Confidence has accelerated in the South West’s logistics sector as the economy continues to recover, according to a new survey – but pressure on margins remains a challenge.
The region’s logistics firms signalled a bounce back in confidence last year after tough trading conditions in 2012. Now, in the latest UK Logistics Confidence Index the sector has registered its highest index rating for optimism – and largest half-year increase – since the survey was launched in the first half of 2012. 
It shows an overall confidence reading of 74.9, up almost 25% on the previous six months and 43% higher year on year.
However, the bi-annual index, commissioned by Barclays and accountants Grant Thornton, shows the sector is still grappling with some big challenges with pressure on margins, customer demand, fuel costs and market volatility the prime causes for concern over the next six months.
Of the senior industry figures surveyed, 61% said operating conditions were more favourable, compared to 26% in the first half of 2013.
Just 7% said trading conditions had worsened with 32% saying they had stayed the same. Looking ahead to the next six months, the majority of respondents believe the outlook is likely to improve further with 55% expecting more favourable conditions. Some 35% believe conditions will stay the same and just 10% believe they will deteriorate.
In line with this more positive outlook, 84% expect their turnover to increase in the next year. Just under half (48%) are expecting an increase of 5% or more with 16% forecasting a rise of 10% plus – well ahead of inflation.
Turnover expectations among large logistics groups have accelerated from 60% in the first half of last year to 84% now. Smaller operators’ expectations climbed from 74% to also reach 84%.
Similarly, the rise in optimism translates into increased profit expectations with nearly three-quarters (73%) expecting a rise over the next 12 months. Some 38% are forecasting a rise of 5% or more, with 16% anticipating an increase of 10% plus.
Just 9% foresee a decrease in profitability, compared to 15% a year ago.
Investment intentions are also high for the vast majority of logistics businesses with three-quarters planning to invest profits in significant capital expenditure. Operators are looking to invest in fleets, infrastructure and technology in order to drive growth and competitiveness. A quarter of businesses say they are assessing acquisition opportunities, which is broadly the same as in the previous six months.
Barclays head of region – South West Mid Corporate, Ian Workman, said: “With the logistics sector a lead indicator on manufacturing and retail activity, the marked rise in confidence is an encouraging sign for the UK economy.
“For nearly a third of the industry, customers expanding their contracts are the main source of new business, up from a fifth in the previous six months. However, while confidence has improved, this is only the start of an upturn in the sector where challenges remain and margins continue to bite.”
Logistics businesses are also looking to take on more employees with half of operators planning to increase staff levels, up 6% on the previous year. This growing figure reflects the findings of the recent Barclays Employers Survey which also reported that half of logistics companies were looking to fill more roles over the next year.
However, major challenges persist for the sector with respondents reporting that continuing downward pressure on margins is still by far the biggest issue for the sector as customers continue to demand more for their money and also are very prepared to change service providers in order to get it.
Another continuing challenge for the sector is the lack of qualified drivers and other skilled employees. The concern lies not only in attracting suitable talent but also in retaining skilled employees with the added burden of trying to attract younger recruits to counter an ageing workforce, a particular problem for the sector.
Grant Thornton regional corporate finance director Mark Naughton, who advised on the recent £117m sale of Wiltshire-based oil distributor Watson Petroleum to World Fuel Services of the US, added: “Operators have entered 2014 on a strong footing, confident that the wider economic revival will continue to drive demand for logistics services.
“This momentum is encouraging for the sector, however the relatively high level of competition in the sector is putting continued pressure on margins. Operators would be wise to keep an eye on value-add opportunities which ingrain them deeper into supply chains and strengthen their roles as critical partners in clients’ success.”
