Uk Bus Service Industry Analysis

by Jason Shaw
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UK Bus Industry – Overview

UK bus industry was deregulated and privatised in 1985 by the Transport Act in England with a view to reduce public subsidy by reducing the pressure on prices. This was also initiated to induce business-related changes and increasing profits due to large demand for busses (Bond, 2007).

Deregulation called for private players which induced competition in an earlier subsidised monopoly market. Industry grew by a series of cost cutting measures simultaneously followed by volume increasing approaches and a lot of acquisitions in a highly competitive market (Stagecoach Group, 2013A).

UK bus industry having about 9000 licensed bus companies now supports about 170,000 odd jobs. There are about 22000 bus services registered within UK. Stagecoach comprises of one of the largest bus operators in UK. It runs about 8100 buses and employs around 35000 staff. It is also engaged in providing rail and tram services in UK.

Size

The daily travel density across the country is about 2 million people. Major competitors for the concern include  Cowie, FirstBus, Arriva, West Midlands Travel, National Express, First and GoAhead. Other competitors include international bus service agencies and independent operators (Arriva. 2013).

Competitive Structure

Since 1985, the bus industry has seen a growth that is remarkable. Presently, 4 of the major bus operators, namely, Cowie, FirstBus, Stagecoach and West Midlands Travel have more than 50% market share. However, the typical market structure specific to a bus industry is that unlike other manufacturing and service concerns, bus service industry focuses majorly on numerous local markets. The local market is evidently the large urban areas (Tsiotsou, and Goldsmith, 2012).

What is also striking about the market is that each one of the big 4 operators has almost equal market share with none having a significant market presence in all of the regions. If any of these big four operators want to become a market leader, they would necessarily need a very aggressive marketing strategy to acquire the market of other competitors. Competition is very limited because each one has its own market niche and customer set (Competition Commission, 2013).

Uk Bus Service Industry Analysis

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Opportunity and Threat Analysis

Opportunities:

Acquisitions

Stagecoach is operating in a market where there are primarily three major competitors, namely, Cowie, FirstBus and West Midlands. Here, each bus operator has almost equal share in the industry ad each one acts as a major market player. Competition is faced by these 3 bus operators alone; rest smaller operators do not pose significant threat (Reuters, 2013).

This is because the bus market in US is geographically segregated. Each player has his set and defined market area. Players do not compete in each other’s defined territories. This culminates in what is known as a lack of head to head competition. Bus operators are running excess profits because of lack of competition in their area of operation. Cities like Oxford, Nottingham and Sheffield were among the few places where there was some sort of competition observed (The Courier, 2012).

With a view to become a market leader and overcome such competition, Stagecoach can employ a consolidation strategy. It can expand its operations, and thereby market share by a series of acquisitions of smaller bus operators. With such acquisition based expansion, benefits to passengers will be felt directly in the form of falling prices, better services and higher frequencies. As for the firms, intense rivalry shall lead to one large firm being replaced by the other such that it leads to complete shutdown of the weaker firm (ReportLinker, 2013).

Emerging Markets and Expansion Abroad

Stagecoach operates majorly in UK and is expanding its operations in USA, NewZealand and Canada. Emerging nations like Brazil, China, India and Indonesia are countries full of growth opportunities. Expansion of bus services in these countries would be a great business opportunity. Countries like China and India have a huge population. They shall offer a wide customer base and opportunities to begin with large scale operations in China. The Chinese market is also geographically segmented into Premium and budget traveller categories. Operations along the sea coast would command more of premium class travel while the interiors of China would need more of budget bus services (OnStage, 2012).

As for India and Indonesia, budget bus services would work more. Premium travel demand is restricted to major cities alone and is growing gradually. Public means of transport are hugely popular here (Kapoor, Paul and Halder, 2011).

Threats

 Falling Bus Traveller Numbers

There has been a drastic and gradual fall in the number of people who prefer travelling by bus. This has been due to dispersed travel pattern.

By this, we mean that people who want to travel by buses have varied destination choices from a single start point. Buses here do not begin for all destinations as frequently as it is demanded. Such a dispersal of travel pattern of people within one city makes it difficult to maximise on passenger count per ride. When the buses are so infrequent, for the passenger, they prefer to take a car instead of waiting long for a bus (Competition Commission, 2010).

