People in the Know: Carriers Head to Russia

The freight carrier Armadillo, well-known in Moscow and other parts of Russia as a B2B, logistics and warehouse operator, is 50 percent owned by the European group GeoPost. The group has been operating on the market of express postal and freight deliveries across Europe for nearly a decade. Inspired by Armadillo’s success on the rapidly growing Russian market and seeking to secure new transport routes the group has moved to launch one more brand in this country, DPD, Claes Osterberg, chief executive officer at GeoPost Northern and Eastern Europe has told Vedomosti.

-Why does GeoPost expands operations in Russia?

Russia is one of the most promising economies in the world. Most major logistics corporations show considerable interest in Russia. Admittedly, the specific nature of the local market remains a problem. Many foreign firms are willing to work there, but are not yet ready for that, you know. That is why we prefer to join ranks with successful domestic operators who serve as our guides in a foreign country. Hitherto we were involved solely in domestic courier services across Russia, carried out by Armadillo. Now, DPD, our distribution chain, already well-known in Europe, the brand and know-how, will make it possible for our Russian unit to tap into the European network, we will launch import and export transportation services.

-Does that mean that in other words, DPD is a company that is part of the European group GeoPost, and a service GeoPost and Armadillo now plan to launch in this country? We know that Armadillo is to provide the service under a franchise agreement with GeoPost.

That is so, indeed.

-How much do you plan to spend on the development of the DPD service in Russia?

We plan to put up approximately 30 million euros in the course of the next five years.

-How Armadillo and DPD will co-exist in Russia? We have got used to the Armadillo logo, this same company will now represent the brand DPD. Or, do you plan to preserve both brands?

That’s true, we have many names. But we are increasingly inclined to opt for DPD.

-What do you plan to do in Russia? What are you revenue targets for DPD, and how soon do you expect to achieve them?

We anticipate a 40 to 50% increase in turnover annually during the next three years.

-How long DPD and GeoPost have been operating in Europe?

DPD has been on the market in Europe for thirty years now. GeoPost was established about a decade ago. Gradually, GeoPost transformed into an umbrella company, with a view to diversify operations. These days we have operations in 45 European countries. In 1998 DPD joined the group. Before it rose to prominence and established its presence throughout Europe DPD was a small privately-owned German firm. GeoPost purchased an 86% stake in DPD. Today, DPD is a franchise network run by GeoPost. To be more precise, the service we have brought to Russia is called DPD Classic. GeoPost also owns privately-owned, domestic companies in many countries, such as Armadillo in Russia.

-Is the quality of parcel and freight delivery services in Russia comparable to that in Eastern Europe?

Russian logistics market is developing fast. As big multinational corporations enter the high-growing Russian market and as Russian businesses evolve and develop, customers become more demanding towards the quality of delivery services. This is particularly applicable to the deliveries of high-value goods, e.g. laptops, computers, mobile phones, spare parts etc. Today big logistics companies including Armadillo Group are capable of providing European standards of service to the customers. Furthermore, there is a definite trend where we see express delivery segment and freight delivery segment to get closer / merge: delivery of shipments of various weights and sizes with express service attributes (i.e. more than just delivery from A to B). This is what we call express forwarding – the segment where Armadillo Group operates.

-Which types of transportation do you use?

That depends on the distance. Inbound deliveries are made by motor roads and by rail, just as to Germany, France, UK, Finland and Sweden. Transportation by air is more expensive. Although, parcels are usually airlifted.

-Which transport corridors do you use to deliver freight from Europe to Russia and inside Russia?

Today, main inbound volumes come from Germany, Sweden, the Netherlands, key destinations in Russia are Moscow and St.Petersburg. Of course we also deliver parcels from other European countries that are part of DPD network and deliver them across Russia – to more than 1,500 destinations serviced by Armadillo Group. Shipments between Moscow and Paris are airlifted and then distributed primarily by road. This allows us to achieve high economies of DPD service. Flights from Paris to Moscow and back are serviced via Charles de Gaulle Airport. Our automobile routes to Russia run through Barcelona, Stockhom and Frankfurt. We also plan to distribute goods from Russia to the Baltic States and hope that by 2008 we will be able to deliver goods to Moscow via Poland and Ukraine. In the beginning goods will be delivered under the DPD brand from Russia to 18 countries, mainly the EU and Eastern Europe, as well as Kazakhstan, Mexico and Tunisia. In the future, the number of destination is to reach 35.

-Major warehouse developers and logistics operators are launching network projects, seeking to build large distribution centers in leading Russian cities to service respective territories. Such are said to be planned in Rostov-on-Don, Samara, Novosibirsk, Nizhny Novgorod, St. Petersburg and other cities. Thus, Moscow will cease to be the only major distribution center in Russia. Do you think such a project is justified?

The project is very interesting. The market will grow faster once such complexes appear. Honestly speaking, the development of a nationwide network of large distribution centers is the only opportunity for further development of logistics in Russia, given the enormous size of the country. The concentration of warehouse businesses in Moscow and partially in St. Petersburg is a temporary phenomenon. Companies, especially retail operators actively expand their presence in the province, bringing quality warehouse logistics to the forefront.

