Imperial

Our context

The logistics industry serves the dynamic needs of a complex world, playing a pivotal role in the global economy, connecting manufacturers and consumers, and directing the flow of goods and services. The industry evolves continuously, lowering its cost to serve and enhancing its effectiveness, to remain resilient to disintermediation and disruption.

Trends in global logistics¹

Third-party logistics provide high reliability at low cost and remain a fundamental driver of growth in the global logistics industry. Over the next five years, logistics costs are projected to grow at a compound annual growth rate (CAGR) of 6,7% (2017 to 2022), with the highest growth areas expected in emerging markets including Africa (CAGR: 7,5%), India (CAGR: 10,1%), and China (CAGR: 10,6%).

Logistics costs are impacted by the quality of physical infrastructure, the sophistication of communication systems, the adoption of technology and the presence of bureaucratic hurdles. As a result, logistics costs as a percentage of gross domestic product (GDP) tend to be lower in advanced economies compared to emerging markets.

Driven largely by growing supply chains and increased consumption in emerging markets, along with the impact of next-generation technologies, current shifts in global trade mean that the costs and risks of international operations are also shifting. Inexpensive, instant communication has lowered transaction costs and increased trade flows. However, a growing reliance on leveraging new technologies and innovations for efficiencies makes for a highly fluid and competitive market space in which industry expertise and workforce skills are becoming increasingly important. End-to-end capabilities are growing in importance in a fast-digitalising industry, allowing technological benefits to be maximised across integrated supplier networks.

Global logistics providers will benefit from capturing value across multiple value chains, regionalising to increase speed and efficiencies, ensuring flexible and resilient operational and business models, building closer and more balanced relationships with suppliers and clients, and developing capabilities in emerging and growing regions.

Key drivers for projected robust growth of the logistics industry in emerging markets include:

• Significant infrastructure investments and economic development driven by changing demographics.
• Growing urbanisation.
• Increased consumption of fast-moving consumer goods (FMCG).
• The emergence of new distribution channels (e-commerce).
• Re-design of complex supply chains to reduce time-to-market.

A truly international business

With two-thirds of its operations positioned outside of South Africa, Imperial Logistics’ focus as an international group is on its vision to be the strategic partner of choice, specialising and enhancing its capabilities in distributorships, freight management and contract logistics in selected industry verticals, mainly in emerging markets.

Revenue* generated outside South Africa increased 9% to R36,6 billion (74% of group revenue) and operating profit generated outside South Africa decreased 11% to R1,6 billion (63% of group operating profit) in F2019. Prior to unbundling, Imperial Holdings' operations outside of South Africa accounted for 45% of group revenue and 37% of operating profit.

While we remain the largest logistics provider in South Africa, our scale and footprint limits our opportunities to grow in this market. Therefore, our acquisitive growth strategy will remain focused on growing our business outside South Africa. The group will continue to invest in capabilities that support the growth of target industry verticals in Africa – mainly in healthcare, consumer, chemicals, industrial and automotive – and will invest in capabilities in select new emerging and developed markets. We will leverage expansion opportunities with multinational clients that recognise us as emerging market or specific industry specialists, and likewise leverage our proven capabilities to expand into new emerging markets such as the Middle East, Eastern Europe, India and Asia where trade growth with Africa continues to expand.

*	Excluding businesses held for sale in Imperial Logistics.
1	Based on McKinsey Global Institute (2019). Globalization in Transition: The Future of Trade and Value Chains.

Our regional context

South Africa

Material macroeconomic factors affecting our South African operations included persistently poor economic conditions, low consumer spending, and fuel price volatility – all of which translated into exceptionally low volumes across most sectors. Load shedding during the year impacted production activity in many sectors, which also negatively affected our volumes.

Government’s growth plan is unlikely to stimulate growth in the short term and high unemployment levels continue to plague the country. The impact of this lacklustre trading environment on operations has been reduced volumes and ongoing competitive and client pressures, particularly in the consumer-facing, healthcare and manufacturing client base. We continued to face margin pressures from clients.

Read more on Operational review – South Africa.

African Regions

Our primary positioning as a leading distributor in the healthcare and consumer space stood us in good stead in the rest of Africa despite subdued growth and lower consumer spending in certain countries.

