When it comes to assessing the various facets of the transportation and logistics landscape, it’s no secret that parcel express and ground activities follow a different playbook than other modes.
One big page of that playbook centers around the fact that this sector, unlike others, is still largely predicated on the actions of its largest players—the duopoly of FedEx and UPS. But that’s not to say that this sector is solely about these two bellwethers, as the United States Postal Service (USPS), despite its financial travails, continues to make steady progress with its shipping and package group.
In fact, the ongoing emergence of e-commerce has also helped to further open doors for regional parcel express players of all sizes, although the pricing power of the big two makes justifying alternatives a bit of a challenge.
To help Logistics Management put the current market into perspective, we’ve called upon Jerry Hempstead, president of Hempstead Consulting; David Ross, transportation and logistics director at Stifel Nicolaus; and Rob Martinez, president and CEO at the parcel shipping consulting firm Shipware LLC.
In the remainder of this article, this distinguished trio will provide their insight into what’s currently driving parcel market trends, the pricing picture, and what to watch for in the future. However, one prevalent takeaway the panel shares is for shippers to do their homework when it comes to assessing rates and service in terms of comparison shopping.
They agree that now, more than ever, high-volume parcel shippers need to carefully vet their providers and open their eyes to the small but growing role that regional parcel express providers are now playing.
Logistics Management (LM): How would you describe the current parcel marketplace?
David Ross: We’ve seen consistent growth in demand for U.S. small package deliveries, with ground-deferred shipments preferred to air-expedited shipments.
Rob Martinez: David is right on. I would actually describe the market as exciting. Many industry developments occurred in 2013, including significant growth in USPS Shipping Services; emergence of regional parcel express carriers as viable alternatives to UPS and FedEx; double-digit growth in e-commerce; and as a result of that growth we saw new players in the same-day delivery market, including Amazon Fresh.
Jerry Hempstead: But don’t forget that at the beginning of 2013 there were uncertainties regarding the negotiations between UPS and the International Brotherhood of Teamsters. From the ebb and flow of package counts divided between the two big carriers, it was obvious that fear, uncertainty, and doubt played well for FedEx and dampened the early numbers of UPS. This variable was eliminated midyear and the playing field has once again been leveled.
LM: How would you describe the current rate and pricing environment for parcel shippers?
Martinez: For FedEx and UPS customers, 2013 was a bear and 2014 will be no different. Annual rate hikes again outpaced inflation, many surcharges were increased, and the dimensional weight changes implemented in 2011 continued to adversely affect shipper costs.
UPS and FedEx continue to be focused on yield management, and shippers report that it’s more challenging than ever to negotiate UPS and FedEx parcel contracts with multiple sets of list rates, different fuel surcharges, complex revenue-based incentives, discount exclusions, minimum charges, and multiple punitive contract clauses.
Ross: The rate environment puts shippers at a disadvantage because there are really only two major players controlling roughly 90 percent of the volume. They set the pricing. Optimizing modes is where the savings opportunity is for shippers, not in pure rate negotiations.
Hempstead: Dave and Rob are certainly correct. No matter how good a negotiator you are or have been, chances are your delivery cost has gone up, and gone up much faster than the CPI for the last five years. The exit of DHL from the domestic playing field in 2009 has left shippers at the mercy of a duopoly. Shippers have little recourse. If one marries a carrier, chances are that there are yearly increases built into the agreement someplace.
One of the largest effects has been in the escalation of the minimum charge. This is important because shippers with big discounts often experience the biggest jump in minimums. Since DHL departed, the ground minimum is up over 35 percent. The benchmark ground commercial base price for a Zone 5, 5-pound transaction is up over 45 percent. Their net profits have soared since DHL exited, and for those that follow pricing nuances, FedEx has matched the price of UPS for the most part on the ground Tariff.
LM: Where do you see rates going in 2014 and what’s driving them?
Martinez: Effective January 6, 2014, FedEx rates increased an average of 3.9 percent for air and 4.9 percent for ground, while UPS implemented 4.9 percent average increases for both air and ground products on December 30, 2013. These “average” increases, however, are misleading. Two- and three-day air products increased 5.25 percent to 5.55 percent, and lightweight ground packages increased an average of 7.5 percent for 1-5 lbs. and 7.0 percent for 6- 10 lbs. Lightweight FedEx SmartPost packages increased an average of 7.5 percent for 1-5 lbs. and 7.1 percent for 6-10 lbs. Ground minimum charges increased 6.8 percent to $6.24, and many accessorial charges increased. Rate increases are being driven by a combination of UPS and FedEx’s yield management strategy, few competitive alternatives, and the market’s tolerance for GRIs.
