By Jeff Berman, Group News Editor · March 2, 2020
The combination of strong economic fundamentals and steady consumer spending continue to provide a blueprint for success for the service providers in the dynamic parcel express market. The ubiquitous duopoly of UPS and FedEx continue to make their collective presence felt on many levels, and global e-commerce titan Amazon is closing in and taking active and measured steps to bring more deliveries into its own network.
In the meantime, last-mile logistics continue to take a more prominent seat at the table, with e-commerce becoming the preferred way of shopping for many consumers. This, in turn, has forced shippers to step up their games when it comes to how they approach rate and pricing negotiations.
In our annual endeavor to keep shippers up to date on this fast-moving and ever-changing market, we’re joined by Jerry Hempstead, president of Hempstead Consulting, a parcel advisory firm; Dave Sullivan, vice president of professional services for Shipware, an audit and parcel consulting services company; and John Haber, founder and CEO of Spend Management Experts, a transportation, distribution and fulfillment spend management consultancy.
Logistics Management (LM): How would you describe the current state of today’s parcel marketplace?
Dave Sullivan: Uncertain and dynamic seems to be the constant state of the parcel marketplace. Change has always been the order of the day, but the pace of change seems to be accelerating lately, largely due to the impact that Amazon is having. The “Amazon effect” continues to force change on parcel carriers and shippers at a pace that they’re likely not comfortable with—and the choices that we make as consumers only amplifies this.
The demand by consumers for faster transit times, coupled with rising costs, presents challenges that some are finding difficult to overcome. Responses to these challenges include a move toward more Saturday and Sunday deliveries and potentially less reliance on the United States Postal Service (USPS) work share programs. And as a byproduct, we’re seeing increased tensions between the two national carriers and Amazon as they figure out how to be both partners and competitors.
Jerry Hempstead: B2C e-commerce is exploding in volume and growing so rapidly that it “forgives” many of the cost increases to the carriers, as new volumes hid a lot of operational sins. The package growth has had a positive effect on UPS and FedEx as well as the regionals like OnTrac, and it has provided the density to allow Amazon to build out its own proprietary network.
“B2C e-commerce is exploding in volume and growing sorapidly that it ‘forgives’ many of the cost increases to thecarriers, as new volumes hid a lot of operational sins”
— Jerry Hempstead, Hempstead Consulting
We also see the positive effect parcels have had on the USPS. The new tax reforms have also put a positive spin on the capital spending decisions, in particular UPS and FedEx. The change in the tax law has allowed them to now invest in equipment that will help their costs in the future.
John Haber: It’s complicated. Retailers continue to offer “free delivery” while last-mile providers are competing on speed and convenience. Free delivery is, of course, not free, but retailers believe that they have to offer it in order to be competitive. Meanwhile, Amazon continues to up the ante by now offering free next-day delivery for Prime members.
At this same time, the last-mile location is changing. Besides the traditional front porch and lockers that can be found in a number of locations, there are other alternative delivery locations. These alternative locations are not only marketed as a convenience for consumers, but they’re also part of a cost savings solution for FedEx and UPS that allows each provider to bundle pick-ups and deliveries in one location versus residential door-to-door deliveries that are time consuming and costly.
LM: Can you describe the current rate and pricing environment for parcel shippers?
Hempstead: Sadly, we’re in a world with only two global integrators with a full range of services. The two have done a great job in leveraging their discount programs to force most of the customers’ wallets into their bucket if the shipper wants to realize optimal results. The two telegraph to each other the breadth and timing of price increases, and as one makes a change the other is quick to match or mimic the revenue grab.
My experience is that shippers don’t want to switch carriers and endure the potential service and cost consequences of doing so. The carriers know this. So, just about everyone endures annual cost increases of one sort or another, and the only mitigation for the shipper is their ability to negotiate.
Haber: It’s a paradigm shift. For years, we expected just an annual average rate increase and that was it until the next year. However, there’s more to these announcements from UPS and FedEx. Surcharges now make up the bulk of the increases, and for several of these surcharges, such as additional handling and fuel, increases can occur throughout the year, in addition to new ones. As a result, shippers struggle to plan and budget shipping costs.
Sullivan: Challenging, as always, but also favorable in terms of the opportunities that exist relative to rate optimization and negotiation. We’ve seen rate negotiations over the past few months that have resulted in pricing that we would have previously considered better than “best-in-class.”
