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UK Parcels: Market Insight Report 2015

  • December 2015
  • -
  • Apex Insight
  • -
  • 79 pages

About this report

The UK parcels industry has continued to evolve dynamically with
– Continued overall volume growth
– New investment in additional and upgraded facilities
– Macro factors such as the trend growth of home shopping and the cyclical impact of the economy on volumes continuing to provide challenges and opportunities
– Ongoing refinement of operating models and launch of new service features to enable evolving customer needs to be served profitably.

We review the UK parcels market, looking at the business-to-business, business-to-consumer and consumer / small business consigned segments.
– We quantify the market size, historical growth rates, segmentation patterns and levels of industry profitability while reviewing key factors behind these figures.
– Our market size estimate is derived from our bottom-up model of the revenues of all of the operators in the market with adjustments made to take into account their range of activities. This model has been regularly updated and refined since it was first developed in 2004.

We also carry out an in-depth analysis of the relevant drivers of industry growth – in particular the macroeconomic environment and home shopping – setting out historical trends and available forecasts.
Our forecast for industry growth by segment is based on this analysis of historical trends and our understanding of growth drivers.
– For the 2015 edition of the report we have reviewed our market sizing methodology, extended our analysis of market segmentation and made a series of other changes which significantly improve the reliability and accuracy of our market data.

The report is intended for parcels carriers themselves, users of their services, partners, investors, banks, analysts, consultants and other parties with interests in the sector.

What are the sources and methodology

This report is based on
– Financial analysis of the accounts of companies in the industry
– Discussions with our network of senior-level contacts in the market
– Extensive desk research
– In-depth analysis of the macroeconomic environment and relevant market drivers
– Our own experience of advising both companies and investors in the parcels industry

Information from these sources has been synthesised and presented clearly and concisely with extensive use of charts and tables to illuminate points and support conclusions.


Market growth and drivers
The UK parcels market is now approaching £9bn in size.
Having fallen during the 2009 economic downturn, growth has since picked up with the main driver of parcel volumes continuing to be the growth of home shopping.

The three main market segments (business-to-business, business-to-consumer and consumer/small business-consigned parcels) were traditionally regarded as distinct markets served by different providers.
However, there has been convergence as:
Home shopping growth has made consumers an increasingly attractive segment, drawing business carriers to enter the area where they believe they can serve it profitably.
Consumer carriers have increasingly invested in tracking and tracing systems and, in some cases, sought business customers.
New services have been developed by both carriers and third parties such as internet brokers to give consumers and small businesses access to a much wider range of services.

Key industry issues
An ongoing challenge for operators has been the development of a model to serve home deliveries profitably, enabling them to exploit the growth segment without damaging overall economics and service levels.
Customer retention has traditionally been a challenge in what is a highly competitive industry with interviews suggesting that churn rates of over 20% are not unusual.
Scale economies are important in increasing route density and hence profitability. However, operators have not always been able to capture this; scale has not, in practice, resulted in higher profitability for UK parcels carriers.

For many customers, the physical goods shipped in a parcel represent a decreasing proportion of overall value relative to other aspects such as information, intellectual property and brand. This ultimately makes basic parcel delivery less valuable as a service.
3D printing illustrates the extreme case of this where the physical goods (ie the plastic ‘ink’ that the printer uses) is very much a commodity, with most of the value being in the ‘pattern’ information transferred electronically – a form of e-substitution for physical delivery.

Operator trends
In the last year there has been no significant further consolidation through acquisition, however the organic growth records of leading carriers show a significant degree of divergence between winners and losers.
Operators who have gained share include
Royal Mail / Parcelforce now under private ownership,
DPD, which has made a series of B2C wins on the back of service enhancements,
APC, where feedback on service remains strong,
Hermes, which has also been very strong in B2C based on its cost-leading business model
Newer players such as brokers (Interparcel, Parcel2Go), networks (Collect+) and finally, potential industry disruptor, Amazon Logistics
Those who have lost market share include:
TNT Express, which has been impacted by contract losses disruption from the UPS and FedEx bids and lack of exposure to high-growth B2C segment
DX, where some business has been exited during the merger of the Nightfreight and DX parcels networks
Overall industry profitability has improved, largely as a result of the closure of City Link and turnaround efforts at Yodel, but remains modest. Nevertheless, several operators now earn respectable margins with six carriers having EBIT margins of at least 8%.
Factors such as compatibility of operations with market segment focus appear to be more important than the effects of scale in determining operator profitability

We expect to see continued growth in the market at an accelerated rate as home shopping continues to grow and a recovering economy supports the outlook for B2B parcels.
Price increases are expected to continue to be modest with volume being the main driver of market growth.