Hempstead: When you consider all of the complexities of carrier pricing—service types, zones, fees, surcharges—I can’t envision many shippers skating by without some pain. The carriers have become very sophisticated in where and how they tinker with the Tariff.
The announcement of “average” increases by all of the carriers is rather deceptive, and there is no shipper that has a shipping profile that matches the way carriers determine this average. With that in mind, the only certainty is directionality. Shippers know rates are going up, but the amplitude is impossible to approximate.
LM: How are market conditions affecting service and what role is the up and down economic recovery playing?
Ross: Market conditions are having an impact on service. Whether the economy is up, flat, or down, parcel service continues to improve—with the exception of the recent snag around Christmas, but that was poor peak readiness.
Martinez: Outside of the holiday season, in which a combination of high package volumes and inclement weather affected service performance, overall service at FedEx and UPS has been relatively stable. We were concerned when FedEx announced in 2012 that the company was revamping the Express segment through a combination of cost reductions, payroll reduction, and service repositioning to shed $1.7 billion by 2016. However, service performance at FedEx Express continues to meet historical levels.
Hempstead: The impact of the havoc that the economy brought on is seen in the downtrading of international shipments and the use of more intelligent shipping software that can correctly select the lowest possible price option to fulfill customer expectations. This has caused the carriers to rationalize networks, in particular in the air, to maximize profits without compromising service.
The reality is that the number of available shipments has been constantly increasing. The variable has been the services purchased by the shippers, and it has taken the carriers some time to adjust to those changing demands. For example, USPS Parcel Select has aided both the integrators and the USPS so that shippers have a system for residential delivery that makes sense for all parties.
LM: How is the ongoing emergence of e-commerce changing the parcel marketplace?
Martinez: It’s safe to say that e-commerce is having an enormous impact on the parcel marketplace. We’re commonly seeing 40 percent year-over-year annual package volume growth with many of our e-commerce clients. And while UPS Surepost and FedEx SmartPost package volume posted significant growth in 2013, the USPS stands to be the real winner because it handles the final mile delivery for the vast majority of these shipments. Moreover, these USPS products will be taking a healthy rate increase later this month.
In addition, the explosive growth of e-commerce is creating new opportunities in parcel delivery. Regional carriers like OnTrac—that provides parcel services to the eight Western U.S. states—are gobbling up market share from Amazon, NewEgg, and many other high-volume e-commerce companies. And in the ever intensifying battle to exceed customer expectations and using delivery as a competitive advantage, same-day services are springing up in major metropolitan areas.
Hempstead: The most significant change is the rapidity at which the mix of business, from commercial to residential, has occurred. It appears to be on a hockey stick trajectory. The e-commerce companies have gained the trust of purchasers, and this allows the buyer the convenience of shopping and comparing from the privacy of their own home. This trend will only continue, and I see the future of shopping malls threatened as they are quickly being obviated by the online experience.
LM: Given the financial challenges of the USPS, what possible changes might shippers expect?
Hempstead: The only politically saleable solution for the USPS is to raise its prices to cover its operating expenses. Going to five-day delivery, closing unproductive post offices, tinkering with employee retirement and benefits are just not going to garner any support from either side of the aisle in Congress.
Ross: I agree. We expect further rate increases, but parcel is not where the USPS financial challenges lie—it’s mainly on the mail side. With Congress still involved, we don’t expect the financial struggles to improve much. Still, as parcel is the bright spot at USPS, investments are being made to improve service—like increased track/trace capabilities—so shippers should expect better shipping options for small packages.
Martinez: While it’s certainly true that the USPS faces significant financial and legislative challenges, declining mail volumes, as well as increased labor, health care, and pension costs, the shipping and package services segment is actually doing quite well. It’s been the bright point, boasting consistent and solid revenue and package volume growth.
Therefore, I don’t believe we’ll see negative changes at all. If anything, the Postal Service is likely to continue to offer new service and product enhancements like we saw with Priority Mail this past year. With all this in mind, we believe that the USPS will continue to grow its shipping business segment, and play a major role in the delivery of lightweight, residential deliveries well into the future.
LM: What advice do you have for parcel shippers in 2014?