Our businesses in Nigeria, Ghana, Kenya and Mozambique performed well during the year. Factors negatively impacting performance included a slower than expected economic recovery and parallel imports of pharmaceuticals in Kenya; the ongoing economic recession in Namibia; and the economic crisis in Zimbabwe which resulted in lower inbound consumer goods volumes and outbound commodities volumes that negatively impacted our managed solutions business.

Notwithstanding these mixed trading conditions across the continent, African Regions delivered a good performance, increasing revenue and operating profit for the financial year 2019.

Read more on Operational review – African Regions.

International

Certain sectors in which we operate in Europe – such as steel, manufacturing and automotive – remain under pressure with the threat of US tariffs resulting in reduced exports. In our largest market, Germany, the lowest manufacturing data recorded in seven years, a decline in industrial production and declining business confidence have raised the risk of a recession. One of the main challenges resulting from the current low unemployment rates is finding highly skilled people to work in the logistics industry and the division felt the ongoing pressure of these labour market conditions – which drove higher wage growth in some areas during the year under review.

In F2019, changing weather patterns resulted in the lowest water levels on the River Rhine in Germany in recorded history, which in turn negatively impacted our shipping operation. While water levels have since recovered, we believe this to be a structural change and have accordingly implemented measures to mitigate this impact. The prolonged impact of the implementation of the worldwide harmonised light vehicle test procedure (WLTP) resulted in significantly lower vehicle production volumes in International’s automotive business during the year. In the UK, Brexit increased economic and political uncertainty, depressing consumer demand and activity, and consequently affecting the performance of the express palletised distribution business (Palletways).

Read more on Operational review – International.

			Industry context
			Market trends in our core industry verticals
Healthcare			Shifts to generics, biopharma and self-medication have maintained sector sustainability. The South African sector is impacted by uncertainty over the implementation of National Health Insurance. The industry in Africa is highly regulated with a shift to product serialisation and increased digitalisation at supply chain and patient-engagement levels. Volume demands across the African Regions remain relatively stable. Significant focus on compliance and governance raises barrier to entry. Experience in quality assurance and providing simplified solutions in Africa increases sector competitiveness.
Consumer goods			Online platforms are changing consumer behaviour with e-commerce growth being driven by omni-channel solutions. Seasonality, intense competition, low profit margins and price sensitivity characterise the mature South African industry. Low consumer confidence levels, high levels of indebtedness and constrained disposable incomes are impacting spending, with increased buying down into ”private label“ products. Increasing urbanisation in Africa is driving the growth of a young, brand-conscious middle class with disposable income. African export baskets continue to rely significantly on a single commodity and limited manufacturing activity. In Europe, global chains dominate developed urban areas, with local retailers focusing on outlying suburbs, and FMCG manufacturers are adopting collaborative logistics solutions. This fluid and rapidly changing trading environment demands simplified, efficient and low-cost solutions with a focus on supply chain visibility, constructive client partnerships, and agile and flexible operations.
Automotive			Global production is expected to decelerate further to 1% growth in 2019 and to stabilise in 2020. Innovations like autonomous driving and electrification are creating new opportunities, while threatening traditional industry supply chains. As the country’s prominence as a manufacturing hub increases, major original equipment manufacturers (OEMs) are growing their presence in South Africa. Increasing cost pressures are driven by competition from Asian manufacturers and cheap tyre imports from China and investment in modernising tyre manufacturers’ plants has the potential to create excess capacity. Automotive OEMs are responsible for 8,5% of all the European Union’s (EU) manufacturing employment. The introduction of a new emissions testing procedure in 2018 (WLTP) negatively impacted production levels which remain subdued. Concerns about further WLTP implementation remain, as does policy uncertainty around Brexit. Providing robust, efficient and sustainable end-to-end solutions across the supply chain remain key to logistics operations.
Chemicals			Innovations in automotive, energy transformation, construction and electronics industries together with globalisation of supply chains, is expected to increase chemical industry growth. The South African chemicals market remains traditional and conservative due to volatility of supply and demand. Subdued economic conditions have led to shrinking volumes. An increasingly competitive landscape is driven by global multinationals considering an increased presence in South Africa and African markets. Demand for chemicals in Europe is expected to increase by 0,5% in 2019. Shifts towards greater service-orientation provide opportunities for logistics businesses to operate as strategic and responsive partners offering supply chain management solutions. Strong client relationships and the ability to develop customised solutions are key drivers of performance.
Industrial			The integration of sophisticated IT systems, increased supply chain visibility and growing expertise in process flow management (end-to-end) are trends that will support e-commerce expansion, upstream consolidation, increased outsourcing and drive the need for fourth party logistics (4PL) services. A steady decline in fixed investment activity in several sub-sectors in South Africa is due to insufficient domestic market demand, strong competition, rising operational costs and key skills shortages. Government policy and the proposed economic stimulus package is expected to drive future growth. Holistic service portfolios (including value-added services) that are capable of meeting client demands across the supply chain will underpin relevance.
			Market trends in other relevant industry verticals
Energy			Increased activity in the biofuels industry can potentially generate significant employment, attract foreign investment and, over time, contribute towards local fuel production that will reduce imports into South Africa. Demand for liquid fuels and other alternative energy sources will result in a decrease in overall demand in the medium term. South Africa remains the primary supplier of fuels and an important channel into neighbouring and land-locked countries in sub-Saharan Africa. The industry has extremely high quality and safety standard requirements together with the appropriate B-BBEE transformation credentials. Certain fuel multinationals insource their transportation operations where specialised equipment is required.
Mining			South Africa’s mining sector continues to operate in challenging conditions and production levels are expected to remain under pressure despite rising global commodity demand and prices. Increasing policy certainty, particularly in respect of the sector charter for B-BBEE, has improved the outlook. The logistics segment of the sector in South Africa is characterised by large volume road freight alongside rail transportation provided by Transnet Freight Rail. Road transport presents opportunities for both asset-intensive and asset-light operations.

