Russian logistics and express delivery market today

The interconnections among countries and businesses located in diametrically opposite parts of the earth in today’s fully globalized world and economies are better illustrated by logistics and express delivery services. The fact that people, governments and businesses in one country can interact and communicate fully with one another across the globe like next door neighbors only serves to underscore the importance of this industry to modern political, commercial and personal activities. 

But there is nothing really new in stating that logistics and express delivery have always, since mankind abandoned the caves, been the cornerstones of commerce, as it has always helped goods manufactured in one place to be brought to another location either for sale or consumption. 

However, the tempo of life regimes and business activities in today’s era of Internet and globalization has increased at astronomical rates that the previous speeds of shipment of goods from one place to another that often took days and even months have now become too slow for modern commercial activities. 

Today, it is often a common occurrence for a copy of a multi-billion dollar contract signed in one country to be shipped to a business partner in another part of the globe, or a donor’s organ needed for emergency surgical operation needs to be shipped from one country to another in a matter of hours, or even on a more personal basis, a vital document forgotten in a hurry whilst traveling needs to be delivered as soon as necessary to enable “such forgetful individual” undertake normal activities on his/her arrival at destination. 

These few examples illustrate different life situation situations, where only modern logistics and express delivery is the only industry that can fully provide the decisive help urgently needed by individuals and businesses within stipulated timelines. This helps explain why logistics and express delivery is one of the most needed business services in today’s fast-paced globalized world of commerce, politics and other human activities. 

Indeed, literally speaking, all companies need express delivery of contracts, other vital documents, cargoes, goods, etc. More and more often, even individuals resort to this service. In Russia, the number of companies, from the smallest to the largest, willing to satisfy the insatiable demand for this service, on the domestic market has been growing year after year.


Ilya Risin, the CEO of FREIGHT LINK (PONY EXPRESS): “The key to PONY EXPRESS’ success in this industry is thorough market knowledge, reliability and constant development.”

According to the data of experts in this field, about 1mln shipments are made annually within Russia. The demand for delivery services, in particular express, has been growing at a high rate year after year. According to the data provided by participants this report, this market growth rate in recent years has been increasing steadily by an average of 30-40% per annum.

Market activity is high. Some companies disappear, new companies appear in their places, but this type of market dynamism refers to small courier firms. Medium and large companies have been holding fast to their positions as the strongest companies in their niches for a long time. According to experts’ data, traditionally, DHL, DPD (Armadilo), FedEx, Pony Express and UPS particularly stand out among the other market leaders. 

According to Discovery Research Group (DRG), the Top-10 largest players account for 75% of the market. But similar index from the portal, Cargo.ru, is more conservative, as it puts the cumulative share of foreign giants at about 45% of the total; the Top-10 largest Russian companies control almost 30% of the market, while the other companies share the remaining 25% among themselves. 

 

Generally, the players on this market can be divided into three main groups: small courier services, operating within a city or region; national companies with a network throughout the country and international companies that operate in different countries and continents.

As a rule, small firms and individuals mainly use small courier firms. The costs of their services are lower than those of larger competitors, and this is their main advantage. However, due to their low number of couriers, their volumes of orders are relatively large. It is quite common to hear in such firms, when placing orders: “We’re sorry, but there are no free couriers today.”


Yulia Feler, the CEO of Courier Services Company FPS-Moscow: “Our responsible attitude to business and non-standard approaches to handling orders have enabled us to continue to develop dynamically, thus increasing the number of our loyal customers.”

Companies delivering documents and cargoes within a country are large industry players. They have nationwide networks, large vehicles fleets and professional forwarding agents that enable them deliver cargoes promptly to different regions.

The industry largest players are global companies. They have developed networks of international partners and proprietary aircraft fleets in many parts of the world. All this enables them to ensure prompt delivery of cargoes to almost every corner of the world. Large companies, which have branches on different continents or transactions with partners in different countries, are usually the default consumers of these services.

According to the DRG data, Russian customers have become more demanding recently due to the presence of not only foreign operators, but also Russian companies that operate at international quality standards. New offers in delivery, such as cargoes tracking, including online, 24-hour emergency communication, provision of needed paperwork, logistics management and costs reduction consultation, etc. These features enable providers develop, expand, acquire competitors, or combine efforts in order not at the sidelines of activities on this rather promising market.

