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Confidence prevails in UK logistics industry but short termism stunting innovation

UK logistics businesses are promisingly optimistic in light of current economic challenges but a focus on cost cutting and sticking to core business is restricting innovation according to research from Barclays and Grant Thornton.

The newly launched UK Logistics Confidence Index*, which includes a survey of key decision makers from the UK logistics industry, shows that although the majority of businesses are investing over the next six months, they continue to tackle the same on-going issues leaving innovation to take a back seat.

When asked what the biggest concern is facing logistics businesses over the next six months, one third of respondents cite margin pressure as the greatest challenge on their business followed by fuel costs (20 per cent). Surprisingly only 15 per cent of respondents are concerned by eurozone uncertainty.

Rob Riddleston, Head of Transport and Logistics at Barclays said: "The continuing economic climate is providing the logistics industry with challenges and whilst some recognise the need to innovate, the day-to-day pressures make this difficult to achieve. However, it is pleasing to see that there is an air of optimism in the industry with logistics businesses seeing a brighter future over the next six months. Whilst a vital element of the supply chain, many of their customers see the industry as a commodity and it’s the successful who add value and innovate who will prosper."

Although faced with cost pressures, there is optimism in the industry. Over three quarters of businesses surveyed view current business conditions as somewhat difficult (65 per cent) or very difficult (13 per cent), with 48 per cent foreseeing conditions to be the same over the next six months. However a quarter of respondents see things improving this year, with 53 per cent expecting an increase in profit over the next six months.

Positivity is also seen in the number of businesses intending to make significant capital expenditure (CAPEX) over the next six months, with 42 per cent of businesses surveyed ‘likely’ and 21 per cent ‘very likely’ to invest in CAPEX. Headcount is also set to increase, with 47 per cent of businesses indicating they’ll be taking on more employees over the next six months.

In terms of how logistics businesses intend to achieve their growth plans over the next six months, 51 per cent are focused on winning new contracts, with margin improvement (18 per cent) and maintaining existing customers (17 per cent) also a key focus.

Merger and acquisition activity is also being considered. Three out 10 businesses (29 per cent) are likely to make acquisitions over the next six months with 9 per cent stating they are currently looking at an acquisition target, whilst 20 per cent are actively reviewing opportunities. These are encouraging signs given the current market, indicating that businesses are seeing opportunities particularly due to margin pressure.

Philip Bird, Director, Corporate Finance at Grant Thornton said: "The logistics industry has always been an early indicator of the state of the wider economy. This sensitivity makes it wiser to the ways that it can thrive in the lean years. There is, however, only so far that costs can be taken out of a business, margins can be cut and only so many contracts that can be won.

"The next 12 months will likely be a period of consolidation in the sector, creating more companies of scale who are able to invest in innovation and diversification, as continuing to do more of the same is simply not an option. We also believe that the really successful companies will be operating on an "asset light" basis and co-ordinating the provision of services across the supply chain."

*The Barclays and Grant Thornton UK Logistics Confidence Index for H1 2012 is 57.2.

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