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The cost of growth: an under-appreciated thematic in the logistics sector?

April 28th, 2022

The cost of growth: an under-appreciated thematic in the logistics sector?

Logistics has reinvented itself as a tech-led sector and a critical retail partner. That makes it an appealing prospect for private equity – but are investors properly scoping out the hidden costs of growth in this rapidly-evolving industry?

‘Uniting you with your customer’ is the strap-line of the logistics and e-fulfilment specialist, Cygnia. The firm presents itself as a trusted partner of its retail customers, providing important steps in the end customer’s experience that go far beyond getting packages to doorsteps.

A few years ago, this type of claim might have seemed a stretch. But now the pandemic has cemented the names of logistics giants in the public mind, and delivery drivers are familiar faces to most households.

Cygnia’s pitch was certainly convincing to supply chain giant Wincanton, which acquired Cygnia last year from Crescent Capital. Cygnia’s expertise in e-fulfilment for brands such as BrewDog and Moonpig chimed with Wincanton’s strategic focus on growing its digital and e-commerce business.

Tech-led sector

For former Cygnia CEO Glenn Lindfield, it was the latest in a series of successful exits, and a further indication of the soaring appeal of logistics as a private equity investment. In a sector viewed until recently as simply transport and warehousing, these asset-heavy, successful firms are now recognised as tech-led businesses offering essential services.

Lindfield warns, however, that whilst trade buyers are well equipped to accurately assess the risks, synergy benefits, and growth projections of a business in a sector they know well, there are some ‘look-out factors’ that private equity investors need to consider.

Cost of growth

While revenue, EBITDA and the strategic direction of businesses are chewed over in some detail by buyers to calculate the starting value and the projected end value, “they can’t reach those long-term plans without considering the real cost of growth,” Lindfield emphasises.

“In my experience of evaluating the performance and potential of logistics businesses, there are some key factors that need to be considered, and perhaps the main question when projecting long-term value is what additional input investments are required along the way to deliver that end value. It’s one thing to have strategic growth plans, but is the business already at capacity and is it fit for growth?”

Top class logistics businesses have solid operating platforms and deliver excellent service. However, if a business is already at full stretch, he points out, its capacity for growth is constrained. This is an issue compounded by the UK’s current property shortage and an ultra-competitive labour market.

Investors also need to look beyond the current top team in the target business, to consider the capabilities and potential of the wider workforce.

“It’s one thing assessing the calibre of the senior management and the motivation of that team – that’s clearly critical,” Lindfield says. “But how do you assess what’s underneath it? You’ve got to have strength in depth if you want to grow the business. Recruitment, training and development programmes are important factors that all need to be scrutinised, including tactical staff retention policies.”

Security in robotics

Continued investment in robotics and automation is another critical factor. Across many supply chain functions there remains an extensive set of processes that require expensive human input of some sort.  Whilst there will always be a need for human decision making and manual touch points, logistics business need to develop automated and robotics solutions to reduce costs and streamline their supply chain performance. This is a particularly acute factor for the logistics industry, where players have been obliged to follow Amazon in offering ever-shorter lead times for delivery.

In a time of labour shortages, Lindfield sees automation as a sustainability issue for businesses: “Robotics reduce the dependency on labour that’s not there. Robotics and automated solutions deal with volume volatility better, which leads to a more secure service offering. Most logistics businesses have solid and secure IT operating platforms, but is there a robotics/automation programme in place, and have the associated input costs been included in any financial projections?”

ESG outcomes

Other sustainability and environmental factors also need to be considered. For example, a company’s strategy to cut CO2 emissions and packaging waste, plus a clear DEI strategy.

Assuming these factors are covered, Lindfield is convinced that businesses in his sector have never been more appealing: “There is no doubt that events such as the global pandemic have highlighted the critical role supply chain management plays in our everyday lives, which in turn has led to a far sharper focus on the logistics industry. Successful providers in this arena are quickly adapting their offering by embracing new technology, recognising the need for a sound CSR programme, and investing in their people.”

Matthew Friend - Director – Business Services                                                                                 

matthew.friend@draxexecutive.com

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