UPS and FedEx have faced major challenges in B2C shipping, not least of which are shippers who expect something for nothing. Now, they're sending clear signals that things are about to change.
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.
Satish Jindel, the president of transport consultancy SJ Consulting, had a conversation recently with one of his clients, a large retailer. According to Jindel, the retailer, which spends millions of dollars a year with FedEx Corp., complained that its rep wasn't keen on handling more of its parcel volumes.
Jindel, whose street cred frees him to administer tough love when deemed appropriate, told the retailer he wasn't surprised by the rep's reaction. "It's to be expected when retailers want parcel carriers to deliver to residences at unprofitable pricing just because they've spoiled consumers with free shipping," he said in a phone interview. Retailers, Jindel added, "can't expect FedEx to subsidize free shipping. They have to come up with creative ways to recover that cost."
So far, retailers have been about as creative as a sledgehammer. Caught between offering a supposedly "free" perk and still having to pay parcel carriers for their services, retailers have forced lower rates down their vendors' throats. However, Memphis, Tenn.-based FedEx and its chief rival, Atlanta-based UPS Inc., have had enough. They recognize it is impossible to turn their backs on business-to-consumer (B2C) volumes given their growing relevance (see Exhibit 1), and they are reconfiguring their networks to handle the business more cost-effectively. At the same time, though, the giants are signaling to retailers that they should begin accepting compensatory rates, or they should find another carrier.
MANY PACKAGES, NO PROFITS
Frederick W. Smith, FedEx's founder, chairman, and CEO, spoke bluntly about the profitability problem last December during the company's quarterly analyst call, acknowledging that there are e-commerce shipments it doesn't make any money on. T. Michael Glenn, FedEx's number-two executive until he retired at the end of 2016, said on the call that FedEx had "discontinued relations with a few customers" during the peak holiday season because their shipping profiles didn't align with the company's objectives of volume expansion and yield improvement.
Steve Gaut, UPS's chief spokesman, said in an e-mail accompanying its fourth-quarter results on Jan. 31 that the company must be "appropriately compensated" for the costs of expanding its physical and IT networks. At UPS, where B2C traffic in 2018 is expected to exceed business-to-business (B2B) volumes for the first time ever, 2017 capital expenditures will total $4 billion, up more than 30 percent from 2016 levels.
UPS is spending hundreds of millions of dollars to automate its "Tier 1" U.S. hubs that today handle a little more than half its domestic volume. The modernization should improve network productivity by up to 25 percent when the work is done sometime in 2019, according to Rob Martinez, president and CEO of Shipware LLC, a consultancy. This will allow UPS to route up to 60 percent of its total U.S. ground volumes through Tier 1 hubs, Martinez said.
FedEx Ground, the ground parcel unit that handles the bulk of FedEx's e-commerce deliveries, has added four major U.S. hubs and 19 automated stations in the past year alone, a 10 million-square-foot expansion. Smith called the pace of the build-out "one of the most remarkable things I've seen in my career."
However, massive investments will take a bite out of the carriers' revenues if the traffic mix isn't optimal. UPS's fourth-quarter revenue came in lighter than expected, in part because more customers used its cheaper "SurePost" service, where shipments are tendered to the U.S. Postal Service (USPS) for last-mile delivery, rather than moving solely through the UPS network, where the company could charge more. Wall Street proceeded to punish UPS's share price in the short run; from Jan. 31 through Feb. 2, the price of UPS's shares fell about $11 a share. FedEx shares fell about half that amount. (Both companies' shares have rebounded as of Feb. 10, the day this story was filed.)
At UPS, domestic B2C operating margins have ranged between 11.6 percent and 14.2 percent from the start of 2013 through the fourth quarter of 2016, according to SJ data. However, B2C margin growth has been compressed, albeit slightly, over that time. From the end of 2013 through the end of last year, domestic margins have fallen by 0.6 percent, SJ said. (See Exhibit 2.)
A ROBUST TOOLKIT
Retailers should take heed of the carriers' warnings about price adjustments. First off, there aren't many alternatives. USPS offers low prices and abundant last-mile capacity, but Smith on the analyst call argued that as a primarily last-mile carrier, USPS doesn't have the capabilities to deliver the so-called "upstream" services to parcel shippers and their customers. Amazon.com Inc., the Seattle-based e-tailer, is building out a transport and logistics network to fulfill orders placed on its website as well as those of third-party merchants using Amazon's services. Still, for retailers already competing with Amazon, using its delivery services would be akin to sleeping with the enemy.
If history is any guide, UPS and FedEx will find ways to surmount the e-commerce challenge. They raise their published rates annually, though they often agree to givebacks in return for large volumes. They have squeezed retailers in recent years by charging more for shipments that fail to meet certain dimensional parameters, and they continually impose an array of "accessorial" charges, fees for services beyond the basic delivery.
The carriers also laid down the law this past peak season, putting retailers on notice that the rules of the game had changed. Both adjusted their time-definite express delivery commitments during the critical final week before Christmas, directing drivers to deliver by the end of a committed day rather than by a specific time, according to SJ. In addition, FedEx Ground suspended its ground service guarantees for the entire peak season, while UPS did the same for Cyber Week (the week after Thanksgiving) and Christmas week, according to the firm. The adjustments to the delivery guarantees were designed to blunt the cost impact of residential delivery spikes rather than to maintain profitability by levying additional charges, SJ said.
