When gauging the state of the parcel market, there seems to be an interminable list of moving parts contributing to its complexity. On that list we find the ever-increasing pressures of e-commerce that continue to reshape the sector; the limited amount of pure, full-service providers; and the pricing power imparted by FedEx and UPS that only seems to be gaining steam.
More so than ever, in 2016 parcel shippers need to do their homework and find innovative ways to get in front of this list of challenges before it increases the cost of doing business. They need to be fully cognizant of their rates and contract structures, and they need to begin to work more closely with their providers to make sure that they’re getting what they’re paying for.
But most importantly, say our panelists in the “2016 Parcel Express Roundtable,” shippers need to get smarter about their own freight and concentrate on more efficient packaging as carriers have now matched their pricing to their costs and look to optimize every delivery route.
Logistics Management is pleased to welcome this year’s trio of parcel experts, including Jerry Hempstead, president of Hempstead Consulting, a parcel advisory firm; David Ross, transportation and logistics director at investment firm Stifel; and Rob Martinez, president and CEO at Shipware, an audit and consulting services company.
Over the next few pages, they offer their respective insights for what’s driving parcel market trends and share practical advice for how shippers need to re-adjust and better manage their parcel operations as mounting e-commerce delivery pressures continue to dramatically alter the service landscape.
Logistics Management (LM): How would you describe today’s parcel marketplace?
Jerry Hempstead: The landscape of options for parcel shipping has shrunk and is going to shrink some more this year. When FedEx eventually consummates the acquisition of TNT Express, that will take the global choices down to two. UPS and FedEx will own the world. DHL, of course, is a solution for global transactions, but they lack a domestic service here in the USA, which is still the number one market on the planet.
The United States Postal Service (USPS) has some solutions here and internationally, but they can’t really provide global shipping solutions. Once FedEx closes on the TNT acquisition, the opportunity exists for them to continually turn up the heat and leverage their offerings so shippers put more, if not all, of their eggs in their basket. The dearth of choice has led to some rather calculated and bold cost increases.
Rob Martinez: UPS and FedEx shippers took another major rate increase on the heels of 2015’s massive increase. And in spite of falling fuel prices, the two delivery giants also raised fuel surcharges in 2015 not once, but twice. On the postal front, after more than two years of pricing stability, the USPS instituted a major rate increase. FedEx bought TNT to bolster its European delivery capabilities—and at a significantly discounted rate from what UPS had offered three years prior. And, Amazon’s recent foray into logistics, including drones and same-day delivery, has the e-commerce world abuzz.
David Ross: Things keep growing and changing. Boxes and boxes keep piling up at apartment buildings and on doorsteps every day, and it is not just UPS, FedEx and the USPS delivering anymore. Amazon, as Rob mentioned, is grabbing all the headlines as they continue to push the envelope in terms of transit time.
LM: How would you describe the current rate and pricing environment for parcel shippers, especially coming off of a year that saw FedEx and UPS eliminate the three cubic-foot exception before dimensional pricing kicked in for ground packages?
Ross: The rates have generally stabilized after a bump up last year due to the dimensional weight changes, but they are going higher. We expect to see an additional 2% to 3% increase in 2016, although there will be different increases for different shipment types. For example, we expect short-haul ground and long-haul air pricing to see the biggest increases and short-haul air express pricing to see the smallest increase.
Hempstead: The environment is still one of opportunity for shippers, but the reality is that costs are rising and will be for the foreseeable future. Fees are now compounding each other, and it’s become rocket science. Most shippers do not have the method and means to sort it all out and get a deal commensurate with their volumes in the marketplace.
Martinez: While last year’s dimensional weight pricing and other FedEx and UPS revenue management actions led many pundits, including myself, to call it the “mother of all rate increases,” the aggregate impact of the announced 2016 general rate increases (GRI), fuel surcharges and special handling rate hikes is proving to be no less potent.
Actual 2016 GRI from FedEx Express increased significantly higher than the “average” of 4.9% that was announced. In fact, Standard Overnight, 2-Day and Express Saver (3-Day) products increased 6% to 7.7%. Similarly, UPS Air increases exceeded the 5.2% average, with some services taking as much as 8.45% year-over-year increases. Lightweight Ground increases for both carriers exceeded the announced 4.9% average, while 1-pound to 5-pound Ground packages increased 5.8% and 6-pound to 15-pound packages are 5.5% higher in 2016.
LM: What are the big takeaways from the move to dim pricing?
Martinez: While many volume shippers successfully negotiated improved dimensional divisors to mitigate the impact of the size-based pricing, on the whole, shippers are paying more. The carrier price changes did affect shipper behavior as many shippers reconfigured box dimensions to reduce the impact.
Ross: One thing that’s very apparent is that packaging matters. Because carriers have now matched their pricing to their costs, shippers need to minimize space—not weight—for maximum savings on parcel spend.
Hempstead: Some savvy shippers were able to negotiate an exemption from the new dimensional rules, but the concessions are all finite in term. The exemptions are now rapidly moving away and what remains are negotiated divisors—for example 250 in place of 166. These, too, will sail into the sunset over time, and we will see a complete sun setting or a gradual reduction of the concessions. Nothing, by the way, prevents the carriers from standardizing the divisor for all parcels to the international standard of 139. We may see this next year, just to make it easy for shippers to do ‘dimensionalization.’
LM: What is driving rates for 2016?
