“It’s a great time to be in the parcel business,” says Dick Metzler, chief executive officer of regional parcel carrier LSO, which operates primarily in Texas and Oklahoma, home to some 35 million consumers. Metzler’s upbeat assessment will come as no surprise to anyone who follows the industry. Parcel volumes, supercharged by the pandemic and e-commerce–happy stay-at-home consumers, have sent revenues soaring for parcel carriers. LSO saw volumes double in 2020, Metzler says, generating $65 million in revenues last year and tracking toward over $100 million for 2021.
He’s not alone. Virtually all parcel carriers have reported record numbers for 2021’s first quarter. Those results illustrate the impact of network-busting volumes but also the ongoing struggles as parcel carriers try to bring their networks back into balance after 2020’s Covid-driven surge—and battle a continuing crush of e-commerce traffic.
Parcel behemoth UPS in the first quarter this year saw average daily volume increase 12.8% to 20.4 million packages per day. Average daily volume for the business-to-consumer segment, which includes e-commerce–fueled residential deliveries, surged 77.6%. UPS estimates that online sales this year will rise 12.7%, following growth of 24.7% in 2020.
And by some reckoning, the party’s just starting.
Pre-Covid, parcel giant FedEx projected that the U.S. domestic package market would hit 100 million packages per day by 2026. That growth milestone is now expected to arrive four years earlier—in 2022, with 86% of that growth expected to come from e-commerce.
“The rapid onset of Covid-19 … has forever changed e-commerce,” says Ryan Kelly, FedEx’s vice president, e-commerce and alliance marketing. “Shoppers were pushed online overnight, and in that instant, everyone from larger industry retailers to small mom-and-pop businesses had to revamp their business models.”
As evidence of shifting consumer buying behavior, Kelly cited a recent Global Shopping Index report published by Salesforce that found the number of unique digital shoppers rose 40% year over year. Another FedEx-commissioned consumer study, released in March, found that 70% of shoppers are buying from more online retailers today than they did a year ago. “The speed of change across every industry has been unlike anything we’ve ever seen,” Kelly observed.
The rapid growth in parcel volumes has strained capacity and impacted service levels, driving supply chain managers to distraction. At the height of last year’s peak season, some shippers found the capacity previously committed to them by carriers either cut or capped. In some instances, shippers had to pay additional surcharges if their package volumes exceeded contractual commitments, and for shipments above certain weights or dimensions.
And while the first quarter saw surcharges moderate and service start to improve, parcel shippers remained frustrated. LSO’s Metzler shared one conversation he had late last year with a large account that had been a loyal 30-year customer of one of the “Big 2” parcel carriers. “They sent in a guy who told them, ‘Look, you have to shed 30% of your volume in 30 days,’” he recalled.
Shippers have long memories, and whether the market is tight or loose, “I don’t care how far technology evolves, relationships matter,” Metzler says. “If you burn someone, you [might] have to wait until the guy retires to get back in the door.”
Not to be left by the side of the road, other regional parcel carriers also are experiencing the surge effect.
LaserShip, a regional parcel carrier that covers 20 states in the Midwest and Eastern U.S., a market of over 100 million consumers, saw its business in 2020 grow 58.2% to $715 million, according to data from SJ Consulting Group, which ranked it the fastest-growing trucking operator in the U.S. last year. LaserShip deploys a network of more than 60 depots supported by four sort hubs and has some 5,000 drivers making daily parcel deliveries.
Similarly, according to SJ Consulting data, OnTrac, a Western regional parcel carrier, grew revenues 34.6% to $832 million last year, landing as 2020’s second fastest-growing U.S. trucking operator. OnTrac, which serves eight Western states that collectively have some 66 million residents, operates 34 pickup and delivery facilities, including six that do double-duty as sort hubs.
The market’s growth shows no signs of letting up anytime soon. And that’s keeping up the pressure on capacity. “They are beating down our door,” Mark Magill, OnTrac’s vice president of business development, says of interested customers looking for reliable capacity and cost-effective service. “Not only do we have peak numbers already, but the number of larger shippers seeking capacity from us continues to grow.”