Ross: Know your freight and your lanes and figure out what service level is really needed. Carriers are targeting specific package weights with their annual rate increases, and if shippers keep shipping as they always have, they may take unnecessary rate increases. Ground service has improved in terms of transit times and reliability; so regional shippers that are using express should take a hard look at shifting to the carriers ground products.
Hempstead: There are just so many complexities now—different services, different zones, and different accessorial charges. This makes it easy to get distracted. The two things shippers should have in their toolbox is a robust shipment processing system that complies with the changing carrier requirements, and the services of a qualified, experienced expert in the parcel industry.
Martinez: Analyze, optimize, and diversify. We’re seeing shippers save 25 percent to 40 percent through a combination of least-cost routing and modal optimization strategies as well as carrier optimization including the USPS, UPS, FedEx and regional parcel carriers.
LM: Have regional parcel players made inroads in market share gains in the last year? What can they do to better compete with the “big boys”?
Hempstead: The regional carriers continue to grow and prosper. However, this really doesn’t seem to have the attention of the national integrators. FedEx has entered into a new service offering of same-day city deliveries using delivery partners. As the USPS continues to raise the Parcel Select prices, the regional carriers become more relevant. This option becomes available to shippers who can use the services of a regional carrier within their footprint, but also as a practical alternative to the USPS for the hybrid services. Some of the regionals are already beginning zone skip pools to facilitate moving orders across regions for entry onto their networks.
Martinez: Indeed, the “super” regional carriers—OnTrac, Eastern Connection, LaserShip, Pitt-Ohio, Sir Spee-Dee, Lone Star Overnight, Courier Express, TransTek— have been making inroads and growing market share. The regional carriers offer many benefits over UPS and FedEx including cost savings, larger next-day delivery footprint, later pickups, earlier deliveries, easier contracts with fewer accessorial charges, same day-delivery options, and customized solutions.
An industry trend that favors the ongoing expansion of regional carriers is the trend to move inventory closer to customers. Companies like Amazon have opened dozens of regionalized distribution facilities all over the country to decrease shipping times, reduce costs and better serve customers. Regional carriers stand to benefit immensely.
Ross: Yes, but keep in mind that the regionals only have less than 3 percent of the market. Even increasing their market share by 35 percent is barely noticeable to FedEx or UPS.
In our view, they just need to keep doing what they’re doing—providing fast, reliable service at a competitive rate on a regional basis. We don’t envision a national network being established, as that would require significant real estate infrastructure investment, and the “big boys” would likely hold rates flat or cut them to prevent any new national parcel company from gaining enough density to make money.
LM: How much different could the parcel landscape be in five years?
Martinez: We see it changing in a few ways. First, the USPS will play a major role in parcel delivery and will take considerable market share away from FedEx and UPS. Within five years, the USPS will be the single largest player in residential parcel delivery.
Parcel select companies that leverage the USPS for final mile delivery will continue to grow faster than air and ground services. With the growth in e-commerce, return shipments will continue to rise. Companies like Newgistics, that specialize in returns, will be the beneficiaries of the trend. Finally, the same-day delivery market will grow as online shoppers realize the benefits and convenience of receiving an order the same day it is placed. Once the shipping operators find the right price point, we can expect rapid growth and expansion of same day service offerings.
Ross: B2C is driving all of the change, and Amazon is certainly experimenting quite a bit. USPS should remain king of B2C delivery, as the low-cost home delivery option, while FedEx should continue to slowly take share from UPS.
We don’t see DHL re- entering the U.S. market, but small local B2C start-ups should emerge to handle e- commerce deliveries. Regional carriers are likely to grow at above-market rates, but still not capture any more than 3 percent to 4 percent of the total.
Hempstead: The potential exists that the USPS may intentionally, or unintentionally, put itself in a position that it’s not the optimum method to accomplish residential deliveries for Fedex, DHL, and in particular UPS. The economics are such that UPS Surepost already diverts many transactions over 10 pounds to their own driver to deliver—the price increase slated for January 26 most likely slips this number to 8 pounds or less.
Amazon has sent a warning message out to the private carriers that it’s willing to explore alternatives to traditional services. However, I don’t see their flying device as the solution. The reality is that Amazon now has sufficient critical mass in its control to become its own parcel shipping company and sell that service to other sellers.
So, although Amazon may be a big customer of FedEx and UPS, they could become a threat as a competitor. What’s most likely is that they will find creative ways to work together to leverage each other’s strengths.