Tesco Plc (TSCO) is leading a trend among U.K. supermarkets to stock stores using container trains, transforming a rail-freight market once dominated by bulk flows of coal, steel and chemicals.
Tesco, Britain’s biggest retailer, is being followed by Marks & Spencer Group Plc (MKS) and Wal-Mart Stores Inc. (WMT:US)’s Asda in the drive to cut transport costs and improve delivery times by switching more of its logistics chain away from crowded roads.
Containers became the biggest part of Britain’s 1 billion- pound ($1.6 billion) rail-cargo industry for the first time in 2011 with a 27 percent share, government data shows. Non-food companies including No. 1 home-improvement chain B&Q (KGF) are also being lured by rail’s improved reliability and flexibility.
“Logistics markets are being increasingly impacted by road transport costs and disruption in deliveries,” said Andrew Griffiths, U.K. chief at Prologis Inc. (PLD:US), which runs Britain’s biggest road-rail interchange at Daventry, central England, serving Tesco and J Sainsbury Plc (SBRY), among others. “Add in the green agenda and rail becomes more and more attractive.”
Containers have become the fastest-growing flow on British tracks, with traffic expanding 7.5 percent a year since 2003, said Carsten Hinne, logistics director at Deutsche Bahn AG’s DB Schenker Rail U.K. Ltd., Britain’s top rail-freight operator.
Shops have doubled their use of rail in five years, said John Holwell, development manager at Malcolm Group Plc, which books trains for Tesco, Asda and the Argos household goods arm of Home Retail Group Plc (HOME) that are run by Direct Rail Services.
Road to Rail
DRS, which moved into cargo after being set up to carry atomic waste, is the fourth-biggest U.K. rail-freight company after Schenker, Freightliner Group Ltd. and the GB Railfreight unit of Channel Tunnel operator Groupe Eurotunnel SA. (GET)
Rail’s attractiveness to retailers has been enhanced as it competes head-to-head with road transport in terms of service levels, said Freightliner Chief Executive Officer Peter Maybury.
“The challenge for us is to manage our process well enough that, from our customer’s perspective, they don’t know if it’s going by road or rail,” he said. “It’s a more complex move as you’ve got to handle loading, rail movement and final delivery.”
Tesco has switched the most freight from road to rail among U.K. retailers, extending the practice beyond primary movements to secondary flows serving regional distribution centers, the Freight Transport Association said in a report in February.
The supermarket has doubled the number of train journeys in the past year, spokesman Matt Francis said in an e-mail, and is working on extending deliveries across a wider range of goods.
Routes include one from Prologis’s Daventry site, east of Birmingham, to Livingston in Scotland, and the company’s containers are emblazoned with “Less CO2,” a reference to the carbon dioxide savings of a rail-based supply chain. Sainsbury, Britain’s No. 3 supermarket group, agreed to lease a rail- connected warehouse at Daventry for the first time on Oct. 18.
M&S, Britain’s largest clothing retailer, has also been slower to make the shift, with flows limited to movements from ports, plus drinks and garments sent to distribution centers. Volumes may jump as it consolidates clothing deliveries at four main centers, logistics manager Emile Naus said by e-mail.
Daventry, which has 6.25 million square feet of rail- connected distribution space, equivalent to 75 soccer pitches, has only one un-leased site left and Prologis last month sought planning permission to more than double the area covered.
Among coastal terminals, DP World Ltd.’s London Gateway deep-sea port and an adjoining logistics park that will be Europe’s largest is likely to become the busiest U.K. railhead when it opens at the end of 2013, according to Schenker’s Hinne.
“From the day the port opens we intend to run four routes, one to the northwest, two to the Midlands and one to the northeast,” he said. Trains will span 700 meters (2,300 feet) and eliminate the equivalent of 4,000 lorry movements a week.
Still, rail is a comparatively poor relation in terms of overall freight, accounting for less than 10 percent of traffic, versus two-thirds for roads, 23 percent for waterways and 5 percent for pipelines, Department for Transport figures show.
That’s partly because the high fixed costs of locomotive haulage are prohibitive over the short distances often involved in U.K. shipments, with rail generally competitive only over 200 miles or more, said Freightliner’s Maybury.
“You have to let modes play to their advantages,” said Stefan Sanders, a rail strategist at engineering consultant Arup Group Ltd. “Rail is no good at specialized one-off journeys. Likewise road is not very good at moving 200 containers a week.”
A general lack of terminals and infrastructure and the long planning processes that must be overcome to add new facilities present a further hurdle, according to Tony Berkeley, chairman of London-based Rail Freight Group, which promotes the industry.
Some lines are also closed to the biggest containers, which are unable to clear the tight tunnels, low bridges and wide platforms of a network built in the Victoria era.
Enhancing “gauge clearance” to allow the transportation of high-cube boxes from every U.K. port to every major terminal would provide a vital boost, Hinne said. Following the upgrading of the route north from Southampton on England’s south coast last year, Schenker has expanded such traffic by one-quarter.
Those paths that are open to the largest containers, such as the West and East Coast main lines, are also the ones most crowded with passenger services, making the orchestration of port, rail and road schedules a constant headache, Maybury said.
While longer trains may help ease the crunch, the biggest factor in freeing up capacity could prove to be the 33 billion- pound High Speed 2 project to build a 200-mile-per-hour passenger route to northern England via Birmingham. That in turn could allow more freight services to use the West Coast line.
For the moment, retailers and rail operators are eking out new freight flows from innovative use of existing links. Tesco plans to carry whisky for Scottish distilleries on south-bound services next year, while Colas Rail, a unit of French builder Bouygues SA (EN), is trialing electric-hauled goods trains to London Euston. The nighttime trips from Daventry could take perishables to the heart of the capital, harking back to days when major stations had depots allowing point-to-point deliveries.
“This may not work when you have disparate journeys in different directions, but when you have a collection of receiving points, as you have in most of the big urban retail centers, it starts to have legs,” Griffiths at Prologis said.
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