February 6, 2013

USPS, regional parcel carrier OnTrac to launch "last-mile" delivery service in late summer

Offering to challenge big three parcel carriers in the West; news comes as USPS announces plans to keep Saturday delivery for parcels but not for first-class mail.

By Mark B. Solomon

Western regional parcel carrier OnTracwill launch a delivery service later this year in conjunction with the U.S. Postal Service, a move that will give retailers a fourth major package delivery option in a territory of 60 million buyers.

The service, which hasn't been formally named, is slated to begin in late August or early to mid-September, according to Mark Magill, director of business development for Phoenix-based OnTrac. The company has hired Andy Webber—who had been vice president of operations for DHL Global Mail, a unit of DHL—to head operations for the new venture.

OnTrac has been granted authority by USPS to begin the service and will spend the next few months putting the necessary equipment and systems in place to launch in late summer, according to Magill.

OnTrac currently serves seven Western states, and its network goes as far east as Colorado. An eighth state, Idaho, comes online March 4. Most notable is OnTrac's presence in California, the nation's most populous state, where it serves every ZIP code. OnTrac serves the major metro areas in the other states.

The initiative comes as USPS announced today it plans to end Saturday deliveries of first-class mail starting the week of Aug. 5, a move that it will save $2 billion a year. However, in a change of plans, USPS said it would maintain Saturday deliveries of packages, an acknowledgment of parcel's growing relevance to the quasi-government agency's future. Parcel's growth is being driven in large part due to the explosion in e-commerce transactions.

"Over the past several years, the Postal Service has advocated shifting to a five-day delivery schedule for mail and packages," Postmaster General Patrick R. Donahoe said today in announcing the change. "However, recent strong growth in package delivery (14-percent volume increase since 2010) and projections of continued strong package growth throughout the coming decade led to the revised approach to maintain package delivery six days per week."

An announcement to end Saturday first-class mail deliveries was long expected, especially as USPS continues to lose volumes to electronic diversion, a trend that is likely secular in nature. However, the timing caught some by surprise, especially since Donahoe made no mention of it when he spoke late last week before the Parcel Shippers Association. There may also be Congressional backlash as politicians concerned about constituent reaction may argue that such a cutback be addressed through legislation and not through administrative fiat.

The OnTrac-USPS service will be patterned after the relationships USPS has developed over the past few years with the three major parcel carriers: FedEx Corp., UPS Inc. and, to a lesser extent, DHL Express. Under the service, known within USPS as "Parcel Select," the carriers pick up and aggregate large volumes of parcels from retailers and e-tailers, induct the parcels deep into the USPS distribution network, and have the Post Office make the "last-mile" deliveries, mostly to residential destinations. By law, USPS must deliver to every address in the United States.

For the past four years, OnTrac has partnered with USPS on a last-mile offering but has only made the service available to parcel consolidators, firms that aggregate shipments for retailers and rely on OnTrac's intraregional distribution network because they don't have their own. The new service signals a major change because OnTrac can now pursue large retailers for their traffic and, in many cases, bypass the consolidators.

"We want to play in the big leagues," Magill told DC Velocity in an interview yesterday.

In mid-October, the company opened a 400,000-square-foot distribution center (DC) in Commerce, Calif., just east of Los Angeles. The opening of the DC essentially served as the catalyst for the new service because OnTrac can now offer larger retailers shipping across the West an integrated pick-up, distribution, and delivery solution in concert with USPS, according to Magill.

OnTrac's relatively limited coverage area enables it to make next-day ground deliveries at distances of up to 500 miles, something the larger carriers cannot or will not do. Yet the company's network, which stretches from Washington State in the northwest to Arizona in the southwest, is expansive enough to allow it to provide next-day deliveries that encompass a NAFTA (North America Free Trade Agreement)-like geography.

By leveraging its territorial advantage, OnTrac's service will undercut the big carriers on both price and time-in-transit, according to Magill. For example, OnTrac offers next-day ground deliveries from Los Angeles and San Francisco, a 400-mile trek, at a tariff charge of about $6.00. UPS and FedEx do not offer next-day ground deliveries in that lane, so a next-day delivery would have to move by air at a much higher price, Magill said.

The same type of differential would extend into the USPS venture, Magill said. All three delivery companies would offer second-day deliveries to the final destinations, but OnTrac's economies of scale would enable it to price its service well below its larger rivals, he said.

Regional carrier executives have said their operating models are well suited to support e-commerce growth as retailers refine their delivery offerings and look to move merchandise in compressed time windows over shorter distances but without paying for expensive air services.

The USPS' "Parcel Select" service has been priced inexpensively relative to the carriers' own closed-loop services, in part because of the low rates offered by USPS for its portion of the delivery. Online retailers find the model particularly attractive because the cheap rates give them the flexibility to offer dramatically discounted, or in many cases, free shipping to their customers.

USPS is taking advantage of the model's success. Effective Jan. 27, it increased Parcel Select rates by between 7 and 10 percent. "[This move] raises the floor on [busness-to-consumer] pricing quite significantly, in our view," said Douglas O. Kahl, executive consultant at transport and logistics consultancy TranzAct Technologies Inc., based in Elmhurst Ill.

For the carriers, the sizable volume increases under the service apparently are sufficient enough to absorb the low yields, or revenue per package, generated by each shipment. The revenue per package for FedEx's service, known as "SmartPost," is $1.81, according to TranzAct data culled from FedEx reports. By contrast, FedEx generates $8.77 in revenue for the typical shipment moving on its "FedEx Ground" ground-parcel service, and between $11.65 and $22.31 in revenue for the average shipment moving on its air and international delivery product known as "FedEx Express," the consultancy said.

In its fiscal 2013 second quarter, which ended Nov. 30, FedEx said SmartPost's average daily volume increased 17 percent year-over-year, primarily due to the growth in e-commerce. Net revenue per package increased by two percent due to a change in service mix and to rate increases, both of which were partially offset by higher postage rates.

More articles by Mark B. Solomon

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