Money Growing: Changes On A Big Road

The market of long-distance goods 0transportation started to develop in Russia in the middle of the 1990s. It is interesting that the first to render this service was not Moscow, but the regions. The tone was set by companies from Vladivostok, Irkutsk, Novosibirsk. For example, one of the market leaders – Avtotrading – started its business with the Chelyabinsk motor depot. The company has since grown and "has moved" from the Southern Urals Mountains to Moscow. Now the Russian market, with respect to its players, is at an embryonic stage and is built by the principle of a pyramid.

Black and white

At its base are several tens of thousands of small companies and individual businessmen with 4 - 10 cargo lorries, which they own or lease. The majority of their cargo is consumer goods, which they transport under the order of regular clients. "The independent delivery of packages and cargo that weighs less than the capacity of the lorry is simply unprofitable for the owner of the cargo. Because it means paying the full cost for an individual lorry," explains Sergei Kruglov, general director of Armadillo group of companies (DPD in Russia. DPD is the brand of the majority of companies within GeoPost holding, including Armadillo). It is more convenient to use professional freight carriers. For example, this is how the Afghan diaspora acted, which is the main customer of the transportation of consumer goods and computers from the capital to Samara.

Small companies work with firms-dispatchers, which are the second level of the pyramid. Dispatchers usually have their own fleet of 10-40 lorries but can manage without their own. Firm-dispatchers transport the most profitable orders in their own fleet, and gives those that are easier to smaller companies for a commission fee. The small firms, in turn, can employ private traders with lorries. Dispatchers are reluctant to work directly with private traders.

Periodically in the market there are scandals of a criminal nature. The most recent heard story happened three years ago in the Moscow region. Back then 15 lorries with cargo disappeared in one week. The police found out at the time that all the lorries disappeared after the first payments on leasing them had been made. Since then dispatchers began to check the reliability of contractors more strictly.

It is impossible to calculate the exact number of market participants, as more than half of all market players in automobile transportation operate in the ‘shadows’ of the economy and work, as a rule, for cash only: by the system of payment on delivery. Otherwise the small companies would not survive. The clients are also happy, transportation turns out to be cheaper and without bureaucracy. At the moment, the main consumers are private individuals. The volume of transportation for retailers is low.

The last level of the pyramid is large operators who work under ‘gray’ and legal schemes. They aspire to improve the service, work with VAT and form a civilized transport-logistics market. "Now everybody is trying to work with transparency. To do business under grey schemes has become unprofitable," says Sergei Tarasenko, marketing director at First Forwarding Company. Frequently operators do not limit their service to just transportation, and aspire to give to clients a full set of services - "from customs to the shop." DPD in Russia, for example, renders services for technical express-transportation technology: will organize the gathering, sorting and joint delivery of cargo of various weight categories and dimensions with all the main attributes of express train delivery and additional services (the possibility of tracking the status of delivery, door-to-door delivery). Direct carriers compete among themselves in tenders organized by large customers. If they win they may give part of the work to dispatcher firms.

The largest companies are DHL, UPS, TNT, SPSR, GarantPost, CitiExpress, PonyExpress, Gruzovozoff, Avtotrading, Baikal-service, DPD (Armadillo), PEK, Dostavkin and STS Logistics. Quality work in this sector demands a wide geography of scope, extra capital and regional warehouse premises for the consolidation and deconsolidation of cargo and significant capital investment. "To enter this market would now cost tens of millions of dollars," Tarasenko considers. However it is worth it. As one market player explained on the condition of anonymity, three years ago, for example, the cost price of the transportation of a 20-foot container (24 cubed meters - up to 18 tonnes) from Yokohama through Nahodka port to Moscow was about $3,000.

The transportation cost for the client was $3,800, i.e. the operator made a net profit of $800. The cumulative price for transportation of consolidated cargo by the same route in the same container is $12,000. Thus, to work with consolidated cargo is much more profitable. At the present stage of development of logistics services this service is especially demanded by clients.

More and more companies are handing over their logistics functions to large transport-logistics companies that work on the basis of open financial schemes. This, in turn, induces clients to refuse to use “black” cash when organizing logistics within their companies.

Russian specificity

The Russian market has a huge number of small niche players who offer an elementary service of delivery from point A to point B with a minimum or complete absence of additional services. The specificity of the market of consolidated cargo is that delivery is not used for all kinds of goods. Companies may specialize in the transportation of computers, office equipment, electronic components, car parts, telecommunication goods, industrial and medical equipment, household electrical goods, audio-video equipment, footwear, clothes, etc.

Companies differ not only by the kinds of transported modular cargo, but also by cargo units. For example, UPS and DHL specialize in express deliveries (up to 31.5 kg), and FML in large modular cargo (pallets). The tactics of business dealing are also different. Some work with their own customers, while others strictly follow the interests of global retailers. For example, Schenker always follows Metro, FM Lоgistic follows Auchan.

Western companies are rendering more and more appreciable influence on the development of the market. "The Russian logistics market is one of the most promising world markets and many foreign logistics corporations are showing an interest in it.