Wide Geographical Area

Route management in as vast an area as the entire UK, becomes difficult for one single operator with such abrupt and dynamic travel patterns. It has been argued that with such a wide geographical spread of services, it is obvious that competitors shall enter into cooperative pacts that will help them serve better in their area of operation. This is an economic reality for services that cover a wide geographic market.

Such pacts deteriorate competition and segregate markets based on geography alone. Also, it allows firms to charge higher fares and make excess profits in a monopolistically competitive situation. Companies do not have growth by way of expansion, or expansion of geographic scope of services as one of their five year term targets (Marketresearch, 2013).

Theoretical Analysis

Service Marketing Mix Commonality Differences
Product The common thing for all local bus service providers in UK is that they all cater to two different segments, the budget traveller and the premium traveller.

Eco driving and minimising fuel consumption to meet the statutory environment norms are the key to the bus business strategy (Winston and Crane, 2012).

What sets buses of stagecoach apart is that they offer greener and cleaner buses. As a part of their strategic positioning strategy, Stagecoach has identified a climate change strategy which would concentrate more on investments in energy efficient buses, meeting and exceeding the regulatory norms and employing more of less polluting fuels.

Stagecoach also operates the first of its kind Biobuses in Britain which runs on biofuel completely (Stagecoach Group. 2013B).

Price Bus operators have scheme\s that offer reduced travel rates and package deals for adult and regular bus travellers.

For children, they have bus passes that a school group could use and make a group of children travel at budgeted rates.

Certain bus companies offer friends pack to attract the college goes that allows 5 people to a budgeted day travel.

They also have special promotional for students, day passes and such other pricing strategies (National Express West Midlands, 2013).

According to the TAS report, stagecoach has been named twice for offering the lowest bus fares among any other UK based major bus operator.

£1 and $1 are the minimum prices levels excluding the booking fee.

Stagecoach plans to link comfort, punctuality, staff attitude, cleanliness and spaciousness to be more important than the price it charges to the consumer (TAS, 2011).

Place All companies offer urban and inter urban bus services. They also have special bus services for Schools, Parks and Rides, On demand rides, Long Distance coaches and Zero fare services.

All major companies have significant market presence in almost all known cities of UK.

Stagecoach offers its bus services almost everywhere in England which includes the Scottish highlands of the islands and southwest of England (Stagecoach Group, 2013C).

Stagecoach also operates bus services in USA and Canada.

It’s also a major operator in rail services in UK and is concentrating on rail JV’s in America.

Promotion What is common for all promotional activities in UK bus industry is that the all use celebrities to promote their specific niches. For example, a specific bus industry uses a famous basketball player pictures with their bus to promote their buses in schools and colleges.

Also, buses advertise on their body of the buses so as to attract eyes to their buses.

To promote bus services among non bus users, bus services try to highlight the punctuality and affordability of using buses to this section through various billboards and placards.

Stagecoach is trying to target the non user segment. It is observed that about 30% of no bus user segment of the UK population has a tendency to switch to bus services. As a part of the market segmentation strategy, Stagecoach targets this 30% of the population (Stagecoach Group, 2013E).

Stagecoach also used started telemarketing to attract passengers to switch over to buses. It also worked with other local transport authorities to facilitate the encouragement process of shifting from cars to buses (Stagecoach Group, 2013D).

Physical Evidence Consumers have experienced punctuality of bus services most of the time. They are reliable and comfortable.

Bus schedules are strategically planned such that there is not a huge time gap between two bus schedules. Also, buses on a similar route are run frequently for the ease of its passengers.

Premium segment allows and experiences total luxury in bus travel. Long journeys are made extremely comfortable. There are coach attendants who help with food and water as well.

Stagecoach offers customer service guarantees as free tickets if passengers get delayed on account of stagecoach.

It offers the cheapest budget travel and uses luxury interiors for buses that cater to the premium class. The drivers are also specially trained to cater the premium segment that gets converted from car using (Stagecoach Group, 2013F).

Process Online bus ticketing is easy and available for all major bus service companies. Tickets are readily available and journey times are minimised through efficient drivers and maximum safe speed. Same day travel booking is convenient and hassle free. Stagecoach pioneered the use of smartcard in its bus service segment which made travel planning and travelling a lot easier. They were the first major bus service company to successfully install their own smartcard machines apart from London (Stagecoach Group, 2013G)..

