Andy Dyer, chief executive officer of transportation management specialist AFS, which manages some $3 billion in parcel spend annually for its customers, has seen the parcel carrier market go through numerous disruptions, evolutions, and reinventions over his more than 30 years in the business. Yet over the next two years, he believes the parcel market will undergo “the most significant changes it has seen in decades.”
Shippers are signaling uncertainty, and in some cases, pessimism, about the overall economy. Hiring is flat, and layoffs are up even as consumers continue spending at a decent clip. Geopolitical conflict, an affordability crisis driven by record-high fuel prices, and other economic bellwethers like housing starts, bankruptcies, high levels of consumer credit, and stubborn inflation all point to a difficult environment. “There is no outlook for [parcel] demand increasing,” he says.
“I do believe that parcel carriers are going to experience a seismic industry event in the coming years, a disruption like what we saw when trucking was deregulated in 1980,” he adds.
A CONFLUENCE OF FACTORS
There is a confluence of factors that together are driving what some believe is an unprecedented time of change for the market. Among them: increasing competition from more niche players and alternative last-mile delivery models; and dedicated delivery networks from the likes of Walmart, Target, Home Depot, and other big retailers that are siphoning off parcel volume.
Then there is a seemingly intense internal focus by the traditional Big Three parcel carriers (FedEx, UPS, and the U.S. Postal Service) and shifting profiles around what shipments they prioritize for their networks, and what they don’t (or charge dramatically more to accept). Another factor is rising complexity in parcel pricing, surcharges, and fees.
And, last but not least, there’s the impact of readily available, inexpensive, quickly deployable, and powerful multicarrier management technologies that let virtually any shipper analyze and then slice and dice their parcel volumes to meet specific service needs at the best price.
Toss into that mix Amazon’s launch last month of Amazon Supply Chain Solutions, which provides distribution, warehousing, and last-mile delivery to any business—for freight as well as parcel shipments. It’s leveraging the network and services built over decades to support Amazon’s retail operations and independent selling partners, opening that up to the general marketplace.
“Supply chain wasn’t just a function at Amazon; it was core to providing an exceptional shopping experience, our differentiator,” said Peter Larsen, vice president of Amazon Supply Chain Services, in a news release. “We’re confident we can give any other business access to the same cost efficiency, reliability, and speed that we’ve built for Amazon customers.” The company said businesses including 3M, Lands’ End, and American Eagle Outfitters are using the service.
The move comes at a propitious time for the parcel market. UPS has been shedding what it has termed poorly priced Amazon business. FedEx announced at its recent investor day that it was reducing emphasis on general e-commerce business, instead focusing on “specialized” B-to-C (business-to-consumer) and “premium” B-to-B (business-to-business) traffic. And last year, after a six-year hiatus, FedEx re-engaged with Amazon, signing a multiyear deal to deliver large packages to Amazon’s residential customers, which Amazon at the time said, “will help us balance capacity [in our last-mile delivery network] to best serve customers.”
Amazon also last month renegotiated its agreement with the U.S. Postal Service (USPS). That agreement, according to a Reuters report, will enable the USPS to retain some 80% of its previous Amazon volume, which last year equated to about 1.7 billion Amazon package deliveries by the USPS. That represents a reported $6 billion in revenue for the USPS.
Not to be left out, regional carriers continue to evolve and chip away at more of the market. OnTrac and LaserShip have completed their combination into a single carrier offering an alternative nationwide coast-to-coast service. “The awkward teenage years are behind us,” quipped Vijay Ramachandran, OnTrac’s vice president of marketing, strategy, and marketplaces. “We are well into an integrated network, using the same underlying technology and back-office systems.”
MUSICAL CHAIRS
All these factors are bringing a new reality to the parcel market, how services are acquired, who provides them, and what ends up being the best strategy for the shipper, with more shippers breaking up their parcel volumes and leveraging more than just one or two large providers.
“For anyone of scale, having a multicarrier strategy is important,” says AFS’s Dyer, who notes that UPS and FedEx are “incredibly inward focused,” using every tweak they can to generate more revenue and increase margins. “They know they have a position of dominance in the industry. The buying public is looking for alternatives.”
In Dyer’s view, “a single-source strategy is eminently precarious.” Keeping track of and accounting for constantly changing pricing tiers, weight and dimension factors, surcharges, shifting zone boundaries, extra fees, and quantity discounts presents complex challenges. “You have to stay on top of those,” he says. “There is a lot of rate, surcharge, and accessorial creep going on.” He recommends frequent benchmarking to make sure in-place pricing is delivering expected results, and where it is not, determining how to adjust, which is one of the core services AFS provides to shippers.
“I still advocate that the math will set you free,” he says.
OnTrac’s Ramachandran shares feedback he’s gathered from shippers around some of the pricing policies, extra fees, and market strategies they are seeing with the larger carriers. “Customers are highly concerned about comments from the Big Two [FedEx and UPS] about lack of interest in [general retail B-to-C] volumes. They are focusing on SMB [small to mid-sized business], health care, and other verticals.”
In one case, he cites UPS’s implementation of a “non-compliant label” fee, which is applied if a package has a label that does not conform to UPS standards. More ZIP codes are being assessed additional delivery surcharges, he adds, either due to rural or remote location, or package size and bulk. On top of all that is a fuel surcharge that seems to rise by the week.
OnTrac differentiates by focusing on the B-to-C customer, running its entire network—first, last, and middle mile—seven days a week, Ramachandran says. One of its fastest-growing areas is e-commerce marketplaces, which are “platforms made up of a lot of smaller shippers and are complicated to service,” he notes. “With our facility footprint, we can service those [smaller shippers] because we have trucks already on the road and returning back on short trips, so that’s economical for us.”
