When DHL pushed into the U.S. parcel market in 2003, its splashy ad campaign sent a clear message to the marketplace: The days of the duopoly enjoyed by FedEx Corp. and UPS Inc. were over.
More than five years and billions of dollars in losses later, the only thing that's over is DHL. Last month, the company shut down its U.S. express delivery operations, leaving parcel shippers to two behemoths whose virtual stranglehold on the business has earned them the not-so-endearing moniker of "FedUPS."
But as DHL fades from view, a familiar face is emerging: the U.S. Postal Service.
Estimates vary as to the USPS's share of the U.S. parcel market. During the third quarter of 2008, the USPS controlled 11.7 percent of domestic parcel volumes, according to SJ Consulting, a Pittsburgh-based consultancy. Hempstead Consulting, an Orlando, Fla.-based firm that develops pricing solutions for parcel users, estimates the Postal Service had 21 percent of the parcel market in calendar year 2007. Whatever the case, its portion is dwarfed by rival UPS, whose share of U.S. parcel traffic is estimated to be somewhere between 58 and 65 percent.
What accounts for the lag? USPS executives privately acknowledge they have not been as aggressive as possible in promoting their shipping products. They also admit some shippers perceive the post office as lacking the operational capabilities and the IT tools to consistently service the demands of corporate supply chains. But the real barrier to growth, they claim, was federal regulations preventing the Postal Service from offering volume discounts and other contractual perks to high-volume shippers.
That changed with a December 2006 law that gave the Postal Service authority to negotiate market-based pricing with any business that came its way. Starting in May 2008, a slew of USPS initiatives hit the street, among them discounts for online purchases of shipping services, customer rebates, a zone-based rate matrix for Express Mail overnight deliveries, and volume-driven price incentives for shippers using "competitive products" like Express Mail, Priority Mail, and parcel services.
Says Jim Cochrane, vice president, ground shipping and the executive in charge of the USPS's parcel products, "I am now able to sit down and negotiate different multi-year contracts with all types of businesses for as much as they want to give us."
Businesses generally use the Postal Service's "Parcel Select" product, where bulk shipments are aggregated—either by a consolidator or by the shipper—and transported to a USPS facility near the parcel's destination for final delivery. The closer the shipment gets to its final destination before entering the USPS system, the greater the savings. Shippers with the volume and infrastructure to manage the process themselves can pay as little as $1.71 per unit for a five-pound parcel moved from the post office nearest to the shipment's destination, according to Cochrane.
The latest chapter in the postal flexibility saga was written in mid-January, when USPS launched "Commercial Plus" pricing to give sizable discounts to big customers of Express and Priority Mail. Express Mail users tendering at least 6,000 pieces a year will receive the equivalent of a 14.5-percent per-piece discount off retail rates. Priority Mail users who tender at least 100,000 pieces a year will get an 8.0-percent discount.
Rates on the rise
If the Postal Service is getting aggressive, it can't come soon enough for large parcel shippers. DHL vowed to be the lowpriced player, and, for the most part, it made good on its pledge. On average, its rates were 15 percent below comparable prices from FedEx and UPS, according to Hempstead Consulting.
Perhaps mindful of DHL's impending demise, UPS and FedEx rolled out 2009 pricing schedules that contained the largest year-over-year tariff increases in their long histories, says Hempstead Consulting. The Postal Service, for its part, also raised its rates for 2009.
Jerry Hempstead, head of the firm bearing his name and a former top sales executive for DHL and its predecessor, Airborne Express, says UPS and FedEx plotted their rate strategies knowing DHL customers would have few places to turn once the company announced last spring it would reduce its U.S. exposure.
UPS and FedEx were "privy in advance that DHL was going to exit and that the market would become a duopoly with the low-price leader eliminated," Hempstead says. "Therefore, they could announce higher general rate increases and make them stick." (DHL officials told the market in May they would restructure their U.S. operations, but denied that the company would pull out of the domestic U.S. parcel market altogether. Five months later, on Nov. 10, however, DHL announced that it would, in fact, discontinue its domestic operations.)
