The recipe for success

From the March 2016 issue.

A new report from McKinsey has identified five core imperatives to help executives in the transport and logistics industry formulate a future-proof strategy.

With many a transport company still on the path to recovery from the fallout of the Global Financial Crisis (GFC) in 2007, finding strategies to gain a competitive advantage over the masses has become of critical importance in the transport community, according to a recent report from McKinsey. As an inescapable reality of the transport and logistics industry is the requirement for ongoing – and often substantial – investments into equipment and assets to keep afloat, it says a clear plan is necessary to turn the considerable outlay into profit.

To help executives define their strategies, four McKinsey principals and partners – Ludwig Hausmann and Maximilian Rothkopf from Munich, Ishaan Nangia from London and Werner Rehm from New York – recently came together and took a look back at ten years worth of capital-market performance from 264 listed transportation and logistics companies from around the world.

Perhaps unsurprising to those who experienced the brunt of the GFC’s economic calamity, the investigation revealed that average total return to shareholders (TRS) in the transport and logistics industry has been well below cost of capital since 2007, and return on invested capital (ROIC) was lower than in most other sectors. The research team determined that TRS is increasingly impacted by the fact that “most companies in the industry have to invest significant amounts just to stay in business”, such as for on-going fleet maintenance, as well as the costs involved with meeting tightening emission standards, expanding distribution networks and launching new and more convenient services.

Although the capital outlay required to ‘just stay in business’ is already a hit on the hip pocket for many a transport company, the McKinsey foursome emphasises that failing to invest in new, more efficient trailing equipment is “not an option” when it comes to business survival. “Typically, companies that continue to use older assets in capital-intensive industries are able to generate windfall profits. However, the opposite holds true for the transportation industry. The efficiency gains from new generations of assets are critical to defending and strengthening competitiveness. It’s crucial to identify sources of competitive advantage that place the company ahead of trends and drive superior performance.”

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