BONDED WAREHOUSING: Back on safe ground

The recent recession threw bonded warehouses into dangerous territory, but for those that survived its ravages, business is prospering, finds Rupert Millar.

One year ago bonded warehousing was in the very teeth of the savage economic storm raging around the world. Currency fluctuations, increases in duty and fuel prices and general reluctance among customers to even buy wine in the first place forced a wave of closures from the likes of Eurobox and Abbey Forwarding.

Nevertheless, the crisis may have had some surprisingly positive side effects for those businesses that had been savvy with their long-term plans. Reduced business meant time to consolidate and consider what bonded warehousing could offer clients both new and old, when they emerged from cover.

According to Anthony Finlayson-Green, managing director of Cert Octavian, the wilderness months of the recession were a time to put the company’s house in order. “We used the time well and took the opportunity to look at initiatives we started a couple of years ago and considered those that contribute and those that don’t.”

Finlayson-Green is quietly pleased with the way things are going and says that by the end of Cert Octavian’s financial year on 30 June it will have a turnover that is £1.4 million up from last year. This, he says, would signal the company’s first profit for several years. Michael Phelps, director of EHD London, says: “We’re through the worst of things now, the crisis gave companies time to consolidate.

While the first quarter is traditionally a little quieter than the rest of the year, I think things are picking up, stock is coming in and we’re attracting interest.”

This interest, for EHD at least, is in the form of private clients: “Private collectors investing has been very busy, the private wine investment market has been buoyant,” adds Phelps. “Taking on extra space is proving very successful.”

Enticing clients

That extra space is the Locke-King Vaults in Surrey. A former air-raid shelter built in the Second World War, the 17 tunnels add up to one mile of secure, dark storage room with constant humidity and temperature and all within striking distance of London as well.
It is just part and parcel of EHD’s customer service, and Phelps hasn’t stopped there.

“In 2009 having seen a gap in the market for a ‘one-stop shop’ for wine logistics, we developed our own shipping service which we believe provides a continuity of passage from the grape to the glass,” he says.

In effect it is a step up from companies employing their own drivers and lorries for deliveries within the UK and helps guarantee the traceability and security of wine being shipped from as far away as South Africa.

David Mawer, managing director of JF Hillebrand, says: “A lot of our continued growth has been down to us delivering what the market needs right now. This includes ultra-reliable groupage services that enable customers to ship small quantities more frequently. Taking some of that uncertainty out of the supply chain.”

To further combat duty fraud, this year will see two new initiatives introduced to the bonded warehousing scene. One is the Electronic Movement Control System (EMCS), which has been approved by HMRC and will be gradually phased in over the course of the year.

Its aim is to replace much of the paperwork involved in shipping and allow more automated management in the supply chain. The second plan is to introduce electronic movement documentation for all shipping coming from the New World from port to bond by the end of the year

Mawer hopes that both proposals will “improve consumer and business confidence in how we manage the continued issue of duty fraud”.

However, even those companies that have not added new services still maintain that “going the extra mile” is what gives them the competitive edge.

Jeff Stanton, chairman of London City Bond, claims: “It’s what makes the difference particularly in difficult times. We had a fantastic period around Christmas, despite the awful weather, even though it involved people sleeping in the warehouse to make sure deliveries went out on time.”

He reports that since last October London City Bond has recorded a 14% increase in volume activity.

Finlayson-Green says that having scaled back during the recession, “we are now in a better position to give that added value back to our customers. It’s a very tight market and, more than ever, people are really price sensitive. Now it is really price driven and if you can maintain very high service levels and be price sensitive that gives you an edge”.

Software solutions provider RedPrairie paints a positive picture of the industry at present and notes the attractiveness of bonded warehouses for businesses looking to maintain revenue and avoid the latest tax hikes, either in an already established facility or setting up their own.

Nick Love, business development leader for international trade and customs at RedPrairie, reports that: “Because trading is so difficult, what you’ve got is the financial directors looking at how to keep cash flow going for the longest possible time. If they can sell the goods quickly then they’ll pay the duty up front but if not then bonded warehousing is the best option.”

Love stresses the role of bonded warehousing in ultimately helping to keep the consumer protected from unmanageable prices.
“The duty escalator won’t have a negative effect on the end consumer.

As duty goes up it’s even more important to maintain the cash flow and businesses look to bonded warehouses to keep away from that exposure for the longest possible time.”

Escalator problems

The feeling among bonded warehouses is that the planned duty escalator is not a major problem. Just as the warehouses are looking to offer their clients something unique and cost saving as they begin to pick up the pieces, so too are retailers and Phelps believes that despite or indeed because of the duty increases, clients will be looking to keep their stock in bond more than ever.

“Duty rates are not helping wholesalers in what is already a difficult economic market, although it does make the job of the bonded warehouse keeper even more important in helping to protect cash flow. Clients will still wish to leave stock in ‘bond’ and pay the necessary duties upon release,” he says.

Meanwhile, despite agreeing in principle that clients would look to keep their products in bond, Mawer was not so sure that meant they would be bringing in huge levels of stock and predicts that the recession may have caused a long-term, perhaps even permanent, shift in how clients use bonded warehouses. Much is still dependent on the public’s spending habits and, as businesses are acutely aware, it remains a very difficult market.

“Reducing stock levels but turning the stock over in bonded warehouses more frequently is the key. I think that’s a sea change, the whole business has changed forever as a result. Companies have had to look at optimising their business. It’s all about optimising your cash flow and working capital, it’s about holding less stock,” he says.

“The successful businesses at the moment are those who are holding less stock than they were a couple of years ago.”

Finlayson-Green agrees with this. “Our commercial clients have had a good first quarter or perhaps better than expected,” he asserts.

“People are now really in control of what they’re doing. Without exception our customers are looking at the whole picture and not just spending.”

The recession’s immediate legacy would certainly appear to be one of caution and restraint, gone are the days of a devil-may-care attitude to money: “I think the biggest impact of the recession is cash management and at the moment people are more sensitive about cash,” he says. “They’ll still keep in bond but that may mean they’ll have less capital.”

Many companies have conceded that the good times have not fully returned and nor will they overnight. However, it would appear that, overall, bonded warehousing can feel confident about the future and things are starting to look up.

In the end, despite the slow pace of recovery, it would appear it is the old idea of providing one’s clients with the best and most efficient service that will come through for those companies looking to go the distance.

Rupert Millar, May 2010