Mike Regan, CEO of TranzAct Technologies Inc., an Elmhurst, Ill.-based firm that also consults with parcel shippers, wrote soon after DHL announced in November that it would pull the plug in the United States that the parcel sector "has gone from being highly competitive to a duopoly. And you're kidding yourself if you don't think that FedEx and UPS understand how to take advantage of this condition."
UPS spokesman Ken Sternad dismisses as "misguided" any connection between his company's rate actions and DHL's U.S. plans. "Our rates were determined well before DHL announced its intentions to exit the market," he says. A FedEx spokesman did not reply to a request for comment.
Ted Scherck, president of The Colography Group Inc., an Atlanta-based consultancy that has worked with all four companies, says although FedEx and UPS knew of DHL's plans to scale back its U.S. service, they were unaware of DHL's intent to exit the market entirely. Scherck says he had believed DHL would stay in the United States but would stick to business-to-business deliveries serving about 14,000 ZIP codes instead of the current 50,000.
An unfair advantage?
One challenge facing USPS as it attempts to capitalize on DHL's retreat is that erstwhile DHL customers may have already left the station. Following DHL's Nov. 10 announcement, New York investment firm Wolfe Research polled more than 60 large and medium-sized companies that were significant DHL customers in 2008. The respondents said they had diverted 42 percent of their domestic volumes away from DHL by Sept. 30, nearly six weeks before DHL made its plans public.
Another issue for the Postal Service is that business that has migrated to UPS or FedEx may not be up for grabs for years. Hempstead says it is becoming commonplace for large parcel shippers to demand contracts three to five years in duration in order to ensure rate and service stability.
Still, there is little doubt that USPS brings unique advantages to the shipping table. As a quasi-governmental entity, it is exempted from tolls, parking fees and fines, and customs duties, rivals say. It is required to report income tax on earnings from competitive products, but according to Hempstead Consulting, it pays the tax back to itself. USPS does not pay fuel surcharges other than those levied by its consolidator partners. And unlike its competitors, the Postal Service (which is required by law to serve every address in America six days a week) does not levy surcharges on Saturday deliveries or on deliveries to remote or rural service areas.
The absence of USPS surcharges is no small matter. In what has become an annual ritual, its competitors either roll out new "accessorial" charges or expand existing ones. The carriers say the charges are needed to perform valueadded services and to cover the costs of serving outlying areas that offer little or no package density. But the charges can and do add up.
At UPS, carrier-imposed accessorial charges can account for 35 percent of a company's parcel shipping budget, according to Hempstead. Scherck of Colography Group says those estimates are conservative on an industrywide basis.
USPS's rivals, who have long complained the Postal Service uses its government-blessed monopoly on firstclass mail to subsidize its competitive portfolio, chafe at the privileges it receives. "That's the big reason why we have always had problems with their cries to be given freedom to compete in the marketplace," says Sternad, the UPS spokesman. "When you have those built-in pricing advantages, you are a formidable competitor, period."
Major player?
As time passes, what additional traction that USPS gains in the express parcel arena may be determined as much by its own mastery of the new universe as by the marketplace's perceptions of its capabilities.
"They are not too far away from becoming a major player on the commercial side," says Douglas Kahl, vice president, strategic initiatives for TranzAct Technologies, who has closely followed USPS. "Their biggest challenge will be to learn and understand the increased flexibility they now have at their disposal."
It is incorporated as a "city," but it's really a small farming hamlet like hundreds of others dotting the state. It became a major air-cargo hub almost by accident after Airborne Express took over an abandoned Air Force base on the city's southeast side. Now, for the second time in less than 40 years, Wilmington, Ohio, finds itself staring into the economic abyss.
