We had the pleasure to host Rob Martinez, Dave Sullivan, and Gordon Glazer from Shipware on a call this past Friday to discuss the recent annual price increase announcements from the major parcel carriers: FedEx (FDX, Hold, $216.00), UPS (UPS, Hold, $112.94), and the U.S. Postal Service (USPS). Shipware represents shippers of all sizes, helping them to save typically 10%-30% on their annual parcel spend, as it is estimated that 90% of shippers are overspending on small package, largely due to the fact that they have no benchmarking ability. As we know from following UPS and FedEx, the pricing environment has firmed in recent years, and both companies have been emphasizing margins over market share, making it even more difficult for shippers to get a good deal. Below are a few key takeaways from the call.
“Help – we’re stuck in a duopoly,” complain most small package shippers
In a recent Shipware survey of small to large parcel shippers (annual parcel spend ranged from a few millions dollars to over $100 million), across industries – from e-commerce/consumer to tech to healthcare to manufacturing – shippers feel it is more difficult today than in the past to negotiate due to the lack of competition and the fact the carriers are focused on profitability over share gains. Furthermore, 76% of the shippers surveyed said it is hard to switch carriers, mainly due to operational complexity, and 73% have not changed carriers in at least two years. Certainly one reason is that the carrier contracts usually include revenue-based incentives, making it harder to shift business, especially mid-stream. In some contracts, there is even a cash penalty (~2% of annual parcel spend) for cancelling early.
The Amazon Effect is real
Over 75% of shippers surveyed have been impacted by Amazon’s growth in e-fulfillment and logistics. This is reflected in what was found to be most important to customers – free shipping, fast transit time, and easy returns. Interestingly, when asked if they thought Amazon Logistics would really go head-to-head with FedEx and UPS, over 80% believe they will (at some point), and 65% think they will within the next five years. Our view remains that Amazon will control as much capacity as it makes sense for them to control – in an asset-light manner – but that the USPS, FedEx, and UPS will remain significant service providers (especially the USPS).
The annual rate increases impact every customer differently
If a shipper plugs in the announced average rate increase of 4.9% into its 2018 budget, it will be wrong (and may be miles off). Know your freight. For example, longer-haul air is up more than Ground-competitive short-haul air, and rates on heavier packages are seeing lower increases, which helps the carriers get down to an announced 4.9% average.
E-commerce shippers get ready
FedEx SmartPost rates are going up January 22, 2018, as the dimensional weight (DIM) divisor is coming to all SmartPost packages to bring pricing in line with Ground and Express. This is likely to result in significant double-digit increases for most SmartPost shippers. While it was not talked about on the call, we believe DIM is coming next to LTL (FedEx Freight and UPS Freight). The companies already have dimensions on the freight and use it for costing; it’s just a matter of time before the pricing is simplified.
How to deal with higher parcel shipping costs?
Most shippers are trying to mitigate DIM pricing via contract negotiations (and the range of DIM divisors among survey participants was much larger than we expected), while 46% are changing box dimensions, 29% shifting to polybags, and 18% to on-demand customized box sizing. We would recommend shippers also look at switching modal mix – Air to Ground, Ground to SmartPost/SurePost, or other – to get the best deal based on their shipping profile. The key for shippers is understanding as much as they can about their own freight profile.
USPS is the biggest player in last-mile, but its biggest customers are FedEx, UPS, and Amazon
When asked if the USPS is an important part of carrier mix, 54% said no and 46% yes. This is better than it appears, though, as the trend has increased significantly from prior Shipware surveys – up from only ~20% responding yes a few years ago.
No accessorial charges (simplified pricing). For most shippers, 20%-30% of overall spend is in the form of “add-ons,” such as oversize fees, peak surcharges, fuel surcharges, residential delivery, etc. Shippers hate that and say they want fewer surcharges even more than better pricing.
So, why do shippers not use USPS more?
1) Pricing is simply not competitive – especially for significant shippers after factoring in discounts and incentives.
2) Hard to do business with them. Also, the perception gap is significant. The service is OK, but 64% said it is significantly worse than FedEx/UPS, and only 9% said the service is the same or better.
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Of the two public U.S. parcel giants, we favor the shares of Hold-rated FedEx over those of Hold-rated UPS at current levels, due primarily to:
1) SmartPost’s DIM change in January 2018,
2) FedEx’s multi-year operating profit improvement program, 3) the UPS Teamsters negotiation in 1H18, and 4) continued positive global trade growth.
Conference call replay info (available until 12/1/17) – dial-in # (800) 332-6854, passcode 193572 Prices are as of the close, November 17, 2017.
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FedEx Corporation (FDX) as of November 17, 2017 (in USD)
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United Parcel Service, Inc. (UPS) as of November 17, 2017 (in USD)
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The rating and target price history for FedEx Corporation and United Parcel Service, Inc. and its securities prior to February 25, 2015, on the above price chart reflects the research analyst’s views under a different rating system than currently utilized at Stifel. For a description of the investment rating system previously utilized, visit Stifel.
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