#183 LAND TRANSPORT SURVEY SEPT—Growth to R300m in parcel transport income is more than e-commerce

Main points: growth to R300m in parcel transport economy; Trucks strike lowest payload since May this year after strike action peaked; and rail income grows to R4bn in September for the first time ever.

There are a number of interesting developments in the most recent Land Transport Survey (LTS) from Statistics South Africa in the September month. However, what is of interest in this brief is the growth in parcel income over the last couple of years, against the backdrop of all kinds of other developments. 

Headline changes are that the payloads are contracting at a rate slower than income from a month-to-month perspective. But, this is balancing act is offset by higher unit prices for certain commodities— specifically textiles, electrical machinery and other freight increased by R 110 million in income. The remaining sectors dropped by R 676 million for the September month. In other words, the month-to-month drop should have been 5%, but the growth in transportation income in the above mentioned sectors kept the the R 13.9bn mark at bay. Another interesting element is that much of the products which kept the market afloat are relatively high value products with relatively lower weight— so their income would also not be directly proportional to their payload. 

Manufacturing and transport income contradictions

The value of a commodity, how it is handled and the general characteristics of a specific month tend to influence some of the contradictions in the data. Sales revenue from in the manufacturing side reveal that paper, paper products, print and recorded media increased by 27% this month, while the income from transporting these goods declined by 9%. Publishing lead the manufacturing sales market with a 23% rise month-to-month— and moving such consignments is usually done in small parcel batches, not containerised bulk. 

Sales revenue from textiles, clothing and footwear were down 5% in September, but income from transporting them was up by 8%. Similar contradictions in the electrical machinery space, with a rise in income from transporting these goods, but a decline in actual sales revenue for the month in question. Clothing and electronics, or electronic machinery tend to have high value and low weight, so income is not expected to reflect the payload. However, other factors may have increased the cost of transporting these goods (i.e. distance, time constraints etc.). 

Freight market shares and pack leaders

With the heat on shifting freight from road to rail in the most efficient and effective manner, the Road Freight Strategy argues that the competitive advantage of rail can only be derived if the capacity constraints are addressed. Their view is that this shift is “thwarted” by the notion that rail systems need to be expanded because they do not offer “services for short-haul and break-bulk”. Transnet Ltd. has an interesting financial report in which the business has an overall increase in profit, contained costs, but a contracting rail division which has lost 4.9% of its volumes but 0.3% decline in revenue. These results remain positive given that it September 2019 is the first month where the monthly revenue from rail freight reached the R 4bn mark. 

Road freight payloads and income are nearly as low as they were in May this year, touching the 58bn tonnes and R 10bn mark for the September month— a drastic 7% drop. Recall that September had significant truck driver strikes,  violence and other impacts on road freight movements. It is plausible that these volume and income drops coincided with weaker freight demand for agricultural (-13%), and mining (-1%) transport demand— supplemented by a 3% contraction in the manufacturing sector in terms of sales revenue. 

“We have to measure the value of lives lost when this type of protest action occurs, largely because if we are just going to have an estimate of the business cost then we are probably going to miss out on the value of lives lost and the long-term economic impact on households and families. This is basically a market failure and the labour input is responding to that in a way that is more expensive for smaller operators than the larger operators.”

Hlulani Mokwena, M&G

The land transport survey reveals that contracting market shares between rail and road between April and June and July to September. Rail freight tons are down by 4.3%, and road freight tons are down by 2.2%— generally there is some contraction in the payload volumes— but this is not proportional to income. Freight income is only down by 0.7% for July-September months for 2018 and 2019. Overall, this month-cluster (July-September year-on-year) has an important set of rapid growth pack-leaders:

  • Commercial products up by 23% over the 3 month period y/y;
  • Used household and office products up by 50% over the 3 month period y/y; and
  • Parcels up by 20.6% over the 3 month period y/y.

Delving a little deeper into the parcel economy, might reveal a few insights about the growth and increasing importance of smaller freight operators in the largely unregulated free freight market. 

Focus on the parcel

In order for municipalities, towns and cities to manage the upsurge of micro-cargo, regulators may need to wear an entrepreneurial cap and intervene in such a way that more and better quality business for customers and communities are created.

This issue goes beyond e-commerce and digitisation, it has planning implications.