The fallout from FedEx firing Amazon, and then Amazon shutting off FedEx Ground as an option for Prime shippers, has created capacity within the FedEx network that they need to fill in. They’re aggressively pursuing new business and competitive, non-incumbent carriers must follow suit in order to keep what they have. And while this is mostly a residential network issue, commercial shippers are benefitting as well. We’re seeing aggressive pricing for both.
However, shippers do need to be wary of new rules and non-linear price increases and service guide changes. For example, the package weight that triggers an additional handling charge from both carriers has been reduced from 71 pounds to 51 pounds. This amounts to a huge rate increase for some shippers. Also, both carriers have increased the additional handling charge itself, resulting in a “double whammy” for many shippers.
LM: What have been the biggest changes for shippers since dimensional pricing (DIM) divisors switched to 139? Have they adjusted well or do challenges remain?
Sullivan: Many shippers have adjusted or are adjusting, but there will always be challenges—more for some shippers than others. Shippers have been able to optimize their packaging to the degree they’re able in order to minimize the amount of air being shipped, but this isn’t always an option depending on the product being shipped.
Some shippers have moved to USPS, where possible, in order to take advantage of their more favorable DIM pricing. The larger question is whether the carriers will lower the divisor again. The carriers are currently realizing a minimum package density of 12.4lbs per cubic foot—this is compared to a minimum density of 8.9lbs per cubic foot when the divisor was 194.
How much higher can they go? We have no indication that the divisor will be reduced again, but as the carriers continue to look for new revenue opportunities, it would stand to reason that it’s at least under consideration.
Hempstead: When the change of the divisor went from 198 to 166 and then to 139, many shippers negotiated exemptions, but in many cases, exemptions and concessions expire over time. The same has held true for the big hit to shippers, which was the elimination of the three cubic-foot exemption that happened in January 2015.
“The rise of e-commerce shipping has been perhapsthe primary disruptor in the parcel market,and a strong economy exacerbates this.”
— Dave Sullivan, Shipware
Some shippers have made operational changes to reduce their package size and packaging procedures, but, for the most part, shippers just have to incorporate the increased costs into their budgets. Sharp negotiators still can get exemptions to the divisor and for a size exemption.
The 2019 Christmas surprise was the modification of the additional handling surcharge (weight), reducing the trigger from 70 pounds to 50. Up until now, the surcharge (now $24) was not imposed on transactions from 50 to 70 pounds. Today, shipments of this weight have this extraordinary burden imposed.
Often for big shippers, the fee is more than the transportation cost, and, to add insult to injury, the carriers now impose a fuel surcharge on the accessorial fee. Keep in mind that you can negotiate the implementation date on your book of business or negotiate a waiver for a period of time or negotiate a discount on the new fee.
LM: How are market conditions affecting service, and what role is the current state of the U.S. economy playing?
Hempstead: The economy has been robust for two-and-a-half years now. The tax cut put more spending money in our pockets. Consumer confidence and spending are up, and e-commerce has allowed us to conveniently separate ourselves from our money at the click of a mouse. This, in turn, has created a tsunami of packages, in particular during the peak buying season between Thanksgiving and Christmas.
The windfall of traffic caused backups in the carrier networks for some areas, which was exasperated by weather delays. It got so bad that Amazon put out an edict to third-party sellers to discontinue the use of FedEx Ground and Home Delivery until service improved. This then forced sellers to upgrade to two-day air or to another carrier. UPS got a similar black eye with Amazon during the 2013 holiday, but has since returned to Amazon’s good graces.
The folks at FedEx terminated their relationship for both air and ground during the summer, so it’s surprising that FedEx had difficulty handling volumes this year. We have seen moves by FedEx and UPS to migrate packages away from USPS for the last mile—as has Amazon—so that they can deliver on their own vehicles.
FedEx is going to be offering ubiquitous Sunday delivery, and Amazon has started next-day free delivery for some items for customers who are members of Prime. However, all of these service improvements come at a cost—and as hard as it is to believe, as John already mentioned, free shipping is not free.
Haber: Consumer demand is driving much of the U.S. economic growth. E-commerce is further driving this demand as consumers enjoy searching for bargains and goods from overseas—all from one’s smartphone, laptop, or tablet. Providers such as Amazon are responding by offering faster delivery service as part of its Prime membership. In response, Walmart and Target, in particular, are building out their own last-mile delivery networks, connecting brick and mortar stores as buy online/pick up in store options.
