the envelope(s) please …

"Would you DHL this for me?" The question doesn't quite roll off the tongue, but if DHL Express has its way, "DHL" will someday be shorthand for overnight delivery. As anyone with a television is aware, the carrier burst upon the scene last year with a land and air assault on the U.S. domestic package delivery business. Not only does the carrier seem unfazed by the prospect of taking on two titans, Federal Express and UPS, it appears to be enjoying the attack. DHL's TV ads depict FedEx and UPS drivers slack-jawed with amazement at their competitor's rapidity and omnipresence, even style. One print ad emblazoned in DHL's signature yellow and red proclaims: "Yellow. It's the new brown." Another screams: "The Roman Empire. The British Empire. The FedEx Empire. Nothing lasts forever. "Clearly, the gloves are off.

Challenging FedEx and UPS, which together own upwards of 75 percent of the domestic express delivery market, may sound like madness. But there's a method in it. DHL, which was founded in the United States but is now part of the Germany-based Deutsche Post group, has long been the market leader in international express shipping (and international air freight). But to achieve true world domination, it needs a strong presence in the United States, which is the world's busiest parcel market. And it's willing to spend well over a billion dollars in that quest.

DHL may actually have a shot at it. As Dick Metzler, DHL Americas' executive vice president of marketing, is fond of pointing out, the battle for package delivery dominance is about more than the United States alone. "We think it's not just a U.S. issue, it's a global issue," says Metzler, who was formerly CEO of APL Logistics. Though DHL casts itself in its ads as a cheeky upstart with something to prove ("Fat and happy. Meet lean and hungry"), the company, which dominates overnight package delivery everywhere else on the planet, is more Goliath than David. "We're the global player who's always been the UPS and FedEx to the rest of the world,"Metzler asserts. "I like the prospect of taking on one much more homogeneous market like the United States better than their prospects of taking on all the other countries in the world."

Gaining ground?
For all of Metzler's saber rattling, his new boss, John Mullen, who became DHL Americas' new chief executive officer Jan. 1, won't find this an easy market to crack. Not only does he face formidable competitors, but the domestic parcel delivery market itself is a market in transition. Over the past seven years, there's been a steady shift toward ground as opposed to air delivery for all but the most urgent packages. Figures from The Colography Group, an Atlanta-based transportation industry research firm, show that since UPS and FedEx introduced ground delivery guarantees in mid-1998, the proportion of U.S. expedited cargo moving via ground service has risen to just under 60 percent from 52 percent (and is expected to keep rising). Air, by contrast, has slid to 38 percent from 44 percent (and is expected to keep falling).

That's not the most auspicious of openings for DHL, which has always been firmly associated with air service in the public's mind. DHL's main bid to grab a bigger share of the U.S. parcel market, in fact, was the purchase, finalized in August 2003, of Airborne Express, which, as its name implies, largely gave DHL leverage in the air delivery market. And the markets where DHL dominates—Asia and Europe—are ones that remain largely geared toward air delivery of urgent packages (just try driving fast through rural China or urban England).

So, is DHL ready to be a ground delivery company? Absolutely, says Metzler. "To compete, we've just finished our 19-hub road network, and that gives us the ability to interconnect the continental United States by road."

DHL has publicly announced it's investing $1.2 billion in infrastructure over the next two years. October '05 should see the opening of its 300,000-square-foot West Coast air and ground hub in Riverside, Calif. Once that hub opens for business, says Fred Beljaars, executive vice president of operations for DHL Americas, the carrier will no longer have to route packages traveling from, say, San Francisco to Seattle through the company's hub in Wilmington, Ohio. "The ground network is completely built out. As a consequence, we can move 50 percent of all we do, whether 2nd day or conventional delivery, by ground, playing to the everincreasing demand for ground services," Beljaars says. DHL has recently opened seven new ground delivery sortation centers, bringing the U.S. total up to 19, if you include Wilmington.

But at least one stock analyst isn't so sure DHL can catch up with its well-entrenched rivals anytime soon. In its thirdquarter 2004 shippers survey, stock analyst Bear Stearns estimated that DHL had 10 percent of the U.S. domestic air market (by revenue), but only 1.5 to 2.0 percent of the ground market. And although analyst Ed Wolfe predicted in that report that DHL would be able to build up that share quickly by steep discounting, he cautioned that it would take "many years to implement the necessary ground infrastructure to compete and grow in order to take material market share."

Does size matter?
Naturally, DHL's much-vaunted expansion is a mere bagatelle if you listen to FedEx and UPS. "UPS isn't responding to competitors. Competitors respond to us. We lead the industry," says Steve Holmes, a UPS spokesman. "Compared to their $1.2 billion over the next two years, during that same period UPS will invest $4.8 billion in infrastructure, technology and operations."

FedEx Ground, too, downplays the threat, pointing out that though DHL may have 19 regional centers, it has 26 hubs and more than 500 local terminals in the United States and Canada. The company also notes that it's in the middle of a $1.8 billion expansion plan of its own, announced in October 2002, which involves building nine new hubs and expanding 22 others by the end of 2010.

Sheer physical size is one thing. End-to-end supply chain management capabilities are another. And just as Metzler insists the U.S. package delivery market can't be looked at in geographic isolation, so UPS's Holmes counters that you can't look at package delivery without considering other aspects of the supply chain.

"We at UPS try not to look at it in a fragmented way.We try to look at it holistically, especially in terms of what we're doing for customers through our supply chain solutions and technology, "Holmes says. "Those have all been successful and we're expanding our relationships with customers. For example, when we engaged with Home Shopping Network and Williams Sonoma, right from the start it was about much more than getting small packages to their customers."

Metzler, of course, counters that UPS isn't the only one with affiliate divisions, pointing to DHL's brotherhood of service providers under its owner, Deutsche Post AG—the old Danzas network, which the company bought in 1999—plus a newly grown DHL Logistics arm. But he's aware that becoming a major player in the United States means big changes for DHL.

"There's no doubt that to optimize our global position in the long run we needed a more scalable and robust infrastructure," Metzler says. The sheer size and scope of UPS's and FedEx's networks in the United States have driven their cost per package down "significantly below DHL's," Metzler admits. "Plus they were bundling their international services with domestic services and that was putting us in a difficult situation, much as we do with our services in Europe and Asia, which is difficult for them." So the only way to genuinely compete is to scale up too. And bundle up.With a $52 billion parent behind DHL, that's entirely possible.

Meanwhile, will DHL's market assault prove, as its ads suggest, not just bad for the competition, but great for you? "It's going to be much more apparent to people like distribution center managers that they have a choice," says Metzler. Within the 10 percent of shippers' supply chain spend that goes to ground parcel, express and export, they only have two choices, he says (though the U.S. Postal Service might take exception to that statement). If they're using truckers, they've got thousands of choices, he says. If they're shipping via LTL or air or ocean containers, they've got hundreds of choices, which gives them negotiating leverage. "So, the whole idea was to tell distribution center managers that they do have a choice," Metzler says. Market research has shown that shippers would welcome another player in the market, he notes. "They need a DHL in this market—is what one guy said—to keep the other two honest."