Sept. 27 2006 12:10 PM

Can it get any better for the US parcel industry? To be sure, the past five years have been nothing short of spectacular. The multi-year sweet spot has been fueled by an unprecedented shift in inventory ordering, management and distribution patterns as well as a corresponding compression of lengths of haul and the reduction of average shipment weights. These developments have all favored the parcel sector. In addition, the emergence of FedEx Ground as a bona fide competitive force has created robust service options for shippers, making the ground parcel value proposition more compelling than ever and attracting even more business to the sector.


The numbers tell the story: Though we dont yet have full-year 2005 totals, we estimate that last year was a record for US domestic ground parcel shipments (more than four billion) and revenue (nearly $25 billion). Equally impressive are ground parcels gains both on an absolute basis and in comparisons with the total market and other modes.


If the good times are to continue to roll, several factors will have to break the parcel industrys way. And from our vantage point of studying the market for more than 20 years, we continue to see positive ripple trends driving parcel sector growth and expansion.


The explosive growth of e-commerce is forcing suppliers ever closer to their customers. Traditionally, businesses designed their shipping programs around pre-determined national distribution points that pushed products into the market. The Internet has turned the traditional model upside down. Today, customers control the order flow. Suppliers and manufacturers can no longer control where their customers are going to be. As a result, vendor distribution networks need to be geographically joined with multiple points of end consumption, especially when the value-per-pound ratio of the goods is too low to justify a high-cost distribution system.


For this reason, two-thirds of all domestic cargo travels fewer than 600 miles to market the distance normally reachable in one day by low-cost surface transportation. That compares to an average surface length of haul of more than 1,000 miles just a few years ago. It is also the reason more domestic US warehouse square footage was added last year than in any other year in history.


This secular trend actually had its roots in the late 1990s when UPS and FedEx introduced money-back guarantees on their ground services. The trend gained momentum during the 2000-01 economic downturn as businesses confronted the reality of compressed shipping budgets and looked for inexpensive alternatives to get their goods to market. The movement accelerated following the September 11 terrorist attacks, as businesses sought secure means of distribution in the wake of the sudden grounding of the air transport system.


As we examine the past and glimpse into the future, we see nothing to reverse the shift towards regionalized, short-haul transportation. E-business will continue to flourish, the decentralized distribution model will become the rule rather than the exception and consignees the customers customer will extend their control over the market. This, in theory, translates into robust demand for parcel transportation and good times ahead for the industry and its stakeholders.


Of course, forecasts are not infallible. In practice, much can happen to upset the applecart. New and innovative services may emerge that divert market share from ground parcel services. Improvements in the quality of regional less-than-truckload operations could attract shippers seeking reliable services at a much lower per-pound price. The ongoing surge in non-discounted ancillary fees, known as accessorials, continues to drive up prices, often dwarfing the more modest increases in base rates and risking a shipper backlash.


As we look out to the rest of 2006 and into 2007, two issues come to mind that might well impact the industry. First, UPS acquisition of Overnite Transportation puts Big Brown into the regional LTL market for the first time. For all of the concerns that, believe it or not, still linger after the 1997 Teamsters strike as well as the effective encroachment of FedEx Ground, UPS ground parcel market share still hovers in the 67% to 70% range, which reflects its continued dominance of the segment. In fact, UPS gained ground parcel share during the first three quarters of 2005. The Overnite acquisition will enable UPS to cross-sell its huge parcel customer base on LTL services. While this may attract business that had been using other LTL carriers, UPS may also risk migration of some of its own ground parcel traffic to the lower-margin LTL category, especially if UPS too effectively offers a bundled value proposition.


Second is DHL Express ability to bounce back from service problems late last year after consolidating its US hub operations in Wilmington, Ohio. It is believed that DHL has resolved most of the issues that drove its on-time delivery rate down to the low 70% range, and its delivery performance is now in the upper 90s. Though DHL may never have the network or critical mass to compete for ground parcel business at the levels of UPS or FedEx, and it will have challenges winning back business that defected over the past six months, its size and resources still make it a force to be reckoned with in the US ground parcel business.


Ted Scherck is a veteran of more than three decades in the logistics and transportation industries. He directs The Colography Groups extensive primary research, multi-faceted consulting and report publishing activities. Mr. Scherck is also a frequent speaker at transportation conferences, and will be speaking at the Parcel Forum Sept. 11-13. Contact him at 678-385-2500, or visit