DHL's decision to exit domestic U.S. parcel operations and outsource its air services to rival UPS Inc. is expected to bring an end to DHL's operations at the Wilmington Air Park, the company's primary U.S. air hub and the largest employer in a seven-county region of southwest Ohio. All told, between 8,200 and 10,000 jobs are expected to be lost in the seven counties.
In Wilmington, which has a population of less than 12,000, one of every three households has someone employed at the facility. Most of the job losses will be at ABX Air, a local company that flew freighters for DHL and which would no longer be needed should UPS take over the flying for DHL. At this writing, DHL and UPS were still in negotiations. But if the two reach an agreement, the operations would be moved from Wilmington to UPS's main air hub in Louisville, Ky.
Not since the U.S. Air Force left in 1970, abandoning an air tanker refueling depot and leaving Wilmington to the weeds for a decade, has the community's future appeared so bleak. That time, Airborne Express came to its rescue. In 1980, it bought the property for the fire-sale price of about $100,000. After making the necessary improvements—including a $1 million investment to fence 700 acres to keep cattle and deer off the runway—Airborne made Wilmington its main air hub. During its tenure, Airborne continued to expand and modernize the air park, and as the facility grew, Wilmington grew along with it. In 2003, DHL acquired Airborne and the facility. DHL says it has invested another $250 million in the air park since the acquisition.
Location, location, location?
This time, though, there is apparently no air-cargo firm stepping into the breach. And despite Ohio's central location and proximity to multiple interstate highways, which have long made it a magnet for distribution services, there is considerable question as to whether Wilmington's pull is strong enough to attract a large shipper or supply chain service provider.
Richard Armstrong, chairman of supply chain research and consultancy Armstrong & Associates, has visited Wilmington and says the city's location is not suitable for shippers or third-party logistics service providers looking to leverage an Ohio market to build inter-regional or national exposure. Armstrong says businesses would prefer to locate warehouses or DCs near Interstates 70 or 80, highways that directly connect Ohio with Northeast and Southeast markets. By contrast, he says, Wilmington sits adjacent to Interstate 71, a relatively limited thoroughfare that runs between Cleveland and Louisville, Ky.
Armstrong adds that Ohio already faces a glut of available warehousing space in its major cities, and a state struggling to attract and retain industrial business hardly needs thousands of square feet of new supply that Wilmington would bring to the market. "There is empty warehousing in Cleveland. There is empty warehousing in Columbus. There is empty warehousing in Cincinnati. And Ohio is not gaining enough industrial base" to keep up, he says.
Jerry Hempstead, who was the top U.S. sales executive at DHL and at Airborne before retiring in 2006 to form his own consulting firm, agrees, saying Wilmington is too "far off the beaten path" to be a viable distribution location and that it would likely have been overlooked as a transportation locale had fate not intervened.
Robert G. Brazier, who was Airborne's president until he retired in 2002, sees it differently. He says the air park would be a tremendous asset to any buyer because of all the capital improvements made to modernize it. "I cannot imagine this place is going to sit empty," he says.
Uncertain future
For its part, the city is undeterred. It has formed a task force aimed at re-marketing the park. On Dec. 19, dozens of businesses— though none in the supply chain realm—came to examine the facility. By Jan. 9, written expressions of interest were due to be filed with the city. Wilmington holds out hope that DHL, which will continue to handle international shipments moving to and from the United States, will use the park as a base for those operations, though speculation is that the company will move those functions 40 miles away to Cincinnati or to Louisville.
As Wilmington and its citizens brace for an uncertain future, reminiscing of better times comes easy. For example, there is an oft-told tale of the pig farmer and the airplanes. The pig farm was located about a mile south of the runway Airborne used for its sorting operations. Each night, agriculture collided with commerce, with the incessant whine of aircraft engines depriving the pigs of sleep and wreaking havoc on the farmer's business. But rather than risk alienating Airborne by complaining to the carrier or to the city, he moved his farm to another location 10 miles away.
"The pig farm was there before we were, and it was the farmer's livelihood. Yet he was the one who left," says Brazier. "That was how much Airborne meant to this town."