Sullivan: The economy is strong right now, and increased consumer confidence leads to increased spending, which leads to increased e-commerce volume. The rise of e-commerce shipping has been perhaps the primary disruptor in the parcel market, and a strong economy exacerbates this.
Both national carriers saw record volume during 2019’s peak shipping season, which was shorter than in past years. The next frontier for carriers and shippers is returns. More outbound volume means more demand for easy, inexpensive return shipping. UPS was expecting its 7th consecutive record “returns day” in 2020. To a large degree, consumer choice is driving much of what we’re seeing in the market.
LM: How are the more established carriers adjusting to the ongoing influx of new, last-mile competitors?
Haber: FedEx and UPS offer a much broader collection of services including well-developed nationwide networks versus the new, last-mile competitors
“Amazon is a threat to UPS and FedEx. Estimates are thatAmazon is currently doing about 25% of their own deliveries,and I believe that percentage will increase as Amazon takesmore of its logistics operations in-house.”
— John Haber, Spend Management Experts
that are typically more limited in scope and service. The advantages that many of these newer competitors have over the more established carriers, however, are agility and lower cost last-mile services. UPS and FedEx are investing heavily in their networks and in technologies to speed up fulfillment services and last-mile delivery. They’re also offering services like later pick-up times from retailers, as well as seven-day delivery services.
Sullivan: The national carriers are certainly getting creative, or at least are trying to. They continue to develop multiple innovative last-mile solutions to meet demand and adjust to the competitive landscape. According to FedEx CMO Brie Career, who spoke at the Consumer Electronics Show in January, 50% of FedEx deliveries are residential, 50 million packages are delivered every day, expected to increase to 100 million by 2026—and 93% of that growth is expected to be driven by e-commerce.
Walgreens CMO Vineet Mehra spoke at the same conference and mentioned that FedEx has counters in 8,800 Walgreens stores and noted that 78% of Americans live within five miles of a Walgreens. FedEx customers have the option to have their packages delivered to the local Walgreens rather than to their front door.
In addition to creating efficiencies for the carrier and providing a more convenient delivery option for the end-user, this solution also deters porch pirates. Expect this trend to continue.
Hempstead: For the most part, the big integrators have ignored the entry and success of new entrants into the game. While the new players don’t offer a superior service, the acceptance and adoption rate of alternative suppliers is due primarily to pricing. If the integrators ever wanted to shut down the regionals, they could. They simply could offer a better price to the customers and do it quickly.
The big guys have a depth of cash that could enable them to do so, but it’s a choice they don’t need to make right now, because they are dealing with their own strong package growth already. I’m sure management at the big integrators understands that onboarding new customers costs very little because they have plenty of network capacity.
LM: Related to last-mile, what is your take on the increase in motor carriers’ involvement in this space?
Sullivan: The national carriers are forcing this change by virtue of their punitive pricing for larger, heavier items. Large items such as TVs, appliances and mattresses are, more than ever, ordered online. FedEx and UPS charge $120 to deliver oversize items to a residential address. If the package is over 108 inches long, measures 165 inches in length + girth, or weighs 150 pounds or more, that fee soars to $875.
Although the carriers have made investments in order to be able to more efficiently move large packages through their network, it’s volume that they really don’t want. There has also been some partnering of retailers and non-traditional last-mile carriers for a quality delivery experience that’s less expensive than those offered by UPS or FedEx.
These partnerships are critical, as many end-users consider the delivery company an extension of the retailer and the interaction with the delivery company and the delivery driver is often the only person-to-person interaction they have with the retailer.
Hempstead: The growth in last-mile business is predominantly residential. Do you want a 53-foot trailer pulled by a tractor making deliveries in your neighborhood? That said, there’s now some growth in heavier online purchases, as people become more accepting of e-commerce and companies like Home Depot, Walmart, and Wayfair are generating transactions that fall outside of a good fit for the parcel carriers.
Haber: Motor carriers see an opportunity. UPS and FedEx do not want these large, bulky items in their small parcel networks because they’re not set up to handle such items. As a result, UPS and FedEx have implemented a number of surcharges such as large package, oversize, and overmax to discourage them. And for many motor carriers expanding into last-mile, there’s a learning curve.
