DHL braced for home turf fight with FedEx after TNT deal
Each night, by the time most people in Leipzig are asleep, about 60 aircraft in DHL’s distinctive canary yellow livery come in to land at the city’s airport.
From mobile phones to refrigerated vaccines, goods are transferred between jets for onward journeys to distant airports such as Bahrain and Singapore, or sorted for transport by road or rail within Europe.
DHL’s hub at Leipzig, where about 100,000 parcels and documents are processed each hour, highlights the vast scale and reach of the German logistics group – one of four companies that dominate the fast delivery of packages around the world.
But the four may soon become three, if regulators approve the €4.4bn takeover of Netherlands-based TNT Express by the US logistics giant FedEx. TNT reports second-quarter results on Monday.
The deal poses a formidable challenge to DHL in Europe, where it is market leader, by combining the US company’s global reach with TNT’s road network in the EU, according to analysts.
FedEx intends to gain European market share from both DHL and UPS by winning contracts from multinational business clients that it already serves on other continents, say Credit Suisse analysts. FedEx is also seeking to gain share in the fast-growing ecommerce market from smaller European competitors.
“A key premise of the planned merger is to reduce FedEx delivery costs within Europe,” says Robert Salmon, analyst at Deutsche Bank. “Right now FedEx is uncompetitive [within Europe], they have a high relative cost to move a package as they don't have a footprint on the continent.”
The TNT deal should fix this problem because the Dutch company’s network of delivery depots and lorries is expected to reduce pickup and drop-off costs for the US group in Europe.
In ecommerce, these first and last-mile costs are often disproportionately high for logistics providers, and this expense has been exacerbated by the rising number of people living alone because often packages cannot be delivered at the first attempt.
Though DHL, part of Deutsche Post, would remain the market leader, with 19 per cent of Europe’s courier express parcel market, the enlarged FedEx group involving TNT would have 17 per cent, based on 2013 figures from TNT.
But analysts do not expect a combined FedEx/TNT to try and close the gap on DHL through a price war. After DHL lost nearly $10bn in five years in a failed attempt to enter the US domestic market, abandoned in 2008, its competitors are unlikely to pursue a price-cutting strategy on the German company’s home turf.
Instead, analysts expect FedEx will aim to compete on superior quality of service.
Furthermore, the threat to DHL posed by an enlarged FedEx is not likely to be an immediate one. Integrating TNT into FedEx will take time, and rivals will be quick to exploit any blunders.
In an interview with the Financial Times, Deutche Post DHL chief executive Frank Appel says the company is looking forward to picking up customers.
“Uncertainty is always good for the companies who are not looking for M&A,” he adds. “Of course customers are concerned [about] what it means for the service in particular for this area . . . any service disruption has significant impact.”
Mr Appel also points out that while the impact of FedEx’s takeover of TNT will be felt principally in Europe, DHL is also the market leader for express courier services in Asia and Africa.
Analysts agree there is probably a short-term advantage for DHL as companies that already have contracts with both TNT and FedEx are expected to seek an alternative logistics provider, to avoid concentrating such work in the hands of one group.
FedEx will need to make a substantial investment in the combined business.
TNT has been reeling since the European Commission blocked UPS’s €5.16bn takeover of the Dutch company two years ago.
TNT lost market share to DHL and UPS during and after the failed takeover, and its net loss widened from €122m in 2013 to €195m last year. The company is cutting costs and upgrading information technology systems as it seeks to compete more effectively.
TNT is geared towards business-to-business logistics rather than residential parcel delivery — a market dominated by DHL and UPS in Europe. Business-to-business delivery is more profitable, but the rise of ecommerce means logistics companies are looking to residential deliveries for sales growth.
Joel Ray, analyst at Transport Intelligence, a consultancy, says: “FedEx would have to spend a lot of money on new depots if they want to reorient the business in Europe towards ecommerce.”