The parcel market is a small share of the bulk of all the freight being transported by and large, but it is rather important. In a recent interview, Takealot CEO, Kim Reid revealed that with nearly 1.2 million deliveries a month Takealot is a R5.5bn company that is yet to break-even. With the growth of companies like Aremax, and PAXI in store delivery and package collection networks in SA are growing. PAXI uses its 2000 strong Pep store network to enable greater market access through a network of partners with a relatively low standard price. Aremax operates like a micro-cargo store-to-door carrier— at scale after acquiring the 287 store Postnet in 2014  R190.5 m or $16.5m and establishing a diverse in-store collection and distribution point with Pick n Pay and Fresh Stop. This was clearly an undervalued transaction, but may have appeared reasonable at the time, but given the most recent developments in the parcel market, it is quite important to look at the bigger picture. 

Fig. 1: Vehicle Population in in South Africa 2000-2018

First of all, there has been a steep increase in the number of Light Delivery Vehicles since 2004, these vehicles have risen at a rate faster than trucks and other heavy load vehicles. There are more LDVs than there are minibus taxis in South Africa— most of which serve a commercial function. This is a serious industry, and if the vehicle volumes represent the future, then their role in delivery, construction and other light consignment industries can not be ignored.  

Fig 2. Income from Transporting Selected Goods in the Year (2019 is only unto September)

Secondly, various goods yield all kinds of income. However, what we expect is that the annual income should rise for most commodities, as a sign of growth and change. However, what we see is that income in the transportation of paper and paper products is nearly stagnant, although the manufacturing side highlights and increase in sales income. Basic metals and fabricated metal products appear to be contracting into September 2019 after a decent year on year increase from R 429m to R594m in transport income— still three months of revenue to go. The most startling feature in this chart is the staggering rise in parcel transport income from R198m in the whole of 2016 to R294m in 2019 for only until September. 

Fig. 3 Year on Year Change for the September Month

Finally, even when viewed on a month-to-month basis, there is clear evidence that 2016 to 2017 was a good period textiles, metals and motor vehicle parts and accessories; motor vehicle parts, household and office products, and parcels picked up in 2017/2018. But electrical machinery, motor vehicle parts and parcels jolted up in September 2019, while the usual leader fell by 38%. Parcels are up 43% in September y/y, and this comes as no surprise with the overall period trend leaning on a complete lack of glory in the 2016/2017 July to September block dropping by 6%, no change in 2017/2018, to an explosive rise in 2018/2019. Why is this happening? What is propelling this new dawn? Will it persist in 2020? 

Where could the parcel economy go?

There are so many moving parts involved here because to infer that there is a relationship between the parcel market, manufacturing outputs and transport income requires an understanding of the operators on the ground; more detail from Statistics South Africa— which has been challenging so far; and empirical analysis of who is transporting what, where, how in the micro-cargo sector. Furthermore, given that the land transport survey has a limited scope, the exclusion of minibus taxis in the survey limits the reality that there are parcels being moved by public transport vehicles at a fee, as well. In many ways the micro-cargo economy is undervalued, and with the growth of social media retail (i.e. instragram retail, facebook, gumtree and other buyer-seller markets) there is a massive gap on the rise.

Furthermore, food deliveries and related solutions are either embedded in the retailer or outsourced and they are essentially contributing to a new wave of transport incomes (which Takealot leaned into by buying 60% of 4200 suburb strong Mr Delivery, and Uber expanded to by introducing UberEats with more than 3000 restaurants in SA to date). This is exacerbated by the affordability and ease of banking options emerging as a result of  three new banks in South Africa, namely: Zero Bank, Discovery Bank and Tyme Bank. Each of which target specific market segments that are distinct from each other. It appears that the digital revolution may be fuelling this direction, but only a longer term view of the potentially 400 million Rand parcel transport market could enable deeper clarity. 

“The coordination of transport regulatory functions is fragmented and levels of control and enforcement are not optimal due to the need for improved coordination between different spheres of government”.

Road Freight Strategy, 2017. —pp 14

For now, my hunch is that even with StatsSA data at hand, there is a larger unseen economy delivering small consignments in our cities and towns. In order for municipalities, towns and cities to manage the upsurge of micro-cargo, regulators may need to wear an entrepreneurial cap and intervene in such a way that more and better quality business for customers and communities are created. However, without deep intergovernmental and public private partnerships in the administration, management and enforcement of much needed interventions, policy readiness will fall flat. The conflicts in road freight may have eroded some market cap, while the demand for moving goods remains constant rail freight may become more competitive. What we perhaps need to avoid is a situation where drivers in the parcel economy are underpaid, overworked and operate in an unregulated and dangerous manner. Usually, as we’ve seen in the road freight trucking sector this leads to violent chaos, consolidation and complex market practices. 

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