Competitive differentiation centred on agility and customisation

Our group strategy speaks directly to this increasingly promising but complex operational context. Our strategic focus on Africa, and connecting other relevant emerging and developed markets to Africa, within key industry verticals, aims to leverage our market positions, competitive advantages and growth opportunities where they are strongest.

Our specialised capabilities across the logistics value chain allow us to deliver customised and integrated solutions to our clients, with service offerings and operating models tailored to their requirements and market maturity. Our regional capabilities are well placed to meet growing logistics demands and are focused on freight management, the air freight market, ocean freight management, freight forwarding, distributorships and contract logistics.

	ABILITY TO PROVIDE LOCALLY RELEVANT, ASSET-FLEXIBLE SOLUTIONS PER CLIENT REQUIREMENTS				EVOLUTION OF CAPABILITIES TOWARDS GREATER SCOPE AND INTEGRATION OF OUTSOURCED SERVICES				PROVEN ABILITY TO APPLY RELEVANT AND EFFECTIVE STRATEGIC APPROACHES TO MARKET AND INDUSTRY EXPANSION
	Ability to customise offerings by geography, channel or product segment. In-depth market knowledge, both in difficult but high-growth African markets and advanced markets in Europe, underpins ability to apply relevant and effective operating models per region that are customised to local market dynamics and available expertise. Ability to develop specialised capabilities and proven legitimacy (by complying with industry and national requirements and objectives) in highly competitive and demanding industries. Significant progress made in aligning dedicated specialised assets to service longstanding contracts with clients in less cyclical industries.				Ability to execute value-add logistics activities on behalf of clients either as point solutions or integrated solutions, depending on their requirements, defends existing revenue streams. Focused on deepening partnerships with clients by optimising their supply chains, lowering their total logistics costs and strengthening their relevance and competitiveness, supporting contract retention and scope expansion, and countering commoditisation and price taking. Unique ability to provide access to end-consumers in challenging markets through route-to-market distribution solutions provides significant growth opportunity. Acquisition and development of integrated freight management (IFM) capabilities will allow global coverage to support African trade flows and connect clients through up and downstream selling.				Opportunities to develop, transfer or strengthen specialised capabilities and integrated offerings in selected markets and industries. Deep understanding of client needs, longstanding relationships and proven legitimacy can be leveraged to grow in chosen markets and industries. Proprietary market aggregation model to provide access to smaller markets in the African Regions is a key competitive advantage. Success in greenfield development of managed solutions operating model in the African Regions. Track record in acquiring and integrating acquisitions to add specialised competencies or enter new markets.