Current State of the Domestic Small Parcel Market
The US domestic small parcel market is currently in the midst in a period of rapid, meaningful, and far-reaching change. This current environment of accelerated evolution is in stark contrast to the relatively stable years in the market preceding the COVID-19 pandemic and the changes in consumer and corporate behavior triggered by that event. This rapidly evolving market created both significant challenges and substantial opportunities for the parcel consulting Industry.
To gain understanding into the market as it exists today, we must delve into the recent past to understand the precedents to our current state.
In the period immediately preceding the pandemic, consumer, shipper, and carrier behavior were fairly predictable and were evolving along established behavior curves.
Consumers sought faster and faster delivery times, generally two days or less, thanks to “The Amazon Model.” Many expected shipping to be free or at a nominal rate and expected deliveries to be made at their home or office during the traditional five-day work week.
Shippers were seeking reliable two-day delivery, enough operational flexibility to meet more stringent customer requirements, complete and accurate shipment data, and competitive carrier pricing which would allow them enough margin to provide free shipping to consumers.
The major national carriers, UPS, FedEx, and the USPS were primarily chasing higher market shares, which led to competitive price pressures. This “Market Share” focus helped keep costs down for shippers while the annual carrier General Rate Increases allowed the carrier to consistently move margins forward. This dynamic provided some market consistency both in pricing predictability and market share entrenchment between the carriers. While new services, new technologies, evolving consumer demands and variations in service performance could cause some market shifts, the environment was generally stable.
The onset of the pandemic was a major disruptive event that dramatically altered the parcel landscape.
The “online buying adoption curve” accelerated dramatically, compressing the increase in online purchases into two years what experts had predicted would take seven to eight years to achieve. This produced a sudden and profound increase in the demand for small parcel shipping services, thus ushering in a period for the carriers of high demand and constrained capacity, shifting pricing power away from the shipper and firmly into the carriers’ corner. The carriers used this new pricing power to implement historically high rate increases, introduce new and varied charges, shed low-margin shippers and shift their focus from market share to margin management. They were very successful in this migration.
At the same time, consumer and shipper expectations underwent significant transformations.
Consumers were squeezed by multiple pandemic developments. Supply chain disruptions caused by COVID lockdowns created a scarcity for many online products, many brick & mortar stores were shuttered, and spending on services such as restaurants and travel was severely curtailed, leading to a higher spending focus on goods. Consumers went from requiring their packages to arrive in two days or less, to simply hoping they arrived. The pre-pandemic need for free shipping dissipated as more focus was placed on product availability.
Shippers became focused on capacity versus price and were willing to accept higher rates to ensure they had the carrier capacity available to satisfy orders. The pre-pandemic emphasis on speed diminished, as did shippers’ insistence that all deliveries had to be made at no cost to the consumer.
Projected Near Future Trends:
As the small parcel market emerges from the pandemic period, other forces are exerting significant pressure on the pandemic era trends, reshaping the industry once again.
The inflationary and interest rate pressures not seen in the US domestic market in decades have conspired to create a rapid deceleration in parcel demand. The decline in demand has led to falling volumes and an environment of excess capacity for carriers. This change in demand has led to a carrier shift in focus, away from strong margin management and back towards market share, creating a more aggressive customized pricing environment than we have seen since the end of 2019. The expiration of the UPS Teamsters labor contract on July 31st 2023 was a key moment in defining the current market pricing environment. In the weeks and months leading up to the contract expiration, UPS lost five percent of its average daily volume to FedEx as shippers sought an operational hedge in case there was a UPS labor disruption. As soon as the new contract was signed, UPS began aggressively trying to recapture this lost volume, primarily through pricing concessions. FedEx, in an attempt to retain the business, reacted accordingly, inaugurating a season of fierce price competition.