Perhaps most significant, both are working to generate sufficient e-commerce delivery densities to reduce costs and capture more of the last-mile e-commerce traffic that they have historically tendered to USPS. The companies have operational alliances with USPS where residential packages are inducted deep into the postal network for last-mile delivery by postal carriers. USPS prices the service cheaply because it is already required by law to serve every U.S. address and can pick up or drop off parcels along the way. Though the model is popular with FedEx and UPS customers, the carriers don't generate much revenue from it and have to share what they take in with USPS.
FedEx is also consolidating shipments moving in its FedEx Ground, FedEx Home Delivery, and "SmartPost" service (FedEx's joint service with USPS) in a bid to boost efficiency. UPS, meanwhile, has created about 8,000 U.S. "access points," commercial establishments in residential neighborhoods where packages are dropped off for customers to pick up. Customers using the company's "My Choice" service can redirect a package to a convenient dropoff location. The strategy benefits UPS by consolidating multiple residential stops into one commercial stop, which optimizes UPS's network and minimizes costly "not at home" delivery attempts, said Martinez of Shipware. In addition, UPS has expanded its "Synchronized Delivery Solutions" capabilities, creating what Martinez calls "synthetic density" to speed up or slow down package deliveries so multiple packages get delivered at the same time.
The strategy of diverting last-mile deliveries into the carriers' own systems appears to be paying off, at least at UPS; its drivers now deliver about 35 percent of packages moving under its postal product rather than letting USPS do it. FedEx is nowhere near that level. However, few would bet against the company should it decide to follow the same course.
USPS, for its part, is concerned. In a Feb. 9 government filing, it acknowledged that the growth of that business—known in the postal world as "Parcel Select"—could be jeopardized if three of its biggest customers continue building out rival networks. USPS didn't identify the carriers, but it's clear that they are FedEx, UPS, and Amazon.
There's no question FedEx and UPS can pull multiple levers to get ahead of the e-commerce tsunami. However, they may still find it tough going unless they can convince retailers that they can't constantly demand lower prices just because they've made service commitments to consumers that they may now regret. "Bending the cost curve isn't just about density, but revenue per stop," Martinez said. "We see both carriers walking away if margins are forced too low." For retailers and other B2C shippers, that may require building a bit more cushion into their parcel delivery budgets.
Supply chain planning (SCP) leaders working on transformation efforts are focused on two major high-impact technology trends, including composite AI and supply chain data governance, according to a study from Gartner, Inc.
"SCP leaders are in the process of developing transformation roadmaps that will prioritize delivering on advanced decision intelligence and automated decision making," Eva Dawkins, Director Analyst in Gartner’s Supply Chain practice, said in a release. "Composite AI, which is the combined application of different AI techniques to improve learning efficiency, will drive the optimization and automation of many planning activities at scale, while supply chain data governance is the foundational key for digital transformation.”
Their pursuit of those roadmaps is often complicated by frequent disruptions and the rapid pace of technological innovation. But Gartner says those leaders can accelerate the realized value of technology investments by facilitating a shift from IT-led to business-led digital leadership, with SCP leaders taking ownership of multidisciplinary teams to advance business operations, channels and products.
“A sound data governance strategy supports advanced technologies, such as composite AI, while also facilitating collaboration throughout the supply chain technology ecosystem,” said Dawkins. “Without attention to data governance, SCP leaders will likely struggle to achieve their expected ROI on key technology investments.”
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.
Serious inland flooding and widespread power outages are likely to sweep across Florida and other Southeast states in coming days with the arrival of Hurricane Helene, which is now predicted to make landfall Thursday evening along Florida’s northwest coast as a major hurricane, according to the National Oceanic and Atmospheric Administration (NOAA).
While the most catastrophic landfall impact is expected in the sparsely-population Big Bend area of Florida, it’s not only sea-front cities that are at risk. Since Helene is an “unusually large storm,” its flooding, rainfall, and high winds won’t be limited only to the Gulf Coast, but are expected to travel hundreds of miles inland, the weather service said. Heavy rainfall is expected to begin in the region even before the storm comes ashore, and the wet conditions will continue to move northward into the southern Appalachians region through Friday, dumping storm total rainfall amounts of up to 18 inches. Specifically, the major flood risk includes the urban areas around Tallahassee, metro Atlanta, and western North Carolina.
In addition to its human toll, the storm could exert serious business impacts, according to the supply chain mapping and monitoring firm Resilinc. Those will be largely triggered by significant flooding, which could halt oil operations, force mandatory evacuations, restrict ports, and disrupt air traffic.
While the storm’s track is currently forecast to miss the critical ports of Miami and New Orleans, it could still hurt operations throughout the Southeast agricultural belt, which produces products like soybeans, cotton, peanuts, corn, and tobacco, according to Everstream Analytics.
That widespread footprint could also hinder supply chain and logistics flows along stretches of interstate highways I-10 and I-75 and on regional rail lines operated by Norfolk Southern and CSX. And Hurricane Helene could also likely impact business operations by unleashing power outages, deep flooding, and wind damage in northern Florida portions of Georgia, Everstream Analytics said.
Before the storm had even touched Florida soil, recovery efforts were already being launched by humanitarian aid group the American Logistics Aid Network (ALAN). In a statement on Wednesday, the group said it is urging residents in the storm's path across the Southeast to heed evacuation notices and safety advisories, and reminding members of the logistics community that their post-storm help could be needed soon. The group will continue to update its Disaster Micro-Site with Hurricane Helene resources and with requests for donated logistics assistance, most of which will start arriving within 24 to 72 hours after the storm’s initial landfall, ALAN said.