Traditionally, market size always defies the law of calculus 

This market has now been existing for over two decades, and has during this time managed to develop and strengthen, though transformations are still taking place, even now. Though western companies were the pioneers on the market, Russian companies have over the last 10 years increasingly shown their strength and competitiveness. 

The market demonstrates annual growth, and the players themselves grow with it. This stems, in the first place, from both an increase in the number of customers and their business activities and the strengthening of Russian economy overall.

However, as a barometer of intensity of economic activities, this sector had not been spared from the negative impacts associated with the global economic crisis. The majority of large players experienced sharp declines in their businesses in 2008 due to economic recession, and hence mass decrease in orders for goods, especially via the Internet, by consumers. These negative trends led to about 10% fall business activities across all market segments: express delivery, cargo transportation and courier services. 

But by 2010, the market had recovered from the crisis and demonstrated encouraging growth rates that exceeding the pre-crisis values by 10%. And, according to Step by Step Group, by the end of 2011, this market growth averaged 15-20%.


Alexei Polikashin, the CEO of Courier Company Lex-Courier: “Our company has been operating on this market now for almost 12 years, and this is certainly an indication of our employees’ rich experience and customers’ trust.”

In monetary terms, the market volume traditionally differs, sometimes significantly. According to different experts’ estimates, the volume of the express delivery segment alone varied from 6bln to 30bln in 2011. For example, EMS Garantpost estimated the volume of this segment at 4.5-6bln rubles, while Russian Post put its valir at about 7.5bln rubles. 

However, data from other players and market analysts are more optimistic. For example, Direct INFO estimated the gross volume of all market segments at 39bln rubles in 2011.  Similar figures, but only in relation to the current year were provided by Ilya Risin, CEO of courier company Freight Link (Pony Express), who had called express delivery “the most actively developing segment” of the Russian logistics market. “According to our estimates, the market volume is expected to hit about 40bln rubles in 2012.” (see this expert’s full commentary in the Expert’s Corner column).

Yulia Feler, the CEO of courier company FPS-Moscow, voiced even more optimistic data. “According to our marketing specialists’ data, the total volume of all market sectors will be 44bln rubles in 2012, which will be about 12% higher than the 2011 figures.” (see this expert’s full commentary in the Expert’s Corner column).

Analysts have attributed such fluctuations in the market size data to the fact that many Western companies, which are the leaders in this industry, often do not disclose their exact financials and other indicators of their activities, as they traditionally prefer to publish these data only percentage ratios of their market shares to the total market volume. On the other hand, most Russian companies, notably, the small and medium ones, always try to hide their real revenues. 

Both industry experts and market players have attributed the cause of this phenomenon to different reasons, including the absence of a uniform definition of the notion ‘express delivery’ and the types of services it represents. “Estimates of the Russian market size vary significantly, depending on how express delivery is defined, since presently there is no generally accepted definition of this service in our industry,” Elena Emelyanova, the head of DHL Express Russia’s marketing department, said. “However, regardless of the types of services and cargoes included in the different definitions of this industry, its size runs into hundreds of millions of euros.”

But no matter what the real figures are, all experts agree about one thing: the market will continue to strengthen. In view of the better economic situation in Russia, at least, compared with the EU countries, most analysts expect the market growth rates to be much higher in the current year than in 2011. Experts forecast that a new round of market growth will take place, especially with the recent admission of Russia into the WTO, which should contribute to an increase in business activities and cooperation among companies both within and outside the country. And the market growth driver in the area of consumer services was and will still continue to be e-commerce (or so-called online trade).

Trends and development prospects 

Regarding further development trends on this market, experts have singled out several basic points. Firstly, more M&A deals are expected among key firms. This will lead to the emergence of new and stronger players with comprehensive facilities and experience. Notably, conversations about M&A prospects in the short term are becoming louder and louder, as the market patiently awaits the announcement of a major deal between two international giants, TNT and UPS. Obviously, after the merger of these companies, other market participants will most likely need to strengthen their positions.


Alexei Belyakov, the commercial director of Courier Company SP Express: “Provision of first-class customer services is a key priority for SP Express, which is reflected in its reduction of delivery times and improvement of the quality of customer services.”

