In last month’s article we talked about the similarities between the parcel carriers’ list rates, rating logic, and accessorials and surcharges. This month we’ll delve into the more recent, and possibly even more disturbing, similarities.
In the last twelve to eighteen months both UPS and FedEx have taken an increasingly aggressive approach to pricing in the parcel space. While many of us have seen this trend in a subjective fashion, let’s try to look at the facts in a more objective manner:
• At Parcel Forum 2009, FedEx and UPS both announced their intentions to stop working with third party negotiators. Weeks later both had rolled out internal policies to enact this change. One might ask if this change had a direct impact on shippers? The answer is, absolutely yes. Most shippers have neither the tools nor the experience to evaluate carrier agreements on an apples-to-apples basis, using adjusted historical data to provide a fair and reliable basis of comparison. And once you begin to consider what-if scenarios related to service level optimization, supply chain network changes, carrier mix analyses, etc. the level of complexity quickly increases to the point that it makes sense to engage consultants for whom these types of analyses are a core competency. Carriers have attempted to use the argument that they prefer to engage directly with their shippers. However, this has proven to be nothing more than a thinly veiled excuse for enacting an oppressive policy on their valued customers. When it comes to contracts and money, companies should have the right to protect themselves. Even the IRS allows you to bring a CPA to the audit. What other vendor prohibits clients from using a lawyer or advisor from looking over a contract?
• Several financial services companies have taken note of the parcel carriers’ aggressive pricing policies in recent weeks. In an April 26 UPS note to investors, Goldman Sachs stated, “. . . we continue to believe we are in the early stages of a multi-year pricing story as the company renews 1-3 year contracts at higher rates.” Likewise, in a May 25, 2011 industry piece Morgan Stanley said of the general parcel market, “The industry’s concentration and relatively inelastic customer base allows for pricing power.” It seems clear that in this duopolistic market carriers are able to exercise significant influence over market prices, and that the wind is blowing in a sharply less competitive direction.
• Finally, let’s look at the carriers’ YOY price increases. The graph below (download the PDF to see) shows a $1 spend as impacted by FedEx’s announced Express increases over time. A second line is added to show how that same $1 spend would be impacted by inflation as measured by the U.S. CPI. It is not difficult to see that FedEx (and UPS as well) has increased their Service Guide rates disproportionate to inflation. Bear in mind that over the past several years carrier-announced General Rate Increases (GRIs) have incorporated fuel surcharge index adjustments. Moreover, fuel surcharges float with changes to market fuel prices, so the argument that increased costs are required due to increased fuel prices does not hold up. Note also that carrier-announced increases are arguably more conservative than the actual increases passed through to shippers due to accessorials, surcharges, minimum package charges, etc. While this chart shows the historical increases over several years, it should be obvious that if the carriers are becoming ever more aggressive, the slope of the Cumulative Actual line will only increase in the coming months.
While this article serves merely to point out the challenges shippers face in this duopolistic marketplace, we will be sharing ways to face and overcome these challenges in future articles. Stay tuned.
In the last twelve to eighteen months both UPS and FedEx have taken an increasingly aggressive approach to pricing in the parcel space. While many of us have seen this trend in a subjective fashion, let’s try to look at the facts in a more objective manner:
• At Parcel Forum 2009, FedEx and UPS both announced their intentions to stop working with third party negotiators. Weeks later both had rolled out internal policies to enact this change. One might ask if this change had a direct impact on shippers? The answer is, absolutely yes. Most shippers have neither the tools nor the experience to evaluate carrier agreements on an apples-to-apples basis, using adjusted historical data to provide a fair and reliable basis of comparison. And once you begin to consider what-if scenarios related to service level optimization, supply chain network changes, carrier mix analyses, etc. the level of complexity quickly increases to the point that it makes sense to engage consultants for whom these types of analyses are a core competency. Carriers have attempted to use the argument that they prefer to engage directly with their shippers. However, this has proven to be nothing more than a thinly veiled excuse for enacting an oppressive policy on their valued customers. When it comes to contracts and money, companies should have the right to protect themselves. Even the IRS allows you to bring a CPA to the audit. What other vendor prohibits clients from using a lawyer or advisor from looking over a contract?
• Several financial services companies have taken note of the parcel carriers’ aggressive pricing policies in recent weeks. In an April 26 UPS note to investors, Goldman Sachs stated, “. . . we continue to believe we are in the early stages of a multi-year pricing story as the company renews 1-3 year contracts at higher rates.” Likewise, in a May 25, 2011 industry piece Morgan Stanley said of the general parcel market, “The industry’s concentration and relatively inelastic customer base allows for pricing power.” It seems clear that in this duopolistic market carriers are able to exercise significant influence over market prices, and that the wind is blowing in a sharply less competitive direction.
• Finally, let’s look at the carriers’ YOY price increases. The graph below (download the PDF to see) shows a $1 spend as impacted by FedEx’s announced Express increases over time. A second line is added to show how that same $1 spend would be impacted by inflation as measured by the U.S. CPI. It is not difficult to see that FedEx (and UPS as well) has increased their Service Guide rates disproportionate to inflation. Bear in mind that over the past several years carrier-announced General Rate Increases (GRIs) have incorporated fuel surcharge index adjustments. Moreover, fuel surcharges float with changes to market fuel prices, so the argument that increased costs are required due to increased fuel prices does not hold up. Note also that carrier-announced increases are arguably more conservative than the actual increases passed through to shippers due to accessorials, surcharges, minimum package charges, etc. While this chart shows the historical increases over several years, it should be obvious that if the carriers are becoming ever more aggressive, the slope of the Cumulative Actual line will only increase in the coming months.
While this article serves merely to point out the challenges shippers face in this duopolistic marketplace, we will be sharing ways to face and overcome these challenges in future articles. Stay tuned.
View Carrier Marketing - Part 2.pdf