Table Of Contents

UK Parcels: Market Insight Report 2015
Introduction 2
About this report
Executive summary
About Apex Insight
List of charts and tables

UK Parcels market 8
The UK parcels market includes next day or deferred delivery of parcels from around 0.75-40kg in weight
Key features of the market include high operational gearing, low capital intensity, scale economies arising from consolidation and low customer retention
The B2B, B2C and C2X segments have converged as they have developed
Use of franchised and outsourced models has been common
The last mile for home delivery remains both a challenge and an area of innovation
Our parcels market size estimate is based on company revenues
Non-parcel activities of the main networks have been excluded and parcels activities of other operators have been included
The UK parcels market has grown strongly since 2010
Figures from Ofcom support our views of market size and growth
The B2B, B2C and C2X segments are impacted by different drivers hence have grown at different rates
The parcels market is often segmented by speed of delivery, type of item and international/domestic delivery
Growth of internet retail is supporting the shift towards more deferred / economy deliveries
Domestic deliveries account for the majority of the market
Larger / heavier items are not compatible with highly automated parcels sortation processes
Price increases have remained below inflation for many years

Market drivers 26
The main drivers of the parcels market are GDP growth and online shopping
Pricing is largely driven by competition
UK GDP has now recovered from the recession, despite faltering in 2012
B2B parcels has tracked, but been lower than, movements in real GDP
Inflation is currently at historically low levels
Retail sales have loosely tracked household disposable income
Of the range of routes via which an online purchase can reach a consumer some, but not all, require a parcel delivery
Internet retailing has grown considerably over the last decade.
These categories of online purchase do not lead to a parcel movement
The UK is the leader in internet shopping in the EU
International sales by UK e-retailers are growing more quickly than domestic sales
Internet shopping transaction values have been falling
Rates of returns - which are not captured by e-commerce statistics - are rising

Competitive landscape 40
UK parcels operators can be divided into several categories
The leading international groups have continued to gain share at the expense of UK-only players
The fastest growing companies have been the newer players, followed by DPD, APC and Hermes
DHL, TNT and DX have seen falling revenue over the last eight years
Features of carrier business models underpin both segment focus and profitability
Differences in average revenue per parcel reflect the different areas of carrier focus
Variations in revenue per depot reflect differences in business model
Tuffnells and Hermes have business models which reflect the requirements of their respective niches
While margins remain low, 2014 saw an improvement to overall profitability
The overall industry picture masks some significant variations in profitability
Several of the more profitable companies have also been amongst the fastest-growing
Those with lowest margins either focus on the B2B segment or have specific factors explaining their performance
There is little relationship between pure scale and profitability
Greater industry revenues are being generated with fewer workers

Forecasts 63
Our parcels market forecast considers the three main segments (B2B, B2C and C2X) separately
GDP is expected to grow steadily and inflation to increase
The B2B parcels segment is likely to grow slower than GDP
We expect to see growth in retail sales at a slightly lower rate than household disposable income
Rapid growth of click-and-collect will lead to slower growth of internet sales requiring a parcel delivery
Growth in international internet retail sales is expected to continue to be faster than domestic sales
Growth of home delivery is likely to continue but at a slowing rate
Our parcels market forecasts combine the different dynamics from the B2B, B2C and C2X segments
Our market estimates and forecasts are supported by other available data
There are several potential market risks which could impact the forecast

Appendix 77

List of figures

UK parcels market size and growth
Market segmentation
UK domestic home deliveries by service type
FedEx UK: revenue and parcel volume
FedEx UK: revenue per parcel
UK GDP in current prices (money GDP), inflation (GDP deflator) and real GDP
B2B parcels market and real GDP
UK Inflation: Consumer price index and GDP deflator
UK Household disposable income and retail sales
B2C parcel channels
UK e-retail spending: value as % of all retailing
UK Internet sales: value and as % of all retailing
Internet sales resulting / not resulting in an parcel delivery
Internet retail as % of GDP
UK e-retailers: domestic and international transaction value
Implied number of B2C transactions
Internet shopping returns rate by category of item
Implied number of UK home shopping movements
Leading UK carriers - revenue
Carrier size and growth
Revenue growth by carrier
Operating models and segment focus
Average revenue per parcel
Revenue per depot
EBIT margins - overall sector and by carrier
EBIT margin by carrier
RoS vs RMS for UK carriers
Industry employment and productivity
Nominal UK GDP, inflation (CPI) and real GDP: historical and forecast
B2B parcels market and real GDP - historical and forecast
UK household disposable income and retail sales / % annual change - historical and OBR Autumn 2011 forecast
Internet retail sales: value and as % of all retailing / £bn - historical and forecast
Internet retail sales resulting / not resulting in an parcel delivery / £m - historical and forecast
UK e-retailers: domestic and international transaction value (£bn) - historical and forecast
Implied number of B2C transactions / millions per year - historical and forecast
Implied number of UK home shopping movements / millions per year - historical and forecast
UK parcels market size and growth: historical and forecast / £m - historical and forecast

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