Logistics in a Constantly. Moving Market

In broad terms, companies operating in the logistics business can be divided into two large groups: profile and non­profile companies. The first category comprises all professional operators specialized in the logistics business. Moreover, specialists include in this group companies that at one time worked in combination with the logistics business but that are now developing the logistics aspect. “Most transport companies nowadays provide logistics services fairly seriously. The most obvious example is Russian Logistics Service (RSL), which first specialized in transport services but now is reoriented to providing a full range of logistics operations,” explains Andrei Duranin, business development director at Relogix. “This situation is due to the fact that clients are interested in complex services. They do not want to pay excess money and incur additional costs by having to deal with several companies.”
It will soon be possible to include today’s distributors in the group of professional providers. According to Andrei Khlus, general manager of Logistics Management, at present the distributors’ business is under threat of “dying” to a certain extent. “Given the prices with which wholesalers are currently operating, they simply cannot support intermediation between themselves and distributors, which is systematically based on a percentage of the product’s price. Obviously, distributors are going to lose their position with wholesalers. Because they understand than in time their link may simply disappear from the supply chain, distributors are now considering reformatting their business,” says Andrei Khlus.
Sergei Vereshagin, general manager of Logicon agrees with this opinion: “With the growth of retail chains, distributors’ functions converge with purely logistical operations – manufacturers find it much more beneficial and transparent to make direct agreements with chains, eliminating intermediaries. Distributors are losing their commercial function and in order to remain afloat must reclassify as logistics providers.”
The second group of companies includes those that develop logistics services although it is not their profile business. This may involve large manufacturers and trading companies who for whatever reason prefer to resolve their logistics issues themselves without relying on outsourcing. Thus, the company Baltimor is independently responsible for its own logistics; in the context of its manufacturing capacities, it always considers warehousing space on which to conduct its logistics operations. Another example is the retail chain Perekriostok – although the company partially outsources its logistics functions, it services its own existing distribution center. In fact, sometimes companies in this segment who provide logistics services to meet their own demands decide to start providing them on the open market. “Eldorado has currently announced construction of the largest logistics center in Yekaterinburg. I am more than certain that it will not occupy all of the premises and like any other company, Eldorado will either rent space out or start providing bonded storage services for other companies using its own logistics subdivision,” explains Andrei Duranin.

To rent or to build?
Neither the first nor the second group of companies has a unified approach as to whether their logistics services should be provided on rented or owned premises. This issue is dealt with separately by each company according to its capabilities, assets, affiliation to other structures, etc. Logistics operators have different business strategies. Thus, NLC, FM Logistics, Frans Maas, Belaya Dacha Market and Sherland, are de facto owners of their warehouses terminals, whereas Tablogix, Rewico, and LogicOn rent their premises from developers. The companies DHL Solutions, CAT Logistics and Relogix also work with rented premises. Each strategy has its own pluses and minuses. Own warehouse complexes increase a business’s capitalization and can make the business more stable in the face of adverse circumstances, although renting can allow an operator to be more flexible and mobile while at the same time allowing a shorter time frame for market entry.
Specialists note a curious tendency for logistics operators to stop wanting to own their own warehouses. A recent example is the company FM Logistic, which sold one of its complexes to the company AIG European Real Estate Fund. At the same time, FM Logistic became the only tenant of the entire complex using the space to service companies such as Auchan, Danonе, Mars, Nestle and other. Obviously, in concluding this deal, the logistics operator released capital to develop its profile activity. NLC is now actively considering renting and not only from its affiliated structure, RosEvroDevelopment, but also from other players. Not long ago NLC rented 68,000 sqm in the Pushkino logistics park. “All of NLC’s warehouse complexes were built by ourselves (or affiliated structures) and until recently our answer to the issue of whether or not to build was one and the same, because the market had no free class A premises available for rent. Now, the situation is changing and western developers and investors have entered the market who in the course of 2006 will release new operational premises for rent,” says Polina Vinokurova, PR and advertising specialist at National Logistics Company. “Renting, speaking of the Moscow region, has become more attractive for logistics operators because considerable financial resources are necessary to build terminals and providers prefer to direct these to developing in the regions, where class A warehousing complexes only started to be built in 2005­2006.” Specialists at the Tablogix also agree with this view. “Ideally, a logistics company should not be involved in development. They are different types of business, each with its own different professional skills required of the company teams responsible for one aspect or another of the business, and different resources. Under conditions when there are no suitable premises, companies with sufficient assets sometimes decide to build their own warehouse capabilities. At the same time, the situation is gradually changing, at present a large number of warehouse projects are underway and so soon logistics operators will be able to focus on their profile activity,” notes Anna Velskaya, marketing and PR manager at Tablogix.
Where non­profile companies obliged to conduct their own logistics operations are concerned, specialists observe the following tendency: Russian companies prefer to build while foreigners prefer to rent. For the latter, the development business in Russia is too risky and moreover, western FMCG companies and manufacturers entering the wide Russian market cannot afford to freeze resources, preferring to direct the money at entering the regional markets. Russian companies are somewhat braver within their own walls and try to obtain support from partners and the authorities to create their own capabilities and at the same time increase their business’s capitalization.
Overall, approximately 70% of new premises released on the market are rented by logistics operators and the remaining 30% by non­profile manufacturing and trading companies.