Secondly, compared to the previous years, industry experts have noticed a trend of Moscow’s declining share in the overall market structure. It is necessary to mention here, that, in spite of this negative, the Russian capital was and still remains the absolute leader among other large cities in terms of number of orders, as the lion’s share of deliveries is made either ‘from’, ‘to’ or ‘through’ it. 

The reason for this is obvious: Moscow has been the main business center in Russia for decades. But the Moscow market has become congested, thus becoming both too tight and competitive for the companies to share one territory. Consequently, many of them have shifted their focus towards the regions. This trend is being fueled by both rapid of development of regional infrastructure and the overall increase in volumes of business activities in other large cities in the country. According to Step by Step Group’s data, these tendencies have led to the fact that in 2011, the share of the Moscow region in the structure of the industry’s total nationwide revenues stood at 65%, a drop of 5% from the 70% recorded in the previous year. Though Moscow’s market share remains, unquestionably, the largest, market participants, however, forecast a further reduction of its size in the Russian market’s overall volume of operations and the correspondently consolidated income generated in the process.

Analysts have also noted the increasing popularity of e-commerce, including ordering goods via catalogs and Internet, as another major important development trend on this market. In recent years, this market has been growing mostly via companies engaged in e-commerce. Prompt deliveries of ordered goods, as it had been mentioned by several market players, are an important link in buying goods from online stores. That is why the task of an online business operator is to offer customers simple and convenient solutions that will enable buyers to acquire their products and effective services to deliver those goods to the buyers in their stated addresses.  According to data from the Public Opinion Foundation, the market volume of Internet trade increased by 26% in 2011, compared to 2010. And, with the accession of Russia into the WTO, the market volume of e-commerce is expected to grow by over 45% in Russia in the coming years, compared to 2011.  All this will be a boon to the providers of courier services.

Due to the growth of Internet trade and goods ordering via catalogs, analysts have highlighted one more trend: previously, the main consumers of express delivery services were mainly businesses (B2B), accounting for about 70% of all deliveries, but today, this trend is shifting toward private clients (B2C) as companies are fighting for private customers. Freight Link’s Risin supports this point of view: “The main customers today still remain legal entities, as before. However, there is also an increase in the demand for express delivery in the B2C segment, which, in the near future, if the current growth trend continues, will be comparable to that of B2B segment in terms of volume of services. There is great growth potential here”.

Aleksei Belyakov, the head of the Commercial Department at SP Express, offers a similar point of view, pointing out that, so far, legal entities have been the main consumers of delivery services. “However, due to the development of e-commerce and large trading networks, demand by individuals has also increased in recent years.” (see this expert’s full commentary in the Expert’s Corner column).

Another trend pointed out by analysts was a pronounced change in customer behavior. Thus according to DRG, there are evident changes in how consumers choose their services providers in this industry. If during the crisis, clients based their choices and preferences mainly on cheapness of services, today, the quality factor has once again come to the forefront. All market players have noted that the price is no longer the most important determining factor, especially for large customers, when choosing express courier services providers.

For such customers, the diversity of services on offer is the determining factor. And, consequently, courier companies are doing their best to meet all the wishes and requirements of even the most demanding customers. Moreover, service providers have long understood that it is no longer sufficient to simply offer clients a delivery from point A to point B, but to offer more services in order to retain the existing customers and attract new ones. 

This trend has led to a diversity of offers, such as guaranteed delivery on same day, within 24 hours or at a certain time, for example, by     9 am or end of working day. Or, other additional or related services, such as professional warehousing, customs processing, cargo insurance, electronic tracking of cargo shipment status and exact location of shipped goods by customers, etc. 

In other words, all courier service providers are fighting for every customer by offering him/her services or other modern solutions on the market that optimally satisfy his/her needs. A growing trend of no less significance is the necessity to bring the overall average level of services on the Russian market to world-class standards, a step that has been taken or being taken by most players in the industry.

And, finally, some analysts have forecast a slight slowdown in market growth rates as the industry is trying to adapt to post-crisis changes, especially given the fact that the industry had significantly outpaced the average growth rate of the economy in the pre-crisis period. Another explanation of the looming lower growth rates put forward by analysts is the gradual market saturation. 

“The fact that companies in one country can interact fully with counterparts across the globe like their next-door neighbors only serves to underscore the importance of this industry to modern businesses.”