Ross: We expect to see an average 2% to 3% increase in 2016, although there will be different increases for different shipment types. For example, we expect short-haul ground and long-haul air pricing to see the biggest increases and short-haul air express pricing to see the smallest increase. This is driven by the increased attractiveness of ground shipping when shipping integration and the carriers’ attempt to close the pricing gap between air and ground in those lanes.
Hempstead: It’s no secret that the integrators and the USPS are focused on yield improvement. That means that just about everyone is going to be paying significantly more in 2016 than in 2015. Most shippers have agreements that are discounts off a base tariff and a discount—either percentage or dollar amount off the base of the accessorial charges. Even if you think you have negotiated a great discount, the fact is that when the base prices for a service goes up, that discount is less effective and you are going to be paying more. All the accessorial charges have gone up, and the formula for the fuel surcharge has been re-engineered so that you’re going to pay more based on the price of the barrel.
Martinez: FedEx and UPS really understand their cost structures and have been pushing to recover costs where they can by charging more for services where they feel they offer service advantages. There’s no debate rates are higher in 2016. While the USPS still offers competitive pricing and savings over FedEx and UPS for some products, it too took a major rate increase in January 2016. On the average, USPS rates increased 9.5%. Moreover, the USPS eliminated volume based Commercial Plus Pricing for some products in 2016, and plans to eliminate it entirely for all products by 2017.
LM: How are market conditions affecting service and what role is the “uneven” U.S. economy playing?
Hempstead: Service became a great frustration for shippers who do the bulk of their transactions between Labor Day and New Year’s back in the fourth quarter of 2014. Further exacerbating this is the crush that occurs between Thanksgiving and Christmas. Some shippers do 80% of their volume the 10 days prior to Christmas, and this unevenness hurts the carriers’ earnings. It’s hard for the carriers to justify building an extremely expensive network to satisfy 10 days of demand around the holidays; however, the carriers began in earnest in January 2015 to meet with the seasonal shippers and to plan ahead for their needs. The result was a significant improvement in performance this past season.
Martinez: Overall, service has been excellent for FedEx, UPS and the USPS. Market conditions don’t affect service quality as much as they affect pricing. As public companies, FedEx and UPS are expected to deliver higher earnings per share, and when the global economy slows and the carriers report slower volume growth, the delivery companies are forced to make up the revenue shortfall with higher pricing.
Ross: The service bar keeps getting pushed higher, especially to justify higher pricing. The uneven U.S. economy is helping carriers manage capacity a little better by holding back volume growth lower than it would be in a strong economy.
LM: How is e-commerce continually changing the parcel market?
Martinez: E-commerce is transforming the parcel delivery business, and carriers have quickly modified their business model to capture the growth opportunity. Keep in mind that online retail is growing at four times GDP, and, globally, cross-border trade is growing at seven times GDP. We anticipate that B2C deliveries will grow 30% over the next six years.
Hempstead: E-commerce has definitely changed the world view of parcel logistics. Not that long ago, the parcel world was all about B2B transactions. Now, because of the Internet, the number of residential transactions has exploded to the point where they now outnumber the business deliveries. The big cost driver in the parcel business is delivery density, and the integrators just don’t have a lot of pieces going to a single residence in any given day.
LM: What does the future look like for Amazon?
Ross: While we don’t think Amazon will be a global integrator and offer its parcel delivery services broadly to others like UPS, FedEx and DHL, we do believe Amazon will look to do more and more in-house each year, as its density grows.
Hempstead: Amazon has a tremendous vision and an insatiable appetite for resources. They continue to promote the concept of ‘free shipping’ for Prime members, and the carriers will tell you that free shipping isn’t free. Amazon continues to stretch when it comes to setting a delivery expectation for the consumer. That said, you can’t deny their success in attracting and maintaining customers. Their volumes continue to skyrocket, as do their transportation costs. In fact, their costs went up by $800 million according to their most recent earnings call, with most of it on transactions going to residences.
Martinez: Amazon will make an impact on FedEx and UPS, but likely limited to a narrowly defined market segment. I’m not yet ready to believe that Amazon is looking to challenge the big two; but rather, handle some metropolitan shipments where it makes economic sense from a cost and service standpoint. In the near term, Amazon is likely to concentrate on products with high order volume to make deliveries in densely populated metropolitan areas that are close to stocking locations. While Amazon sales make up nearly one quarter of all U.S. e-commerce sales, e-commerce is only a part of all the shipments handled by UPS and FedEx. And how much of its own business could Amazon handle on its own, 10% maybe? That’s not a big dent to FedEx and UPS, who continue to handle the other three quarters of U.S. e-commerce sales—and, by the way, the majority of Amazon deliveries.
LM: What advice do you have for parcel shippers in 2016?
Ross: My advice is straight forward: If you have your box in the right mode and in efficient packaging—small enough to avoid paying for excess air but big enough to prevent damage—you should be getting your best rate.
Martinez: Analyze, optimize and diversify. We’re seeing shippers achieve parcel cost savings of 10% to 40% through a combination of least-cost routing, modal and carrier/contract optimization including the USPS, UPS, FedEx and regional parcel carriers.
Hempstead: Shippers need to know that the carriers don’t want to lose your business to the other guy, and therefore everything is negotiable. The base tariff used, the calculation of the density of your package, the fee for residential or delivery area are all negotiable. Shippers also have to know package characteristics as well as the carrier knows them.
You need to know what’s being offered to firms like yours in the marketplace. You need to know how to position your responses to carrier offers and be able to evaluate the economic value of the carrier proposals. You need to realize you have something they want, and that’s packages, and you are in the driver’s seat. If you are bold enough to actually change carriers you can win the negotiation game and lower or mitigate your costs.