Change… the inevitability of a shifting environment. Perhaps there has not been as rapid of an evolution in the parcel industry as the current adaptations to the global pandemic. The Coronavirus has served as an accelerant; many of the industry changes that had begun pre-COVID have quickened.
Pre-virus, 2019 included the diversion of UPS and FedEx strategies on several key points:
• Amazon interaction
• Delivery of more than 5 days per week
• How USPS would serve as a partner going forward
FedEx broke away from Amazon fulfillment all but completely in August 2019. They currently still service Amazon’s third-party seller network, but no longer deliver for Amazon direct fulfillment. FedEx’s changes also include an effort to maximize delivery density by not only delivering some Express packages in the Ground network beginning March 2020, but also converting SmartPost deliveries from USPS delivery into Ground with the goal implementation of EOY 2020. FedEx has also chosen to run its delivery network 7 days a week, with Sunday delivery done by uniformed FedEx drivers.
UPS’s tactics have been almost the exact opposite. They continue to deliver for Amazon, which now represents approximately 12% of UPS’s total revenue. They are utilizing the USPS in an even bigger way, using their SurePost service for USPS Sunday deliveries.
The lines between these rivals are clearly drawn , but it’s too early to tell which approach will be most successful.
Another pre-viral change agent was Amazon’s rapid growth not only as a shipper, but also a parcel delivery service. It represents nearly 40% of e-commerce in the United States and has consumed mall retailers’ businesses, then moved into their former locations. The circle of life was completed as these retail locations became Amazon fulfillment centers.
Then Came a Virus
The policies enacted during the pandemic have served as a catalyst for changes that were already in progress, with some additional side effects:
• The ratio of residential versus commercial deliveries
• Conversion of goods shipped from “wants” to “needs” items
• 7-day parcel networks became a capacity necessity
The shift from brick & mortar to click & order has clearly accelerated. The proof is in FedEx’s annual report for 2020. FY2020 began June 2019 and closed May 2020. FedEx Ground’s average daily volume was growing six to seven percent in 2018 and 2019, but as of the fiscal year end had grown over 11% for 2020, almost twice the year-over-year volume. Likewise, FedEx Ground’s Q4 (March-May) revenue grew 10-12% YOY in 2018 and 2019, but over 20% in 2020. UPS’s Q2 results agree: 2020 ADV increased (April-June) over 22% YOY.
It is important to note that we have not reached this year’s e-commerce peak, which can easily be 200% over a shipper’s normal business. FedEx and UPS are already stressed (along with the USPS and other parcel carriers) and have imposed capacity restrictions on many large retail shippers. If they are already at capacity, that does not bode well for this peak and their performance .
Short Term Implications
Increased cost to shippers will come directly in the form of temporary peak surcharges and indirectly through UPS and FedEx giving fewer concessions during negotiation. This peak may not have the same high 2020 growth we have seen on the carriers to date (>20%), but it could be the largest peak we’ve ever experienced. One factor that may dampen some of the growth is that consumer spending is down overall. With capacity and labor constraints already impacting shipping, it’s sure to be an operationally tough peak. Expectations are that transit times will increase, damage will increase, and additional capacity constraints will be imposed.
Long Term Implications
Some interesting possibilities come into view as COVID accelerates capital spending. This spending is likely to increase as e-commerce continues to grow as a portion of overall retail. What Amazon does will likely guide how e-commerce moves forward. If they continue to grow their parcel network, they will heighten their perception as a competitor to UPS. As UPS’s capacity constraints tighten, they could automatically free up as much as 10% of their capacity by dumping Amazon. UPS CEO Carol Tome’s Q2 comments indicate that UPS is planning to build “better, not bigger.” She indicated that one of her priorities is to increase shareholder value, and to do that, they should focus on small- to medium-sized customers. Just how these indicators play out will be seen in the coming months.
It’s difficult to predict how permanent the growth experienced in 2020 will be. As the election is decided (along with any stimulus funds), as policy changes regarding restrictions for COVID-19, and as people return to in-person school and work, there will be some physical retail rebound effect. A key factor in this return will be how long it takes to gain the confidence that it’s safe to do so. The longer the restrictions remain in place, the more retailers will change to e-commerce only and more brick & mortar retail could become permanently obsolete .
What Shippers Should Be Focused on:
DC Systems: If there was ever a time to invest in technology capabilities and operational flexibility in e-commerce DCs, that time is now. Systems that enable multiple carriers and sortation on multiple package criteria (destination ZIP, weight, size, etc.) will enable strategies to service e-commerce recipients.
Ship from Store: Ship from store will decrease the time inventory spends in carrier networks. The difficulty here is that carriers may restrict the number of locations available for pick-up, as this adds to their operational cost and decreases pick-up density.
BOPIS: Buy Online Pick-up In Store is a great model for the current environment. It helps retailers decrease cost by avoiding residential fees and related surcharges. It is a win for carriers as well in that it increases delivery density and decreases the number of stops.
Transit Time Improvements: Time in transit has been important for years and will be a key differentiator going forward, as delivery lag increases with capacity constraints. Shippers that can deliver in less than two days in a more challenging environment will stand out from their peers who do not make this investment .
Mark Taylor is Transportation Consulting Manager, enVista. With 20 years of experience in transportation — most of which have been in the parcel industry — he works with clients to guide them through contract analysis and negotiation processes.
This article originally appeared in the September/October, 2020 issue of PARCEL.