The second area where OnTrac differs, he says, is on price. “While we have adjusted for fuel because of the increasing costs, we are significantly under what UPS and FedEx are charging,” he claims, adding “we don’t have 50% of the surcharges they do. The only time we adjust for big-and-bulky is where we see congestion in the network and get overloaded.”
As the industry approaches peak season, and with more carrier options available, Ramachandran expects the usual “musical chairs” of give and take between parcel carriers and shippers will be as intense as ever. “We are about to see in the next four months some of the largest changes in parcel carrier market share we have seen in some time,” he predicts. OnTrac has grown to 120 facilities across the U.S. and saw a 40% increase in volume last year.
STAYING TRUE TO THE PLAN
Even with more options for service, and a parcel market “that will in less than two years undergo the most significant changes it has seen in recent times,” a case still can be made for being a “shipper of choice” that partners almost exclusively with one big player, says John Janson, vice president of global logistics at branded apparel distributor SanMar.
For a company that operates 10 distribution centers across the U.S. and collectively ships on average 80,000 packages a night to demanding customers, consistency and resiliency remain the most critical factors, Janson notes.
“The B-to-C customer has a very different profile than the B-to-B customer, which is our bread and butter,” he says. SanMar customers often drop orders later in the day and then expect delivery in most cases the next morning or afternoon, “so they can start doing the embroidering and customizing of the product,” and meet their customer’s deadlines, Janson explains.
SanMar has for several years utilized UPS as its principal parcel express carrier, while also working with several small carriers for a portion of its spend, where the service is a good fit “and they do something that UPS can’t,” Janson says.
That’s by design. SanMar’s stake in the game is “walking the walk” as that shipper of choice who works with the carrier to adapt and adjust, making the handling of its business as efficient as possible. “Our packages are perfect for UPS. We ship basically with two box sizes, both of which work well in automated handing systems,” he notes.
The foundation of that strategy is trust and communication, Janson stresses. “You have to build a deep, authentic relationship, where both sides recognize and collectively work toward joint goals and objectives. We are a meaningful customer, and we know we will be well taken care of” regardless of market conditions.
He’s not a fan of shippers who bid out their business every two years. “That’s disruptive to the carrier; there is a real risk … if you follow through and move the business. The carrier will plan for that and reflect it in your pricing and discounts.”
BUILDING IN OPTIONALITY
The role parcel carriers play in overall customer satisfaction is critically important, since that last-mile delivery can make or break the customer’s overall happiness with their purchase, says Jess Dankert, vice president, supply chain with the Retail Industry Leaders Association (RILA).
“When you look at parcel service, that is a key part of [the retailer’s] focus: how does it arrive, is it on time, and how fast,” she notes. “Did it meet the customer’s expectation and was that a good experience? So cost to serve, relationship with carriers, and the execution piece all are a big emphasis.”
She sees a market that is dramatically different today. “It used to be with each company, you knew who their carrier was. Retailers had a main and a secondary carrier. That’s not so much the case now; it is a much more fragmented market.”
Part of that, Dankert says, is driven by the optionality customers increasingly demand. “Retailers want to give customers choices—options in terms of the speed and time of delivery as well as the price they want to pay,” she explains. “The suite of services offered by the retailer has to reflect that variety.”
She says RILA members recognize that “diversity [of services] and increased optionality really do bolster the resiliency piece. So you need to diversify between [traditional] parcel carriers, regional carriers, and other same-day carriers,” she notes. That way, “if there is a disruption in one, there are other avenues available to meet that customer’s expectation.”
As a result, most retailers are pursuing a strategy where they employ a portfolio of last-mile and parcel partners. “It is a balance of cost to serve, the type of customer, [and] their delivery expectation and offering them optionality,” she explains. “It can’t just be a focus on the lowest price.”
Stephanie Cannon, vice president of global digital IT for FedEx, makes a similar point. “Delivery options build brand loyalty for our customers and their customers, and deliver lifetime value, keeping customers coming back.”
Reliability and consistency also are paramount. In its recent “Future of Logistics Intelligence Report,” FedEx found that 53% of respondents pointed to delivery delays as being a key factor behind higher cost to serve. That cost and consistency calculation also is a factor in shippers’ decisions to increase or decrease business with a carrier.
Technology remains a basic yardstick by which shippers measure carrier value, one where Cannon believes FedEx has an edge. “Competitive differentiation comes down to intelligence and reliability. It’s a shift from simple visibility to logistics intelligence,” she explains. “[Visibility] is no longer about seeing a dot on a tracking page or seeing a tracking status update. It is much more sophisticated and evolved now,” she says, adding “we convince shippers by closing the gap between what they can see and what they can do” with FedEx’s digital solutions and global network.
TRANSFORM OR BE LEFT BEHIND
Satish Jindel, principal at parcel data analytics firm ShipMatrix, believes that by 2028, parcel volumes handled collectively by Amazon and the private networks of Walmart, Target, and other retailers will surpass that of UPS, FedEx, and the USPS. “They will be left behind unless they transform their core competency from being parcel carriers to e-commerce enablers and find cost-effective ways to handle the fast-growing B-to-C parcels,” he said in a recent op-ed.
And with its recent USPS agreement, and the previously announced $4 billion investment Amazon is making to build out a more robust nationwide rural delivery service, Amazon’s market share will only continue to grow. Jindel predicts that as this network build-out is completed and density increases, “in three years, they [Amazon] will no longer need the Postal Service.”
It’s a long-term strategy by Amazon to eventually dominate the parcel market and use other carriers just for seasonal spikes in volume, Jindel believes, adding, “No one builds a church just for Easter.”