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Specialists estimate that the demand for logistics services currently exceeds supply. And above all, this refers to demand for warehouse space, which limits providers’ capabilities. “The market genuinely has a deficit of warehouse space, which is the main reason for the lack of logistics services available on the market,” notes Polina Vinokurova. “At the same time, there are a number of companies working with a specific product for which logistics operators cannot always provide a specialized service at a price acceptable to both parties.”
There is a high level of demand for bonded storage, transport services (distribution), customs clearance, pre­sale preparation – order picking, labeling, packaging, etc.
Specialists find that at present operators cannot keep up with clients’ demands. There is a serious lack of specialists in the market. As a result, operators carelessly assume complicated operations – for example, pre­sale preparation. “Clients nowadays don’t want just cargo turnover services, but delivery control, product storage in the warehouse and in­store stocks. Many retail companies have matured enough to outsource these functions to professionals, but considering that not all logistics providers are ready for this, retail companies are often forced to cater for their own needs,” says Andrei Duranin.
“Far from all providers are capable of servicing the retail chains,” confirms Sergei Vereshagin. “For retail, speed is of vital importance, operativity, precision, accuracy, in delivering product and correct handling of a broad assortment of products. We are forced to state that not all operators and not all warehouses are equipped to work with a fairly varied and voluminous flow of goods.
The main users of logistics operators’ services remain large western firms and to a lesser extent, Russian manufacturers and distributors. “The ratio is approximately as follows: 4/5 – western clients, 1/5 – domestic clients,” cites Anna Velskaya.

Down with the price list!
The cost of logistics services comprises direct costs – renting of real estate, communal services, running costs, and variable costs, which depend on the client’s type of product, volume, turnover, etc. “The cost of Logistics companies’ services is calculated on the basis of expenses, but the final sum for each client will be defined individually, in so far as in addition to the direct expense it is important to consider other parameters: volumes, average turnover times for product stocks, the need for special storage conditions, specifics of stock­taking, storage and turnover,” comments Polina Vinokurova.
Some companies do not have a basic price­list as a matter of principle and design an individual technology for each specific client. Depending on the nature of the product a technological solution is chosen and the required resources in terms of personnel and technology are calculated and offered at individual rates. “We do not have a price list, and this is our agreed position,” says Sergei Vereshagin. “We do not sell services that can be stated on a price list, because each service is personalized.” The only service that an approximate price indicator can be provided for is the cost of storage per pallet/space. The monthly rate can vary between $9.5 and 12.
To break down the cost of logistics services, evaluations by the company Relogix are that fixed costs represent on average 65%, variable – 25­30%, and the provider’s profit – 5­10 % of the cost of the services.
Rent costs represent the largest proportion of the cost of the services for the client although the operator, generally, does not make any money on the direct renting of the premises. It is not infrequent for the provider to rent out the warehouse at a lower rate than it is renting the space from the developer. This is explained by the fact that operators receive their profit not so much from storing the product as from the full complex of services. Accordingly, the greater the volume of the service required by the customer, the less the cost of storing the product may be. “The rate at which logistics operators at the construction stage rent an class A complex is $110­140 per sqm per year excluding VAT. From the stage of construction to handover, the rise in price is unlikely to exceed 2­5%. Having obtained fairly expensive premises for rent, the operator cannot rent them out more expensively, considering that the customer is additionally paying for product processing services,” says Andrei Duranin. “Providers’ main income comes from moving products (processing), and not from bonded storage. Pre­sale preparation: order picking, labeling, packaging and similar (one of the most complicated and demanded services) provides a considerable volume of logistics providers’ profit,” states Polina Vinokurova.

Growth potential
According to data from NLC, the turnover in the market for professional logistics services is currently worth $3 billion. “The potential for the Russian logistics services market is valued at $120 billion, of which the proportion of the cargo transport and dispatch for all forms of transport represents 55%, the warehousing services business – 13% and the sector of services for integrating and managing supply chains – 32%,” notes Polina Vinokurova. “The potential volume of the warehousing market is estimated at $15 billion. At present, the real volume of the Russian market for warehouse premises is no greater than $3 billion; however, by 2008 this sector can expect growth of more than five fold.”

Weather forecast for the logistics market
At present, the cost of logistics services is higher than on average in Europe. Specialists relate this fact to the cost of renting warehousing premises, which is fairly high on account of the imbalance between demand and supply. At the same time, the cost of labor here is lower than in Europe, although the high rent rates compensate for this fact. In the future, as a larger volume of space is gradually released on the market, rent rates may decline. However, we should not forget that the cost of labor is gradually increasing and will represent a greater proportion of the cost of logistics services.