The UKWA Blog

Friday 18 September 2009

EPR one year on

It is over a year since changes to the Empty Property Rate (EPR) rules resulted in empty warehouses becoming liable for the same rates as occupied buildings.

When the new rating scheme was introduced (on April 1, 2008) UKWA, expressed considerable concern about the impact that the legislation would have on the logistics and third-party storage industries.

It would appear that these fears were well-justified. The Government’s move to scrap rate relief on empty industrial property has led many landlords to demolish perfectly sound warehouse property as a way of avoiding paying the substantial amounts of tax that unoccupied facilities now incur. Indeed, a recent report by property consultants Lambert Smith Hampton, found that owners of properties tended to wait for 12 to 18 months once a property had become vacant before making the decision to demolish it, which indicates that the speed of demolition of warehouse buildings is likely to increase in the near future.

Furthermore, the cost of EPR is proving a major deterrent to speculative warehouse construction.

By encouraging the early demolition otherwise useful warehouse buildings and discouraging new speculative development the imposition of EPR

means that when this recession ends there will inevitably be a shortage of warehouse accommodation and rents will rise significantly – thereby creating inflation.

The imposition of EPR on warehousing and other properties could not have come at a more difficult time, demand for warehousing was falling in the spring of 2008, since when the credit crunch has developed into the severest recession since the War.

The Government’s intention when it changed the rules relating to EPR was to increase the availability of property and to reduce rents or the cost of occupation. However, it is clear that Ministers have not thought this policy through and in the long term its consequences will be precisely the reverse of what they sought to achieve.”

No Government Help

The present Government continues to do little or nothing to help the logistics industry ride out the current storm. In fact, the Government’s failure to reduce the high cost of fuel in Britain could lead many companies to relocate their major UK-based warehouses and distribution centre hubs to mainland Europe with many hundreds of jobs lost as a result.

Fuel represents around 36 per cent of an operator’s costs and the UK Treasury imposes the highest level of fuel duty throughout whole of Europe – around 25 per cent more than any other state.

But the logistics industry isn’t just about lorries. Modern third party logistics (3PL) contracts comprise a range of services – including distribution, storage, packaging etc –rolled into one. So, if - as has been demonstrated - a lorry refueled in northern Europe pays over £10,000 a year less than a similar vehicle doing the same mileage that fills up in the UK, it is easy to see why a 3PL might be persuaded to relocate its distribution hubs to mainland Europe.

With around 2.3 million people employed in a wide variety of roles within the UK logistics industry, if the Government doesn’t do more to bring UK fuel prices closer into line with the rest of Europe, it won’ t be just the HGV drivers that suffer.”

UK firms are further handicapped by the fact that, in comparison with many European hauliers, our wage bills are high. An Eastern European lorry driver can be up to 20 per cent cheaper to employ than his British counterpart and, regardless of the guidelines laid down in the Working Time Directive, he will work longer hours to earn it.

With margins already tight in the UK 3PL sector and faced with high fuel bills and higher employment costs, it is becoming increasingly difficult for UK-based operations to compete with their European rivals. I fear more and more blue chip British manufacturers and retailers will choose to outsource their logistics operations to established western European transport firms. As a knock on effect of this more UK logistics firms will find themselves swallowed by the bigger European operators. I’m not sure that it’s a good thing for our country or our economy to have so many logistics firms not in British ownership.”

Derrick Potter is National Chairman of the UKWA and the Founder and Executive Chairman of The Potter Group

Use the Experts

Because most companies have a major percentage of their costs tied up in their supply chains, supply chain management - once seen as something of an add-on with no real bearing on a business’s ultimate success - has been elevated to a key board-level discipline. And in the current economic climate, an optimised supply chain is now considered vital for any business hoping to avoid the jaws of a nasty recession.

The approach to supply chain optimisation has traditionally focused on one piece of the puzzle at a time. These can include sourcing goods and services strategically to strike a balance between lowest material and transportation costs; maintaining the right mix and location of factories and warehouses to serve customer markets; and, using traditional logistics techniques to maximize distribution efficiency.

However, since the 1980s there has a been a sharp upturn in the number of companies that choose to outsource logistics and supply chain management functions to 3PLs.

Typically, 3PLs specialise in integrated warehousing and transportation services that can be scaled and customised to a customer’s needs. The kind of service offered will be based on a client company’s own unique market conditions and the demands and delivery service requirements for the goods that company produces and sells.

In today’s price sensitive market, the need to drive cost out of the supply chain is often cited as a major reason for using third party logistics service providers. However, perhaps a better reason for engaging outside experts is the in-depth knowledge, flexibility and added value that a specialist contractor can provide. In short, as well as helping companies to achieve significant cost savings, a good 3PL will enable a business to enjoy shorter order cycles, better customer service and improved all-round business efficiency.