 

People All bus companies target safety of their people as a prime concern. The drivers and coach attendants are well trained and know their job well. Stagecoach has been successful in creating about 1000 jobs since 2006 and employs about 35000 people in total (TAS, 2013).

(Source: Arnie-design, 2007, Stagecoach Group, 2013A)

Stagecoach Group

Stagecoach group is one of UK’s leading bus service providers. It operates in almost all major cities in UK and has expanded into countries like USA and Canada through a series of strategic acquisitions and organic growth. They operate buses, trains, trams, ferries and express coaches. Its market share in the bus segment is 16% which stands at par with other 3 major bus operators in UK.

Problem Definition

Problems that plague the bus services sector in UK are

  1. Lack of Vigorous Competition

Competition in UK bus industry is nearly absent and is in the form of corporate pacts and understandings. There are four major players Cowie, FirstBus, Stagecoach and West Midlands Travel. High competition is unsustainable in UK and very few cities could support competition. Only very few cities like Nottingham, Oxford and Sheffield have some sort of a competitive environment. However, it is to be noted that if an operator does not do well, lack of competition does not help in sustaining the loss making firm. This theory can also be contested by the fact that absence of competition did actually support excess profits. Fare prices rose by 76% within 1997 and 2010 while actual cost of bus travel went up by 33% approximately (Maclay and Spens, 2010).

Lack of competition deters benefits from Stagecoach’s innovative initiatives. Since customers are geographically segregated, any new innovative move by the company does not invite significant switches in customer brand loyalty (Evans, 2005).

  1. Wide Geographical Coverage of Services

Stagecoach’s operations are major in some cities where it has significant operations while it has limited operation in other cities where its competitors hold a major share. It is also observed that many cities cannot operate more than one single operator. This means that only one firm operating bus in the city can make profits. The demand for buses is so low that multiple bus operators shall run into losses. Social obligations demand more than one operator to run bus services in a city. For this very reason, commercial bus operators have entered into understanding that separates their catchment areas for profitable operations (Arnie-Design, 2007).

Comfortable market competition deters consolidation via mergers and acquisition. Stagecoach plans to expand via acquisitions but this would invite intense rivalry that would let to downfall on one large firm. Recently, National Express rejected Stagecoaches expression of interest in acquisition of the company (House of Commons and Transport Committee, 2012; The Telegraph, 2009; Maclay and Spens, 2010).

  1. Falling Demand for Bus Travel

Varied patterns of travel have deterred the demand for bus travel. People prefer cars over buses because they are faster and conveniently available. Bus travel invites wait periods. Also, taxis offer comfort and privacy that buses cannot match.

Moreover, there is a segment of people who would prefer to travel by rail rather than bus, simply because they are quicker.

The growing health conscious segments prefer to travel by cycles or simply walk. This has reduced short distance traveller count.

Stagecoach has to win over all these different segments of non-bus travellers. Falling demand for bus travel has also infected the group.

The bus services industry is operating under excess prices. Hence, as a problem statement for Stagecoach, price problem does not qualify (Bhattacharjee, 2006).

Solutions

In order to overcome the problems associated with service marketing in the bus industry, Stagecoach has to go about devising a positioning strategy via market segmentation (Lovelock and Wirtz, 2007).

  1. The Product Problem for Stagecoach is associated with falling demand for bus services. The problem has identified several groups of customers who do not travel by buses for specific and different reasons.

To cater to the car loving passengers, Stagecoach has to carry out intensive advertising campaign such that the car traveller associates comfort and luxury of a car in a bus ride. Stagecoach has designed premium buses for the high class travellers and needs to modify on privacy factor present in cars, comfort of direct destination travel, availability at all times.

For this, stagecoach can design a frequent traveller list of car preferring consumers and design bus schedules based on their frequent travel times. They can enhance bus travel experience by offering entertainment on the move and internet connectivity for the business class. This can be a major crowd puller and can pull people’s preference to bus travel

As per the service marketing strategy, stagecoach is trying to cater to different segments of people by

  • Identifying various target segments
  • Segregating various service determinant attributes and
  • Developing an effective positioning strategy

The value proposition should target and drive consumers towards product offerings of Stagecoach (Hoffmen and Bateson, 2006).

