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Road freight: Small enterprises make inroads

05 May, 2010

Small road-freight enterprises have seen robust growth in previous years in what is becoming an increasingly crowded market.

The stagnation of growth in the trucking industry during the previous year has not hindered small business which has come out relatively unscathed by staying competitive.

Major players in road freight still dwarf these businesses but while industry giants like Toll Holdings and Linfox look internationally for continued expansion, smaller firms like Wridgways and Kings Consolidated have been making inroads by utilising aggressive pricing strategies for growth.

Despite economic conditions, Wridgways lodged revenue of $124.3 million, a record increase for six straight years in a row. Earnings were buoyed by its corporate removals division: Wridgways Move Solutions; and international division, Wridgways the WorldWide Movers, which saw increases in revenue of 48.0% and 16.5% respectively.

Kings Consolidated followed the trend of growth by acquisition with the takeover of Blue Circle Transport. Building on its 10.9% rise in revenue in the 08/09 financial year, it is expected that turnover will continue to increase by as much as 30% in the current fiscal year to $145 million.

Border Express and Allied Express both felt the pinch of the global financial crisis but managed to outperform the industry average drop in revenue of 6.6%. Although revenue declined for Allied Express for the second year running, reductions in borrowing costs have enabled it to more than double its net profit to $870,000. Similarly, Border Express implemented cost cutting measures by streamlining its human resources leading to an increased after tax profit.

Tepid revenue growth for some of these small firms did not immediately translate into higher profits. Decreased demand in domestic sales has forced firms to accept lower margins as competitors heavily discount on prices to win contracts. Compared to an industry average of 4.6%, smaller businesses were left scraping by on operating margins of just below 1.0% last year. Thus, return on revenue was largely unchanged for these firms with any revenue growth undercut by lower overall net income.

In line with strong performance in the past financial year, both Wridgways and Kings Consolidated far exceeded the industry average of 5.4% return on shareholders' funds. Keeping in mind that significantly higher ratios may be attributed to the low amount of assets needed by firms to operate in this industry, it is nonetheless a useful metric to gauge the efficiency of firms' ability to generate earnings.

Outlook
Smaller firms look set to capitalise on renewed freight activity in the domestic market as the economy eases back into recovery. As evidenced by Kings Consolidated last year, the benefits of economies of scale through integrated networks and acquisitions will continue to appeal to small businesses as they look to stay competitive against major industry players.

Source: IBISWorld

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