“In the coming years, the current market growth rate is expected to continue”, SP Express’ Belyakov noted. “However, this growth forecast will only be possible if the legislative framework that regulates the activities in the sector is stable, and the current economic growth rate is maintained,” he added, calling the latter the most important guarantee of continuous growth both of the Russian logistic services market in general and its express delivery segment in particular.”

Cargo.ru’s experts believe that market growth will continue at the level of 20-35% per year, attributing the trend to the fact that the Russian logistics market has yet to attain maturity and has just entered another phase of intensive growth. In the longer term, when the market is more mature, the analysts forecast a probable reduction in the number of players as one of the ways to retain the current growth rate and returns on invested capital. As a rule, a redistribution of forces will take place, mostly via M&A deals, as the weaker players will leave the market, whilst the influence of the stronger ones will strengthen further.

Sector’s problems and solutions

According to data from the sector players and experts, there are more than enough problems of different degrees of complexity in today’s industry capable of ruining even flawlessly developed and well-run business processes. One of these is the poor state of transportation infrastructure, both within cities and throughout the country. It is no wonder that all the experts and industry representatives who took part in this report were united in their complaint against one of the two most famous Russia’s eternal problems: roads. 

Beside the traditional complaints about long traffic jams in cities and major highways, regional carriers also often complain about the complete absence of something resembling “road surfaces” in some districts and towns that are remote from regional centers. “Transportation infrastructure is highly underdeveloped, which negatively impact on the quality of offered services,” FPS-Moscow’s Feler noted. “The poor condition of roads and their limited illumination delay cargoes’ delivery times. Indeed, a lot of settlement centers possess restricted capacity for shipping and receipt of cargoes and correspondence.”

“Today, Russian customers have become more demanding recently due to the presence of not only foreign operators, but also Russian companies that operate at international quality standards.”

Underdevelopment of logistic infrastructure requires special attention and solutions. This issue is of particular urgency in small cities, as logistics-related problems, though also acute in bigger cities, do not pose the same hurdles in megalopolises as in smaller towns. Poor logistics infrastructure development is the main reason that is seriously limiting a much faster express shipments growth rate in the industry.

Also, certain difficulties are caused by the imperfection of the aviation and customs services, continuous increases in transportation fares, and insufficient qualifications of specialists. The Association of Express Carriers is sure that Russian courier firms have the potential for fast-track development and implementation of competitive strategies. However, these goals are presently unattainable or  difficult to implement because of the imperfections in customs legislation, lack of due attention to the acute problems facing courier firms and lack of government support. 

In addition to this, experts have also noted that many legal problems associated with express shipments have yet to be solved. Today, issues of distinct classification of shipment items, such as acceptable dimensions and weight restrictions have not been settled. “The term ‘express delivery service’ is not defined or described in any law in our country,” Feler noted. “Consequently, this service is among items that fall under obligatory licensing requirements by the Communications Ministry as ‘a form of postal service’ and neither does it come under licensing by the Transportation Ministry as ‘a shipment service’ offered by cargo companies that do not have vehicles with weight carrying capacity that exceed 3,000 kg.”

Besides, the legal base, regulating the work of express delivery operators, in experts’ opinions, also needs reform and improvement. Transportation infrastructure and customs facilities need to be improved because in their current state they do not conform to the industry’s overall development level, and therefore, cannot completely and qualitatively satisfy business requirements of the sector. “Today’s Russian express delivery market has turned out to be insufficiently ready for the boom of shipments to individuals from abroad,” DHL Russia’s Emelyanova said. “The pressure on Russian customs and the transportation systems is enormous, consequently, the goal of all market players today is to offer solutions that will enable Russians that buy goods from foreign online stores to promptly and easily receive their orders.” 

It seems that the express delivery market exists in Russia not thanks to, but rather in spite of, the conditions of its normal development. However, despite this, analysts are certain that the existing, recalcitrant problems and deficiencies will be resolved and the express delivery of documents and cargoes in the nearest future will continue its growth and development, attracting more and more interested customers, which mean a relatively cloudless future for industry as a whole.

But this brighter future awaits only players, who are capable of offering the optimum ratio of price and services for cargoes delivery to the customers, whilst observing the highest quality standards at all stages, starting from receiving orders to their deliveries to their addressees. This is the winning formula on this market, especially as today’s clients are no longer willing to be content with less.