Strategies of entering the market are various: some companies create their business in Russia from zero, others become partners of large Russian companies," says Kruglov. If earlier foreign suppliers delivered goods only to warehouses in Moscow, where it was then picked up by clients from the regions, then now suppliers have begun to deliver goods right to the shop in the regions. For example, two years ago L’Oreal did this. Western car factories have now changed their systems of distribution of spare parts. Now they have built regional chains and have begun to operate through large logistics operators. "During the day cargo is taken from sellers to a warehouse and is then sorted to be sent to various places, cities. Cargo can be delivered directly, for example, to Kazan, or to Nizhny Novgorod. It depends on the cargo," says Rustam Yudashev, president of STS Logistics.

In the market there is a real need for the creation of chains of multi profile transport terminals which in addition to transport cargo handling and "joining" automobile transport with other types of transport could provide a complete service: customs, the storage and distribution of goods, etc. Companies created with foreign participation and focused on international cooperation build their own terminals especially quickly.

Now the overwhelming majority of operators work in old Soviet warehouses where it is often impossible to provide simultaneous input and output streams. Therefore at almost all terminals it is possible to see queues. If a driver doesn’t manage to hand over documents to the office before 14.00 he probably won’t be able to unload his lorry the same day. "In Russia there are not enough class A warehouses. There are especially few modern cross-docks (a building with a lot of input/output ports, floor storage, and a top limit on the storage of cargo of 24 hours)," complains Andrei Popov, the manager for the development of distribution at FM Logistic.

Open out-of-town spaces and weak transport infrastructure stop the development of modular transportation. In Europe it is much easier to construct a chain of cross-dock terminals and to train the personnel. For international transportation in Russia there are a number of custom requirements which complicate the customs registration of non-commercial deliveries. "You have to pay for everything at customs," operators admit. Those who don’t pay, waste time in queues.

"In addition to manufacturers of confectionery products, such as Nestle, Kraft Foods, and Mars, other food stuff manufacturers are concerned about the mode of transportation. They closely monitor the temperature in lorries and make sure that foodstuff is not transported with industrial products. And such control essentially influences prices," says Popov. As Yuldashev considers, "today it is almost impossible to work under western standards. Russian legislation, in connection with accounting, is much stricter than western transport documentation, there is much more detailed elaboration."

Transport logistics bear small material, but significant moral losses on the road. Employees of the motor licensing and inspection department have intimidated drivers by caviling at nothing. Checks at check point cost 500-1,000 rubles. As a result, all the factors mentioned above considerably slow down the development of the market of modular cargo.

One air-lorry for the whole country

The most developed segment is international express delivery. According to analysts at DPD, the market of express delivery and deliveries of modular cargo by express delivery is worth from 500 million to 1,700 million euros. In the Russian market large international integrator companies operate. They set the quality standards. DHL, UPS, Pony Express and Danzaz have started to develop neighboring niches and have switched to the transportation of more dimensional modular cargo. However their services are very expensive. Now in the market there are several companies which provide quality door-to-door services at reasonable tariffs.

In Russia there are a lot of places impossible to reach by motor vehicle. Therefore more often these companies use various class passenger planes for delivery. The companies have quotas on all routes with all airline operators. Hitches usually arise because of the dimensions of the cargo. For example a light box (an advert board with lighting) simply cannot get in the transport hatch of a plane. Modular cargo sorted at the airport may not depart for the most banal reason. Cargo may be returned, if the passengers of the given flight have too much luggage. This is fine if it’s not perishable cargo. Passenger flights also have increased safety requirements and a long list of transported cargo is therefore not permitted.

"The turnover of goods is growing and there are no planes for transportation. Russian airlines do not have a special plane park. Therefore we carry cargo only with passenger planes. There is only one cargo plane in the whole country. But this Aeroflot plane flies exclusively on the Moscow-Khabarovsk route," says Viktoria Chub, general director of 4Sides. According to her the peak times for cargo deliveries by plane are on March 8 (Women’s Day) and February 14, when planes are filled with flowers.

Multimodal fashion

Besides automobile and air transportation other kinds of deliveries of modular cargo are also being developed. The first to achieve success on the railway were ZhelDorEkspeditsiya and transport company Sherl. They started with 10-15 wagons attached to passenger trains. General director of ZhelDorEkspeditsiya group Vladimir Nazarov considers that now there are less inward cargo at railway stations as economic communications increase within the country.

"The face of the customer is changing. Western companies prefer to work under transparent schemes. Therefore there is a need for the consolidation of cargo transportation. Many companies have started to carry out multimodal transportation." notes Yuldashev. Cargo is delivered to the final destination by various types of transport: by lorries, planes, railway, river and sea. Sometimes even by deers.

Reasons for optimism

Experts questioned by Vedomosti think that further development of the sector of automobile cargo transportation across Russia is directly connected with the condition of the road infrastructure. This should develop to world standards of quality, providing an increasing share in the turnover of goods of motor transport in the Russian logistics market. Market participants expect that after Russia joins the WTO there will be increased demand for quality import/export services. "Operators offering a complete set of services: transportation, customs registration, storage, distribution, will have the advantage," notes Kruglov.

In the near future logistics operators will try to create alliances. "Globalization continues, nobody will stop merger and acquisition deals," adds Chub. As a result, in the market there will be a rather small amount of strong players left. These will be companies that can successfully adapt international logistics experience into the realities and features of the Russian market.

In Popov's opinion, IT platforms will actively move ahead, and the regional expansion of large retailers will proceed.

"Logistics providers in Russia have every reason for optimism - low saturation of the logistics market and a favorable economic climate in the country,” concludes Kruglov.