Regarding the warehouses being constructed, according to the developers, these are Class A warehouses in full compliance with European standards. In Moscow and in Moscow Region a lot of such projects are currently being implemented, they also started in the regions outside Moscow. Everywhere in Russia demand exceeds supply. At the same time, regions outside Moscow also face the shortage of Class B warehouses since regional businesses tend to save on warehousing costs.

-Which transport corridors would you propose to create in Russia?

Russia has 11 developed regions, which may become leading centers of cargo transportation in the country. But of course, the comprehensive development of the entire logistics industry, including warehousing, transportation and information technologies is necessary. Such cities as Nizhny Novgorod, Yekaterinburg and Novosibirsk, for example, may become important centers.

-Which logistics transportation corridors would you suggest to be set up in Russia?

There are 11 advanced regions in Russia today which can become major distribution centers for Russia. At the same time a comprehensive development of the whole logistics system is needed – warehousing logistics, transport logistics as well as IT. Important areas include Nizhny Novgorod, Ekaterinburg, Novosibirsk etc.

-Are GeoPost’s services more expensive in Europe than in Russia?

The prices are almost the same. DPD Classic offers deliveries of a 6kg parcel for 110 euros, VAT and fuel charges incl. A parcel of less than a kilo costs 50 euro. The delivery takes two days from Moscow to Paris for example, and up to five days to other French cities.

-How would you describe the level of Russian logistics providers market development and their services today? In your opinion, is it profitable for international logistics providers to operate in Russia and what kind of problems do they face here?

Currently the level of logistics market development is far from homogeneous. On tre one hand, there are big international companies, so-called integrators operating in the area of international express delivery where they set quality standards. This is the most developed market segment, although of course there is room to grow further. On the other hand, there is a huge (c. 1200 MEUR in 2005) and fragmented freight delivery segment, where about 80% of business is dones by small niche players which use “grey” operation methods. Their service level is marginal, no guarantees are given to customers, the major selling argument is low price.

As mentioned already, there is a clear trend where these two segments are getting closer – we call it express forwarding. Providers seek to provide a full range of logistics services, to become so-called 3PL operators. A crucial factor is the expansion of own network of branches and agents across the country, personnel training and local market knowledge. Armadillo Group has chosen this way and this has proven to be successful. We currently offer a full range of multi-modal delivery services across Russia, backed by a wide range of value-added services (including online services). For example, there is a unique BizPak service featuring money-back guarantee. Our service portfolio now also includes international delivery service capitalizing on GeoPost network, one of Europe’s best networks. We believe that this the next step in our development which is important not only for us but also for the whole market since we are one of the players setting and maintaining transportation industry standards.

I believe I have partially answered the second question: about how profitable Russian operations are. This is one of the world’s fastest growing markets, with market growth rates at the level of 30%. Most of the biggest international logistics companies launch of have operations in Russia. Regarding complexities, I have already mentioned those. It is not always that easy to simply apply Western methods in Russia. In this respect GeoPost approach is optimal – we choose to develop local businesses via partnerships with strong domestic delivery providers and support them. Armadillo Group is one of our fastest-growing businesses worldwide.

-Your opinion about the quality of warehouse terminals recently built in Moscow and in Russian regions? Are they comparable with the European quality? Is the profitability of developer projects in Eastern Europe a lot lower than in Russia?

Regarding the warehouses being constructed, according to the developers, these are Class A warehouses in full compliance with European standards. In Moscow and in Moscow Region a lot of such projects are currently being implemented, they also started in the regions outside Moscow. Everywhere in Russia demand exceeds supply. At the same time, regions outside Moscow also face the shortage of Class B warehouses since regional businesses tend to save on warehousing costs. ROI level for Moscow developers may be as high as 17 – 20%, this is very high level, i.e. payback period is around 6 years. Which explains why big companies such as Capital Partners, Raven Russia Limited, Citigroup Venture Capital are active in the Russian market. Developed European market numbers are way lower.

-Do you think foreign investors can “save” on the quality of warehouse projects when they implement them in Russia?

Do you mean that a warehouse is announced to be a high class and in reality turns out to be of a lower level? If this is an issue, this may have to do with errors at the planning and investment stages, force majeure etc. Customer expectations increase, which means that it makes little sense to save on quality as in construction and real estate we are talking about long-term investment.

-By which criteria to you select your clients?

Hitherto we operated chiefly in the B2B format targeting corporate clients. Lately, we have been considering B2C flows as well. In Russia we are set to continue to focus on B2B flows for quite a while.

-Do you plan to launch operations outside Europe and Russia?

First and foremost we are a European group. But over the past two years we launched offices in China, South Africa, Latin America, the U.S. and India.

-Who are your key rivals?

Such companies as DHL or FedEx.

-Do you think Russia will ever see the arrival of international networks of warehouse developers (not just investors or partnerships, which we see here today?)

I think that will happen. The first to arrive could be the companies who currently develop warehouses in Poland. Provided of course Russia’s investment climate remains favorable and warehouse sector continues to grow as rapidly as it does today.