July 25, 2018
transportation report | Air Freight

A yellow-letter day?

A yellow-letter day?

It's been nearly a decade since DHL ceased domestic U.S. express service. Its future success here will depend on executing in a very different delivery environment.

By Mark B. Solomon

Inside the halls of delivery giant DHL, the Jan. 30, 2009, termination of its money-hemorrhaging domestic U.S. express service is characterized as a "repositioning" and not a withdrawal. Semantics aside, it was a humbling blow to a company that had known little but resounding successes during its first 40 years.

Yet with those billions of dollars in losses came understanding. DHL Express returned to its original model, where the U.S. was one node in the company's 220-country air and ground delivery network, by far the world's largest. From the 2009 date on, all U.S. pickups and deliveries would have an international origin or destination.

Results over the subsequent years appear to bear out the wisdom of the move: Since 2013, its U.S. inbound volumes have risen 13 percent, compounded annually. Outbound volumes increased at an 8- to 10-percent compound annual rate from 2010 to 2017. Annual revenue compounded annually by 9 percent over that time.

DHL Express today averages 200,000 daily shipments moving to and from the U.S., roughly double its 2009 totals. In 2017, a rare year of synchronized global growth, outbound U.S. revenues rose by 14 percent over the prior year. U.S. daily inbound shipments grew 16 percent in 2017. Through May, inbound traffic is up 14 percent relative to the same period a year ago.

What may surprise those who perceived that DHL Express had abandoned the U.S. is that its footprint has expanded since it ended the domestic service. Today, the U.S. business employs about 10,000 people, roughly doubling its work force from 2009. It operates 4,300 vehicles, up from 2,500 in 2009. It has between 105 and 110 U.S. service centers today, compared with 95 in 2009.

Besides the improving U.S. and global economies and a more appropriate alignment with the rest of the DHL network, the U.S. unit's express operation has benefited from what would first be a nascent and then a dramatic increase in global e-commerce traffic. Today, e-commerce accounts for 40 percent of its outbound revenue. Six out of every 10 total domestic shipments it handles has a residential component. That is a far cry from DHL Express's near-exclusive reliance on domestic business-to-business (B2B) traffic nearly a decade ago.

If the DHL business units (besides Express, it has a large contract logistics business called DHL Supply Chain; DHL eCommerce, a dedicated e-commerce operation that works closely with the U.S. Postal Service (USPS); and a freight forwarding and logistics service called DHL Global Forwarding) are to sustain their U.S. success, e-commerce will likely be the talisman. According to SJ Consulting, a transport consultancy, about 38 percent of all U.S. parcels today move in distances of less than 300 miles, up from 29 percent in 2008. The weight of the average domestic shipment has declined by 17 percent over that time, according to SJ data. This reflects a migration to lighter and localized shipments triggered by more e-commerce activity, said Mark D'Amico, an analyst for the firm.

It also demonstrates a dramatic change in mix. For example, parcels today account for about 90 percent of DHL eCommerce Americas' current shipments, according to Lee Spratt, CEO of its Americas operations. A decade ago, Spratt said in a phone interview last month, virtually all of the unit's shipments consisted of large envelopes, newsletters, and magazines known in postal lingo as "flats." To reflect the change, the unit was rebranded in 2014 from DHL Global Mail, which had been in the U.S. market since 2004.

To put the market shifts in perspective, e-tailer giant Amazon.com Inc. today handles four times the U.S. volumes per year that DHL Express did in 2007, according to SJ data. In another sign of the times, DHL Express manages Amazon's daytime sortation operations at Cincinnati/Northern Kentucky International Airport, which Amazon is sharing as its temporary air hub until its own hub there is operational sometime in 2020.

 "STRATEGY 2020"

Dominating global e-commerce logistics is one of the two core components of DHL's broad mission known as "Strategy 2020" (the other component is expanding within developing economies). Given its mandate, and because e-commerce is broadening beyond the small-package segment to include heavier, more industrial-type goods, all of DHL's components will have to operate in sync in order to maximize its value.

"We will need to be a full-service provider" to hit all of business's e-commerce needs, said Spratt, whose unit moves 400 million parcels a year in the Americas (most of them in the U.S. through a partnership with the USPS), in a phone interview.

While offering end-to-end services sounds good in concept, it could present a challenge in the execution. That's because each business unit has its own culture, a different service niche, and, perhaps most important, its own operating platform. The siloed model has been by design. DHL Express, for instance, offers time-definite service in the U.S. with an international origin and destination point, whereas DHL eCommerce interacts with USPS for domestic services that aren't time-specific and are offered at a lower price point. Integrating the sales, marketing, and IT (information technology) services for different types of customers could create more problems than it solves.

Spratt said DHL is working with third-party software developers to build more connectivity across its disparate business units. "It's a huge focus for us," he said.

To be sure, there are areas of cooperation. DHL has a dedicated unit that cross-sells its portfolio to big shippers. In addition, the Americas e-commerce unit uses space in four of DHL Supply Chain's fulfillment centers—Columbus, Ohio; Mexico City; Los Angeles; and Newark, N.J., which was scheduled to open around mid-July. The e-commerce unit also leverages its sister unit's technology, according to Spratt.

If there is one product that underscores how DHL is reacting to the changing times, it is "Parcel Metro," which was launched last March in Chicago. Run by the e-commerce unit, Parcel Metro provides e-commerce deliveries without utilizing DHL vans or drivers. Instead, it relies on local and regional professional delivery firms as well as a cast of crowdsourced citizen drivers and their vehicles, both of which are vetted by DHL before hitting the road.

DHL's goal is to use its brand and technology to build credibility with retailers and their third-party e-commerce partners such as Shopify. DHL also wants to attract a critical mass of qualified drivers who can cover as much geography as possible. In addition to Chicago, the product has been rolled out in New York, Dallas, and Los Angeles. It was expected to be launched in Atlanta at this writing, and will be available in San Francisco and Washington, D.C., later in the year.

Perhaps most important, DHL has gotten the jump on rivals FedEx Corp. and UPS Inc., neither of which has a similar product. If it succeeds, Parcel Metro is likely to boost the DHL unit's 2 percent share of the U.S.-origin e-commerce delivery market.

One unit that is unlikely to leverage Parcel Metro, however, is DHL Express. Its U.S. operations are unionized, and it's hard to imagine the Teamsters union going along with such a concept. What's more, Greg Hewitt, the CEO of the unit's U.S. operations, said in a separate interview that the DHL name is too powerful not to be as visible as possible. "We see great value in the DHL-branded vehicle," he said.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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