Published on 27/04/2016 by Punchmedia

Road Freight Keeps on Trucking

The Road Freight Transport industry provides the primary mode of transport for non-bulk freight in Australia. The industry dominates the transport and storage sector in terms of revenue and employment. Over the five years through 2015-16, road freight industry revenue is forecast to increase at a compound annual rate of 2.6%, to reach $52.8 billion. However, industry revenue growth is forecast to slow to a more sluggish 0.9% in the current year, as operators pass on the savings from lower fuel prices to consumers. Demand for the industry's services remains strong, with profit margins largely unaffected by slower growth in the current year. The Road Freight Transport industry is a critical component in many increasingly complex supply chains, as it provides quick and reliable door-to-door delivery nationwide. The industry provides services to various clients, notably to a range of manufacturing industries. This diversification means that industry revenue is less volatile than the revenue in individual major markets. The industry also services itself, with widespread subcontracting occurring among players.

Trading Landscape

The industry has continued its long-term pattern of growth over the past five years. Returning demand, due to client companies rebuilding inventory levels, has caused industry revenue to rise strongly over the past five years. Continued mining production, wider outsourcing of logistics among smaller companies, and increasing freight volumes have also supported industry demand. The industry benefits from its position as a necessary stage in the supply chain for many industries. Road freight services are pivotal for many industries in transporting products to end users. While the industry has enjoyed a period of sustained expansion over the past five years, revenue growth is expected to weaken in the current year. Weaker growth is linked to the fall in world crude oil prices in 2014-15, which has pushed local fuel prices down significantly. Surging fuel prices over the past five years had previously forced many industry operators to introduce fuel surcharges to cover costs. This protected the profit margins of the medium and large businesses that had enough market power to pass on costs. However, falling fuel prices have the opposite effect, as industry firms remove their fuel surcharges. As a result, 2015-16 will be the first full financial year in which customers will be generally able to avoid paying fuel surcharges, which will put downward pressure on industry revenue. Slower industry revenue growth is expected to have little effect on industry profit margins. Operators are careful to maintain existing margins, and lower prices make road freight more attractive. A decline in the value of the Australian dollar over the past year has coincided with falling oil prices. Larger players have forced smaller operators to pass on fuel savings, with high competition preventing them from maintaining higher margins.

Demand Trends

The industry's sources of demand have shifted over the past five years. Wholesalers have grown in importance as the need to transport imports upon arrival in Australia has increased. The high Australian dollar over the past five years gave greater incentive for consumers to buy relatively cheaper imported products, leading to growth in road freight transport of imported goods. Conversely, demand from many parts of the Manufacturing division has declined. Falling demand from manufacturers has occurred largely due to the high Australian dollar over much of the period, and an inability to compete with low-wage manufacturing in many countries in Asia. Therefore, while consumer sentiment and business confidence have primarily remained positive over the past five years, falling demand from manufacturers has restricted industry revenue growth.

Profit

Industry profitability has increased only marginally over the past five years despite solid growth in volumes. The strong gains in productivity achieved by the industry earlier in the decade have been waning, with infrastructure limitations restraining further significant gains. For example, B-double vehicle transport has gained considerable market share from articulated trucks, with little room for further gains. The industry's largest vehicles, B-triples, now have access to key highway routes. The fierce competition in the industry means that the productivity gains from the use of larger vehicles and savings from lower fuel prices have been largely passed on to downstream industries in the form of cheaper freight rates. Industry wages and licensing costs have increased over the past five years. Wages have also increased as a share of revenue over the past five years, with competition for labour from the resources sector putting upward pressure on the average wage. While higher wages have cut into profit margins, profitability across the industry has remained relatively strong as freight volumes have increased, enabling greater economies of scale. Larger integrated firms have been the most profitable, while smaller operators have maintained the lowest margins.

Industry Participation

The business structure of the larger operators is significantly different from that of small- and medium-size companies. The industry's major players provide integrated logistics and distribution services. Due to their market power, they are in a stronger position to adjust prices to protect profit. In contrast, fierce competition characterises the bottom tiers of the industry. The industry has low barriers to entry, as participants only require the appropriate licence and a minimal amount of capital to invest in a vehicle. Small companies and owner-operators therefore dominate the industry in terms of participant numbers. Owner-operators in particular influence the industry's cost structure, as they tend to report lower wage expenses. However, in an effort to boost profitability and gain easier access to small business loans, several small players have merged their operations. Low profit margins have also pushed some small to medium operators out of the industry over the past five years, and an inability to pass on cost increases or retain cost savings played a large part in these exits. As a result, enterprise and establishment numbers have trended downwards over the past five years. However, strong growth of larger operators has driven employment numbers upwards.

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Curtis is a leading expert in the business-for-sale industry, serving as a senior content creator at anybusiness.com.au.

With a career spanning over fifteen years, Curtis has accumulated extensive knowledge in the domain of business sales, acquisitions, and valuations. His deep understanding of market dynamics and his ability to translate complex industry jargon into accessible insights make him a trusted resource for entrepreneurs and business owners looking to buy or sell businesses.

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