The effect of e-commerce has been daunting, says Magill, who notes that 86% of OnTrac’s deliveries are to residential addresses. Long-time e-commerce shoppers are buying more, while older shoppers—those from the baby boomer generation who once shied away from e-commerce—have become avid users. During Covid, “they had no choice but to buy online,” Magill notes. “Once they found out how easy [online shopping] was, why go back to the store and risk getting Covid?”
OnTrac suspended new business at the end of last year, but started taking new customer requests again in the first quarter. Looking ahead to a market facing persistent capacity issues, Magill advises shippers to start planning now to secure capacity for the coming peak season. Those who delay could find their parcels sitting on the dock.
In response to the capacity crunch, supply chain managers are increasingly looking to diversify, carving out portions of their parcel business to give to regional carriers where there is a fit and capacity—and finding creative alternatives to “zone skip.”
Magill has seen instances of East Coast shippers (often those who lack a West Coast distribution center) consolidating thousands of West Coast-destined parcel shipments into a 53-foot dry-van trailer, linehauling them with a two-driver truckload team, and then injecting those shipments into OnTrac’s main Reno, Nevada, sort center. From Reno, OnTrac says it provides next-day service as far south as the Mexican border and north to the Canadian border.
The reason driving the alternative strategy: volume restrictions with national parcel carriers that limited pickups in certain areas and delayed cross-country service. Magill has even seen consolidated parcel loads coming into Reno via intermodal rail.
As for those on the receiving end, consumers annoyed by parcel delays and higher costs “should not be mad at anyone except themselves for their inability to manage their addiction to [want it now] consumption …,” remarks Satish Jindel, president of SJ Consulting Group and its data analytics subsidiary, ShipMatrix. Thanks to Amazon, consumers have been lulled into the perception that e-commerce orders come with “free” shipping. “It’s not free; it’s built into the price of what you are ordering,” says Jindel.
Make no mistake, retailers and online shippers are paying the parcel carriers for their services, he emphasizes. If shippers are upset at surging parcel costs, “they should look in the mirror. They are responsible … because they failed to prepare for the conversion [of commerce] from store to online. And it’s here to stay.” He projects online growth to continue at a 15% to 16% clip annually. “If you don’t need to touch, feel, or see it, why go through the difficulty of driving to the store? And then finding out [what you want] is not on the shelf?” he says.
However, Jindel adds, there is a silver lining for carriers: more density per route and higher productivity. “As density increases, it will reduce the cost of [business-to-consumer] deliveries,” he says. “Instead of the driver making 10 stops an hour, now [because of more e-commerce deliveries in close proximity], he’s making 12 or 14 and that lowers the cost per stop,” he notes, adding that parcel carriers may choose to share a portion of the savings to grow profitable market share faster.
Then there is the technology component, which is evolving at an unprecedented pace and scale.
The dramatic growth of parcel volumes, and the increasing complexity and breadth of delivery networks, has only heightened the need for more advanced, flexible, and adaptable multicarrier parcel management technologies, says Bart De Muynck, VP analyst for transportation technology with research firm Gartner Inc.
The goal: faster deliveries over shorter distances at the lowest possible cost.
It’s no longer a shipment originating at one DC and being sent to one address. “How do you route and price things when you have alternative pickup and delivery points?” he notes.
Today’s omnichannel networks require parcel management platforms that can certify and manage multiple carriers. They also must evaluate multiple alternative routings and then select the best one to accommodate pickups that might originate at multiple points, such as a DC, a local brick-and-mortar store, a temporary “popup” storefront, or a third-party service provider.
Then the delivery could be to a job site, a business or residential address, a retail store (where the consumer picks up the online order), or a locker at, say, the local Safeway store. And lastly, the system has to determine the best carrier for the desired service, whether it’s same-day, next-day, or later. That means deploying a wider base of resources, from less-than-truckload (LTL) carriers to UPS and FedEx to regional parcel carriers and even crowdsourced same-day networks like Roadie, De Muynck says.
“What people are looking for is analytics and more intelligence in their systems,” De Muynck says, noting that the highest demand is for real-time visibility, distributed order management, and multicarrier parcel management—all connected and supportive of overall goals for lowest-cost, best-service delivery.
“How do you make sure you [accurately] calculate all that?” he asks. “Today’s distributed technologies are far more sophisticated than the transportation management systems of the past. These platforms and their capabilities are a must-have and are critical to making the right decision with the right resources to meet the fulfillment expectation of each consumer.”