We expect to see the continuation of record high carrier rate increases into the foreseeable future. With the carriers being able to raise rates with near immunity since they perform in lock-step, this trend should survive especially while inflation provides an easy justification. We predict more and increased accessorial charges to come with the twin goals of revenue generation and shipper behavior change. The carriers were very successful in implementing their “Peak Season Surcharges”, so much so that they have introduced additional variants and raised existing levels. We foresee this trend continuing with more “Surge-Pricing” type fees, which apply to time frames such as smaller holidays and even specific days of the week. For example, the heaviest operational day of the week for carriers is traditionally Monday. If they implement a higher shipping rate for Mondays, they can both increase revenue and succeed in having shippers delay shipments until later in the week, easing the carrier operational burden.
Consumer and shipper trends are evolving as well.
Shippers are much more price sensitive than during the pandemic years as their sales slow and costs garner heightened focus. They are willing to explore alternate shipping strategies, such as downgrading to non-premium services, split carrier volumes, and regional parcel carriers. Cost reduction and containment is the new primary shipper focal point of consulting engagements. Many shippers are also expressing desires for more environmentally friendly delivery solutions. Carbon footprint tracking requests are increasing over the pandemic era.
Consumers are becoming more price conscious again as well. While many shippers were forced to pass along a portion of the heavy carrier fee increases to their consumers, many consumers are starting to push back. Consumers are more open to alternate shipping methods than they were previously if it leads to lower shipping fees. BOPIS, delivery lockers, and other delivery methods are now entrenched in consumer behaviors.
We are seeing rapid changes in carrier, shipper and consumer behavior as the slower economy, higher prices, and high interest rates replace pandemic supply chain issues as the major drivers of behavior evolution.
Potential Industry Disruptors:
The USPS is changing its relationship with its parcel consolidator partners. The USPS is ending Destination Delivery Unit discounts and inductions for many of its shipping partners. As part of the “Delivering for America” plan, consolidators such as DHL must induct their packages further “upstream” into the USPS network. The consensus is these changes will lead to both higher shipper costs and to performance delays as the USPS will be in possession of the package for a larger percentage of its journey.
There are two additional potential industry disrupting events which spring from the shadow Amazon.com, Inc. casts over the industry. Amazon has had a strong relationship with UPS since its inception and continues to be the single largest customer for UPS. Amazon has worked for many years to build out its own delivery network, keeping more and more deliveries in-house. With the number of deliveries slowing with the economy, it would make sense for Amazon to pull more packages from the UPS network to deliver via the Amazon network. Should this happen rapidly, it would cause the UPS asset utilization levels to fall significantly, driving a need for UPS to fill its network from other sources. This could beget an escalating price competition between UPS and FedEx. The second potentially disruptive Amazon event could be the e-commerce giant’s entry into the common carrier market as a competitor to UPS and FedEx. With their significant technological resources, delivery infrastructure and capital, Amazon could represent a significant threat to the existing power structure. The renewed competition, long dominated by UPS and FedEx, could cause one of the traditional carriers to be weakened to the point it becomes an acquisition target of Amazon, disrupting the market even further.
Projected Far Future Trends:
There are several longer-term trends which could impact the industry in the years to come.
The resurgence of the US labor movement could lead to the organization of large industry players such as Amazon and the FedEx Ground network employees. This industry penetration, along with the current UPS status as a union operation, could lead to significant cost and operational changes in the industry.
Shipper-initiated delivery solutions, such as crowd-sourced delivery of local shipments could have a profound impact on how retailers interact with their customers.
New technologies such as drone and robot executed deliveries could have a dramatic impact on the industry, especially if these technologies are introduced from non-traditional delivery companies such as Apple, Uber, or Tesla.
Conclusion:
The rapidly changing environment we now inhabit is ripe with both challenges and opportunities. The organizations that are able to predict coming changes, adapt current practices to new realities and employ innovative, customized and effective solutions will find fertile ground for meaningful growth and success in the coming years.
Kenneth Moyer is LJM Partner & EVP of Supply Chain Strategies.
