Saturday, 15 June 2024

for Business Owners

The Freight and Logistics Industry in South Africa

A diverse industry, investing in freight and logistics in South Africa requires an understanding of the overall industry, especially road-based. South African road-based logistics service providers are affected by consolidation processes driven by the fast-moving consumer goods sector.

Other modes of transport are still dominated by a state-owned enterprise.


The Transportation and Logistics sector is split into two parts in South Africa. Overall, the sector is dominated by Transnet, the state-owned operator and custodian of South African port, rail and pipeline infrastructure. Increased competition is now being provided by a vibrant and growing domestic road haulage and warehousing subsector. The process of consolidation has affected mainly road-based logistics service providers.


The largest of these road transport operators have grown through a process of acquiring their competitors and now command truck fleets in excess of 5,000 vehicles, excluding subcontracted fleets. This process saw the emergence of local conglomerates such as Bidvest, Imperial, Unitrans, Supergroup, Grindrod, Crossroads, Fuel Group, Value Logistics and Laser Logistics, to name some of the largest in the market. There are also about two dozen privately-owned mid-size logistics companies operating fleets of 100 to 300 trucks.


The degree of competition in the road-based logistics sector is high and has served as the primary driver of consolidation. By far the highest degree of competition exists in intermodal road haulage, containers which can easily be carried using various modes of transport, where service provision typically does not require specialised and expensive vehicles. In consequence, the barriers to entry in the intermodal road haulage business are quite low leading to depressed margins.


The intermodal road haulage market is also not based on contracts, but is rather a spot market where the lowest-cost provider typically secures the business.


Beyond intermodal road haulage, the degree of required asset specialisation has been higher, leading market players to build up their fleets along industry requirements and often also along the requirements of specific clients. In these cases, consolidation has helped service providers diversify their fleets and widen the portfolio of clients that they could effectively target.


But consolidation in the sector has not only been fuelled by the providers of logistics services. The users of such services have also integrated vertically into the transport sector by taking control of distribution centres. This is particularly the case in the fast-moving consumer goods sector. In consequence, South African logistics companies have found themselves competing not only amongst themselves, but also with their clients. 


This process of vertical integration could continue depending on the level of control over supply chains that retailers wish to have. It is possible, for example, that the large retailers will in the foreseeable future absorb drivers and will require only truck rental services from logistics providers. In either case logistics service providers in South Africa will encounter fierce competition in the sector in the future which will continue to put downward pressure on margins, especially in primary transport designed to link major transport hubs.


Over 200 logistics companies operate in the South African market. There is a high degree of concentration among the leading players. Less than 10 companies control over 40% of the market, while only about 5% of players have shareholdings exceeding 20%. The largest operators include Bidvest and Imperial Holdings, which between them control more than 80% of the domestic road-based logistics market. Specialised logistics companies mainly focus on the transport of intermodal goods; the bulk of their business operations are conducted in South Africa and this is the case for about 50% of these companies.


The leading trucking companies typically operate fleets in excess of 5,000 vehicles. The private-sector players with significant market shares include Grindrod, Supergroup and Value Logistics Holdings. However, super network operator Class One Catering also operates a fleet exceeding 1,000 vehicles (about 16%), while about 17% are under 1,000. The largest truck rental firms are Unitrans and Fuel Group. 


There is potential for new entrants in the Transport and Logistics sector in South Africa, especially with the rising demand of agricultural commodities and consumer goods in the growing cities and towns across the country and in neighbouring countries. The fragmented nature of the sector, however, will continue to present a barrier to entry. Furthermore, many industry participants have integrated vertically, reducing the incentive for new entrants to enter the transport markets. As a consequence, there is limited room for new service providers in this market and most of these service providers can be found in the freight forwarding and freight brokerage businesses.


Other than that South Africa’s transportation and logistics industry is open to foreign investors and there are no significant legal or regulatory barriers to entry. Foreign investment can either be by means of establishing subsidiaries or joining existing partnerships. The large transportation and logistics providers in South Africa are owned by non-South Africans, mainly by Dutch and Australian investors.


The South African Road Transport Agency (SARTA) regulates the road transport sector. It is responsible for matters relating to the licensing of road transport operators, enforcement of vehicle standards, administration of roadside stops, regulation of truck weights and sizes, overdue vehicles and driver shortages. SARTA also provides a comprehensive suite of information resources to the industry including electronic lift maps that provide drivers with information about local weigh stations. All freight forwarders are required to obtain an annual accreditation issued by SARTA.


According to Mordor Intelligence, the South Africa Freight and Logistics Market are estimated to grow at a CAGR of approximately 4% during the forecast period. South Africa’s total logistics volumes rose 3.1% in July 2019 compared to 2018. This recovery is attributed to a more stable electricity supply from Eskom (Electricity supply commission) and largely driven by the country’s land transport sector, which is up 4.6% in 2018. the volume of freight transported by road in South Africa increased by 9.5% in 2018 but decreased by 4.3% in the Q1 2019. 


One of Africa’s largest and most affluent markets, South Africa has a well-developed retail sector, including a number of major domestic players. South African households continue to face challenges due to economic pressures that have resulted in decreases in disposable income, this is reflected by the low sales growth levels recorded in the last two years. A move to centralized distribution has been an important trend in recent years, with new warehouses and logistics centres built in major cities such as Johannesburg, Cape Town, and Durban.


In South Africa transport routes and supply chains can best handle the booming e-commerce sector with the help of smart software and the latest infrastructure. According to the South African Freight and Logistics Market Report 2019, South Africa is ranked as the 6th most digitized country in Africa.


The prospect of 'Logistics Valley' or the first 'Logistics Campus', set up by PostNord PSM, is a huge opportunity for South Africa’s logistics industry. The first centre will be established in North West province, on land that belongs to the Swedish International Development Cooperation Agency (SIDA), at Nooitgedacht. This move will ensure a high level of security in order to support sustainable development. The completion of the project is scheduled for 2020.


The logistics sector has grown very quickly in South Africa, where its global value chain is set to increase to US$12.3 billion in the next three years, an increase of 36 percent. The logistics sector has a high growth potential due to strong demand for goods and services such as food, consumer electronics, IT hardware and software (24%), household goods (8%) and construction materials (6%). 


South Africa is experiencing rapid economic growth that presents the potential for an improving business environment. This huge opportunity can be seized by investors who are willing to make a long-term investment in South African infrastructure, especially transport networks. The country’s weak infrastructure has been a major bottleneck for the logistics and transport industry. It is estimated that the lack of infrastructure has cost South Africa $12 billion annually.


The Freight & Logistics sector in South Africa is one of the largest sectors in the economy representing about 10 percent of gross domestic product (GDP), and employs approximately 1.1 million people, or almost 7 percent of the working population. The sector contributes more than 44% to value-add to GDP and 70% to total foreign exchange earnings. 


South African government is spending money on improving road transport routes through an infrastructure development program called "Project Khulisa".


Sources: Handley, Mordor Intelligence