With "Parcel Metro" service, DHL looks to be big fish in fast-growing delivery pond

In January 2009, German transport and logistics giant DHL pulled the plug on its express unit's domestic U.S. operations, ending a financially disastrous six-year quest to become the market's third major express player, and denting the parent's reputation that took 40 years to build. Now Big Yellow is back, much smaller, and in far different form than in the first go-around, reflecting the profound trends that have changed the U.S. parcel market since it left.

The service, coined "Parcel Metro," launched in mid-March in Chicago, New York, and Los Angeles under the auspices of DHL Supply Chain's e-commerce unit. It will be expanded to Dallas and Atlanta in the second quarter, San Francisco in the third quarter, and Washington, D.C. in the fourth quarter. The service will provide last-mile (or, in some cases, last quarter-mile, or maybe less) deliveries. It will not utilize any DHL vans or drivers, but will rely instead on regional and local firms as well as the "Delivery Dunkirk" of crowdsourced drivers with private vehicles, who will be vetted by the DHL unit before hitting the road.

What DHL brings to the table is its technology and, perhaps more important, its global brand. The U.S. last-mile parcel market is both embryonic and hodge-podge-like, with startups like New York-based Deliv vying for share along with other eager pros and a De-Mille like cast of citizen drivers looking for a piece of the e-commerce action. By muscling into the nascent segment, DHL wants to build credibility with the retailers that choose delivery methods, as well as attract a critical mass of qualified drivers to cover as much geography as possible.

It also hopes to attract the ardor of a certain Seattle-based e-tailer that nine years ago was just a seller of stuff and not a transport and logistics force. The ties between Amazon.com Inc. and DHL run deep. DHL's U.S. hub operations—it serves the U.S. only for international air services—uses the same airport in Cincinnati where Amazon is building its air hub to support its "Prime" service, which promises nearly unlimited two-day deliveries for an annual fee of $99. Amazon had used nearby Wilmington, Ohio, for some of its air services before choosing Cincinnati as its permanent hub. DHL had its national air and ground hub in Wilmington before ceasing domestic service. Amazon and DHL are big customers of cargo airline ABX Air, a Wilmington, Ohio-based unit of Air Transport Services Group Inc., which is also based there.

But those bonds will only go far in persuading Amazon to use the Parcel Metro service, according to Satish Jindel, founder and president of consultancy SJ Consulting Group Inc. Amazon would use Parcel Metro if it can deliver reliable service at the lowest price. Should service falter or be priced beyond what Amazon deems acceptable, the e-tailer will go somewhere else, Jindel said. "These are not marriage vows," he said in an interview Friday.

The DHL service is also likely to take aim at the U.S. Postal Service's "Parcel Select" operation, where big retailers, parcel consolidators, and carriers tender large consolidations deep into the postal system for deliveries by letter carriers. Parcel Select grew by 14.4 percent in USPS' fiscal first quarter, which included the peak holiday shipping season. However, USPS has warned that the business could be negatively impacted if Amazon, UPS Inc., and FedEx Corp., its three heaviest users, expand their networks to offer similar services and siphon off business from USPS.

Last April, FedEx and UPS rolled out pricing initiatives geared to ultra-short-haul deliveries. The companies planned to price the services cheaply because they wouldn't involve the use of over-the-road line-haul operations, which add to their costs. Jindel, who is familiar with the initiative, said the carriers have moved too slowly in building out the programs, however.

This is a microcosm of the challenges that FedEx and UPS face to compete in a new world of parcel delivery, according to Jindel. FedEx and UPS either rely on USPS or on their own networks to make local deliveries. They do not leverage the new ecosystems that have sprung up to respond to changing retailer and consumer needs, Jindel said. In that vein, DHL has the jump on them, he said.