  1. The Process Problem associated with Stagecoach is pertaining to lack of healthy competition. This deters any incentive to perform better and the consumer becomes a price take rather than a price maker. Also the possible benefits that could be realised with products innovations have not been yielded for Stagecoach.

Stagecoach is now operating in the service looser segment of the four levels of services marketing. Stagecoach has its set of consumers because the customers have no alternative to bus travel in the particular geographical area. Stagecoach introduces new technologies and innovate products but these are done only in pressure. Pressure of environmental regulation by the European Union led to development of Stagecoach’s Climate Change Plan.

To move on to become a service leader in the bus service industry, stagecoach has to go about a series of promotional and customer acquisition plans for expanding its scope of business. It also needs to acquire small operators to get a better share of the market in its area of operations. Increase in service quality and focussing on customer care would expand customer base. For example, catering to non-bus travellers by offering them comfort and luxury of car travel might help in initiating passenger switch to buses. Also, Stagecoach could develop various new service strategies that would help them establish a brand name, like have punctuality in bus schedules (Hoffmen and Bateson, 2006).

  1. The Place Problem is associated with a wide spread of service in the bus industry. Stagecoach has had limited operations in a number of cities where its competitors have prominence. Larger market presence would help Stagecoach in benefitting from economies of scale (Hoffmen and Bateson, 2006).

The strategy to gain more market presence would be to make a series of business acquisitions. Small operators operate buses in almost all cities; Stagecoach should start by acquiring small players such that it becomes a prominent player in these cities because of its brand name. The company has to simultaneously develop the most effective route plans that will minimise cost of operation and time of travel and maximise on passenger traffic. Stagecoach is a profit making concern despite the economic downturn in Europe and such series of acquisition could make it a market leader in no time at all. However, Stagecoach also has to appreciate that there might be period of a slump in demand and such expansion might pose excess capacity losses. To minimise those losses, the company has to formulate excess demand management strategies (Lovelock and Wirtz, 2011; Northcott, 2013).

As for theory, the problem of excess demand can be overcome by proper downtime scheduling, analysing seasonal demand and formulating backup plans during seasons of low demand, induce flexibility in capacity by renting buses and using part time employees to cut down labour costs during slump (Hoffmen and Bateson, 2006; Whirtz, Chew and Lovelock, 2012).

As a result, The excess profits problem shall also be resolved.

Recommended Strategy

It is recommended that Stagecoach follows the third strategy for solving the place problem. The segregated geographical market is the prime problem that hinders Stagecoach’s problem of expansion. It is also impacting its product problem of not extracting the full benefits of innovation in a competitive market scenario and also the process perspective by defining areas of operation. Consolidation plans and inducing competition could have a trickledown effect on both the remaining problems (Apte, 2004).

Also, theory supports the consolidation strategy. In Thompson’s ‘perfect world’ model, a firm should operate in a manner such that the market absorbs one single product kind continuously and flow of inputs was steady and of the same quality. This theory underscores the fact that in an imperfect competition, not all products are consumed and some products are not quality products. Also, uncertainty in production also initiates inefficiency (Rao, 2004).

If Stagecoach goes about consolidating small firms, other large players would realise market competition and would also initiate their consolidation plans. Intense rivalry and competition will follow. Companies would try to consolidate and differentiate their services. This would drive service innovation and better quality of services. Also, stiff competition would induce price wars, which in turn would lead to competitive pricing of bus services. This would remove the scope of excess profits. In the end, at least one firm will close down and the market will emerge as a competitive market where firms are competitive, services are of superior quality that will bring in demand and prices are competitive (Grönroos, 2000; Clarke, 2000).

Conclusion

The solution to Stagecoach’s problem of lack of competitive environment, fall in bus service demand and segregated geographical landscape is a series of acquisitions by the company. Acquiring small or big bus operators that are located in different areas would increase scope of operations for Stagecoach in the bus service domain and solve the place problem. Again, acquiring firms would induce competition in other large firms, who, in order to remain in competition, would begin their strategies of consolidation. This would resolve the process problem associated with the bus industry in UK. Lastly, wide scale operation and increased competitiveness in the industry would induce product differentiation. Each firm will try to establish and gain market share via product differentiation. This would create quality services that are customised to suit the needs of the passenger. The product problem shall hence be resolved (Clarke, 2000).

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