To say that the transportation markets are in flux would be a gross understatement. 2020 and the effects of COVID-19 have uncovered gaps in the resiliency of transportation networks across modes and across geographies. As we have just experienced the largest holiday peak in history, we can safely consider this the perfect transportation storm. But, after literally hundreds of conversations with shippers big and small over the last several months, I can also say that most have been so focused on getting through peak season that they have given little thought to what comes next. Let’s face it, the capacity issues, the surcharges, and the transit time all made 2020 a minefield to navigate. But it’s what comes next that will determine success or failure of transportation professionals in 2021. Much has been made of the explosion of e-commerce volume, with e-commerce volumes essentially experiencing five years of growth in a 10-month period. And we can expect much of this growth (although likely not all) to be sustained post-COVID. However, I have heard enough of the term “new normal” to last me a lifetime. Those who use this phrase fail to recognize that no market, and no player in a market, stays constant.
For example, UPS’s new CEO Carol Tomé’s recent comments concerning her vision for the UPS network have gotten a lot of attention. To paraphrase what I believe Tomé has said, she intends to re-forge the UPS network better, not necessarily bigger; she intends to focus on profitable segments/accounts and largely ignore others. That is a reasonable goal. It makes sense, at least on paper. But Tomé’s vision fails to account for a few fundamental facts:
- Others are going to be pursuing those high-protein accounts as well. If UPS aims at only a portion of the market, but must compete for those accounts, they are narrowing down an already narrowed target area.
- Like markets, transportation networks never stay static. They are either growing, or they are shrinking. And networks are hungry beasts. They require volume shoveled in the front end in ever-increasing chunks. While Tome’s strategy tallies nicely on a spreadsheet, it fails to account for the fixed costs associated with keeping such large-scale infrastructure in play, where even marginal business is required to fill the gaps and keep the lights on.
- Maybe most importantly, the segmented market approach cedes opportunities to those looking to enter/re-enter the US parcel market.
DHL has been more competitive of late, successfully securing volumes from SurePost and SmartPost more and more frequently. The USPS, with its subsidized business model, has experienced fewer capacity issues than its non-government competitors, or at least it hasn’t cut off the possibility of taking on new business. While it is true that steadfast regional carriers like OnTrac and LaserShip have temporarily implemented holds on new volume, regionals were performing strongly prior to the pandemic, and we expect them to capitalize on growth opportunities post-peak. Newer entries into the regional market such as Optima and PCF were still accepting new volumes as late as November/December, and we anticipate very aggressive market positioning from them in Q1/Q2 2021.
Perhaps the most interesting question mark of 2021 will be Amazon. The national carriers’ abandonment of segments of the market is even more baffling in light of the e-commerce giant’s forays into the transportation space. We basically have a company who has been signaling for a few years its desire to enter the parcel market, who has been buying and building out the necessary infrastructure, and who has the capital to invest due to the surge in e-commerce. Amazon must be looking at these abandoned market segments, segments already disenchanted with the national carriers due to late deliveries, capacity constraints, and seemingly never-ending surcharge increases, and thinking the next move seems fairly obvious. UPS especially should be concerned with Amazon’s plans for the future. While FedEx walked away from its relationship with Amazon last year, UPS is more reliant on Amazon revenues than ever. As of August 2020, Amazon represented 12% of UPS’s gross revenue, up from 10% reported only eight months previous. It seems inevitable that 2021 will bring a resolution of the UPS/Amazon relationship, one way or another. If UPS is going to exercise “revenue discipline,” it would do well to start with Amazon. The margins on the Amazon business are almost certainly problematic. Rather than continuing to feed the lion that is going to eat you, better to pursue other, more profitable large shippers. This would force Amazon to use the infrastructure it has been growing to service its own fulfillment, rather than compete with UPS for theirs. Of course, this is not a long-term solution, but more of a stalling tactic.
2021 isn’t likely to be a buyer’s market for shippers, at least not with the big national carriers. But revenue discipline will be difficult to maintain when the regionals are firing shots across the bow and Amazon enters the fight. While the next several months will likely require operational excellence and carrier agility to drive meaningful savings, the transportation market, like all markets, is cyclical. And that may not be as far away as the “new normal” crowd is preaching.
Joe Wilkinson is Vice President, Transportation Consulting, enVista.
This article originally appeared in the January/February 2021 issue of PARCEL.