It’s not the same as moving more traditional trucking freight. Motor carriers need to have the right equipment and vehicles, as well as trained employees for white glove services such as installation and removal of goods like furniture. Technology is also needed for scheduling, tracking, and customer service. It proved too much for Schneider National, who ended up shutting down its last-mile division due to cost.
LM: Given Amazon’s constant growth and scale, they continue to be viewed as a viable parcel and logistics operation. How do you view where Amazon is for both parcel and last-mile services and where may they be headed next?
Haber: Amazon is a threat to UPS and FedEx. Estimates are that Amazon is currently doing about 25% of their own deliveries, and I believe that percentage will increase as Amazon takes more of its logistics operations in-house. Amazon recently said its dedicated last-mile delivery network delivered over 3.5 billion customer packages globally in 2019.
Amazon’s last-mile delivery network is just a part of Amazon’s broader, intricate supply chain that includes ocean, trucking, air and rail and is all interconnected from the origin of the package all the way through the last mile. Their goal, in my opinion, is to not only control their own global supply chain, but to also provide logistics and transportation services to businesses similar to what they did with Amazon Web Services (AWS)—use it internally and then once perfected, sell it to others.
Hempstead: Indeed, Amazon is the wildcard in this game. They’ve built out an impressive network of hubs, terminals and aircraft. Estimates are that they have 20,000 of their own vehicles on the road now, but they have a breathtaking 100,000 electric vehicles on order to be fully integrated by 2030.
Amazon may be optimistic in thinking that its organic growth is going to devour that capacity, but logic dictates that we consider Amazon retailing their parcel services at least to large shippers. I’m optimistic that Amazon will become a third player in the market, at least competing for the big retailer business. The optics so far reveal that Amazon has just been busy taking care of Amazon’s business, and we have not seen any wholesale entry into the vast amorphous parcel market.
Sullivan: Consider Amazon’s business model and, as an example, the evolution of AWS. First, Amazon was building Cloud-based servers to better control costs and efficiently serve its internal needs. Now, AWS is a mainstay for IT operations of many Fortune 500 companies. Amazon is pushing hard to control its shipping costs, which accounts for roughly half of its retail gross profits. As with AWS, its history is to provide an internal model that drives down costs and drives up efficiencies.
Amazon continues to make bullish investments in its delivery network. The return on the investment resulted in their ability to deliver 46% of all U.S. packages bought on their platform, compared to 20% the previous year—that’s extraordinary growth. The evolution of AWS took a full decade to go from its internal self-serving infancy state to its market-dominant position in Cloud infrastructure. It doesn’t take much speculation to see a similar outcome with its shipping network, and I expect that Amazon will begin delivering packages to the doorsteps of non-Amazon customers in early 2021.
LM: What advice do you have for parcel shippers in 2020?
Hempstead: Normally, a shipper is not precluded from negotiating all or part of their contract at any time they please. After all, the carriers reserve the right to change their base rates, fuel surcharge formulas, accessorial charges, rules and regulations at their pleasure and at any time they want and to whatever degree they want.
Therefore, my advice is to use the tools available to stay on top of the changes. You don’t have to just sit back and take it as etched in stone.
I have said many times that everything is negotiable. And in the parcel space you don’t get what you deserve, you get what you negotiate.
Sullivan: We know from experience that the best carrier contracts come from shippers who regularly seek improvements. Those shippers don’t take a piecemeal approach to contract negotiation, understanding that a more comprehensive approach is best. They analyze their current carrier distribution patterns and compare their pricing to appropriate industry benchmarks to identify opportunities for improvement.
Savvy shippers also focus on freight costs, but also pay very close attention to accessorial and surcharge costs, dimensional weight impact and pricing, and minimums. They leverage carrier competition and provide a fair pathway for the non-incumbent to win the business. If the non-incumbent offers cost reduction or other efficiencies and the barriers to switch are relatively low, smart shippers jump at the opportunity. Shippers who never go through this process are left with incumbent carriers who never feel at risk and, therefore, have little incentive to offer improved pricing.
Some savvy shippers will keep at least a portion of their business with multiple carriers, including consolidators and regional carriers, while successfully managing the dilution impact to their primary carrier pricing. Finally, the savviest shippers hire third-party experts to help them navigate all of this.
Haber: Jerry and Dave are both spot on, and I would add this as a piece of advice: Expect the unexpected. Stay on top of industry news, understand how the news affects one’s own businesses and be proactive.
March 2, 2020