Exploring the changing influences on the European logistics market
From new sustainability standards to greater adoption of technology and e-commerce
5 minutes to read
EU Supply Chain Act - New sustainability standards
The EU Supply Chain Law, adopted in May 2024, brought in corporate sustainability obligations for large companies, requiring them to audit their suppliers along the entire global supply chain, including all direct and indirect business relationships.
Under the new law, large companies operating within the EU will be required to identify, mitigate, prevent, and remedy harmful human rights and environmental impacts in their operations and their value chains; that is, the company's business partners involved in production, distribution, transport, and storage of the company's products.
These additional reporting requirements mean greater supply chain visibility and may require investment in supply chain management systems and due diligence processes.
Greater supply chain outsourcing and rise of the 4PL
Managing supply chains is becoming increasingly complex. Additional reporting requirements are part of this, and there is also a need for enhanced flexibility due to geopolitical issues and rising cost pressures. This is driving increased demand for logistics firms. Logistics firms can offer businesses efficient supply chain solutions due to their economies of scale, utilising their large networks of warehouses and transport providers to secure competitive rates. An increasing number of businesses are turning to logistics firms to manage more of their supply chain infrastructure, including inventory and shipments.
Demand is rising for third-party logistics providers (3PLs) and increasingly what are known as 4PLs (fourth party logistics providers). While a 3PL focuses on order fulfilment, including warehouse operations, picking and packing orders, and shipping packages, a 4PL takes on a more strategic role, responsible for the entire supply chain, managing and optimising all aspects from resourcing to overall infrastructure. Increasingly, 3PLs are expanding their capabilities and morphing into 4PLs.
Advancements in technology are also giving logistics firms a competitive advantage. 4PLs can leverage advanced technology such as artificial intelligence (AI), big data analytics and blockchain to optimise entire supply chain ecosystems. As logistics providers adopt this new technology, they can act as a central hub, providing their customers with end-to-end supply chain visibility and decision-making capabilities. These capabilities will alter Europe's logistics landscape and drive shifts in fulfilment centre requirements, with modern warehouse space increasingly in demand.
Demand for logistics firms rises as e-commerce adoption rates increase
Over the past five years, logistics firms have increased their share of occupier take up across Europe. In the UK, where online penetration rates are higher than in other countries in Europe, 3PLs are the dominant occupier sector.
Ten years ago, when online penetration rates in the UK were 11.3%, high street retailers accounted for the largest proportion of big box warehouses. In Q2 2024, online sales accounted for 26.2% of retail sales in the UK, and distribution firms accounted for 45% of take up in the first half of 2024.
Furthermore, this figure does not include Amazon, which is categorised as an online retailer for our analysis but often performs the function of a 3PL for retailers who sell through their platform and distribute through their network.
The drive for efficiencies focuses demand on best-in-class assets
The adoption of logistics technologies is driving demand for newly constructed industrial space, with higher specifications and features not typically offered in older, second hand units.
The increasing use of automation technology and the electrification of fleet vehicles is driving higher power requirements. Logistics firms are also increasingly demanding greater eaves height, enabling them to reduce occupancy costs per square metre, using modern high-rise pallet racking systems and stacker cranes to maximise their efficient use of cubic storage capacity. These storage systems and automation equipment also affect floor loading and finish requirements. Modern building designs and materials also provide further efficiencies and enhanced environmental sustainability. With a focus on maximising efficiencies and meeting their clients' sustainability targets, logistics firms increasingly require new, best-in-class assets.
With distribution firms dominating leasing activity for new and grade-A facilities, as demand for their services rises, we expect demand to become increasingly focused on high-quality, well-located logistics hubs.
Threat to Red Sea shipping continues
The GSCPI The Global Supply Chain Pressure Index rose for the second consecutive month in June to -0.03, up from -0.5 in May. Attacks from Yemen's Houthi militants continue to pose a risk to shipping in the Red Sea, with many shipping companies re-routing via the Cape of Good Hope (a 4-5 day detour).
As yet, there are no signs of de-escalation, and recent developments in the Red Sea suggest that the threat to international shipping from Yemen's Houthis is growing. UN Special Envoy to Yemen Hans Grundberg, told the UN Security Council this month, "Recent developments suggest that the threat against international shipping is increasing in scope and precision."
A new, alternative route has been created. In May, a new multimodal service option was launched, offering an overland service via KSA (Jeddah) and Oman (Port of Salalah). However, the overland route takes 4-5 days, meaning that time-sensitive goods may need to be transported as air cargo at a significantly higher cost.
Cargo prices have soared over the past few months. According to data from Freightos, the cost of sending a 40' shipping container from Asia to Northern Europe is currently €7,724 up from €3,136 at the end of April.
To reduce the time goods are in transit and minimise shipping costs, many firms are opting to hold additional stock, thus reducing the frequency stock needs to be replenished. However, acquiring and holding additional safety or buffer stock involves additional storage requirements and costs. For some firms, this isn't a viable option.
German Ports were impacted by dockworker strikes in June and July. The strike action led to cargo bottlenecks at some of Germany's busiest ports, including the Port of Hamburg (Germany's largest port by volume).
Workers have threatened further strike action, which may cause inventory shortages for retailers preparing for year-end sales, hampering just-in-time manufacturing processes across Europe and could severely disrupt German exports. The impact would be felt most by the German automotive and machinery sectors, which rely heavily on these gateways for trade.