Two years ago, parcel express carriers were flooded with business. Some prognosticators predicted annual growth of 20+ percent. E-commerce was on fire. Capacity was exceptionally tight.
Fast forward to today. The economy continues to grow, albeit at a slow but steady pace. Inflation, while still painfully high, has moderated and fallen below last year’s highs. Employment is at record levels, unemployment at 20-year lows, wages are on the rise, and consumers keep spending but with a discerning eye for bargains.
Yet that’s not translating into a rising tide for parcel carriers.
UPS is cutting back, closing facilities and laying off staff. FedEx with its Drive initiative is in the midst of perhaps the biggest restructuring in its history. Added to the mix are regional parcel carriers, which are expanding coast to coast. In addition, new players are entering the market—and carving out profitable niches—with lower-cost, high-quality services and flexible business models built on leading-edge technology platforms. And then there’s Amazon—and its record-breaking parcel volumes—which has eclipsed UPS and FedEx as the largest nongovernment delivery service in the nation.
What’s on the horizon for parcel express carriers, and how should parcel shippers be refining their strategies? If first-quarter earnings reports are any indication, flat demand, excess capacity, rate pressures, retrenchment, and cost-cutting all are troublesome issues that will continue to challenge the parcel express market throughout 2024.
SLACK DEMAND, YET A FEW BRIGHT SPOTS
Shippers and carriers both continue to contend with a slump in parcel demand, driven by shifting consumer spending habits, an intense focus on price and shipping costs, and a market where operators, product and service mix, technology, and revenue strategies continue to evolve. UPS provides a window into these trends. Its average daily volume in 2024’s first quarter was down 3.2% year over year. U.S. domestic revenue at $14.2 billion was down 5%. Revenue per piece was relatively flat.
“We continue to see a shift from air to ground as customers prioritize cost savings over transit times by taking advantage of our ground services,” said Brian Newman, UPS’s CFO, in the company’s first-quarter earnings call (UPS subsequently announced that Newman is leaving the company this month). On the cost side, the company closed 18 sort centers, lowered block hours (aircraft operating hours) by 15.2%, cut 5,400 management and support staff jobs, and reduced purchased transportation by 17%.
A bright spot: UPS’s returns business. “We like the return business a lot,” said Carol Tomé, UPS’s chief executive officer, in the earnings call. She noted that these returns are typically B2B (business-to-business) shipments where customers bring packages into a UPS store to be sent back to the original shipper. Using its largest customer as an example, Tomé said, “We take in thousands of returns for that customer and package [them] into one consolidated return that goes back to them. That’s good business for us … and the margins are very attractive.”
Ryan Kelly, vice president of marketing for FedEx Services, has been through a few boom-and-bust cycles in his time. One current trend on which he agrees with his largest competitor: the challenge—and opportunity—of giving shippers a simple, pain-free return experience.
“We’re seeing some interesting changes, especially around returns,” Kelly notes. “Consumers are redefining what convenience and quality mean to them,” he explains. “It’s not just about speed anymore; people want flexibility. Many are willing to engage more deeply with brands—in exchange for perks such as free shipping,” which places a premium on the carrier providing cost-effective, consistent, superior-quality service.
And whereas in pre-e-commerce days, dealing with returns was an annoying afterthought for retailers, today that experience can mean the difference between retaining and growing a customer, or losing it entirely.
“It’s all about balance, right? Unsatisfactory return policies, high fees, and strict return windows just aren’t cutting it anymore,” says Kelly. “These are all significant deterrents that can stop [customers] from doing business with a brand altogether. It’s up to retailers now to rethink their strategies to better align with customer expectations.”
There is no doubt that e-commerce will continue to grow, if only in the short term and at more muted rates. Staying competitive and relevant as a carrier will require not only flawless operational blocking and tackling but also continual improvement in and evolution of technologies that support the business—and create simplicity, ease of use, and lower costs for shippers.
“Innovation is in our DNA,” Kelly says. “We operate at the intersection of the physical and digital, and we’re unlocking the power of this intelligence to transform our business, provide better customer service, and move up the customer’s e-commerce value chain.”
A FOCUS ON THE FUNDAMENTALS
Regardless of market conditions, there are core fundamentals of running a parcel carrier and providing the service that will always endure—and be top of mind with shippers, notes Greg Hewitt, chief executive officer at DHL Express U.S.
What is the biggest “ask” he gets from shippers today? While price is always part of the discussion, particularly in times of soft demand and weak volumes, “quality is No. 1,” he says. “Efficient and reliable delivery service, making sure the customer’s goods reach them on time and in great condition. Reliable transit time and tracking,” with regular progress updates and visibility into the shipment through the last mile and confirmation of delivery.
“And it has to be cost-effective. The shipping cost cannot outweigh the value of the goods.” He stresses as well the need to be proactive with shippers and “help them find alternative means where they can get value [and consistency] at a lower cost.”
Parcel service providers also have to recognize they can be a critical factor in the growth plans of businesses, particularly in the fast-paced, ever-changing, and constantly shifting world of e-commerce. As new e-commerce businesses seek a path to growth, “they need flexibility and scalability” from their parcel carriers, Hewitt stresses.
“Today’s small e-commerce player is tomorrow’s giant,” he notes, adding that new businesses just out of the gate typically are focused on product development and expanding their market. Shipping and logistics, while certainly critical to success, aren’t necessarily a core focus, or where they want to spend precious development dollars. “So, as a parcel carrier,” Hewitt says, “we have to grow with them as they grow,” demonstrating flexibility and agility to effectively plan for and accommodate surges in volume stemming from peak season demand, big sales events, or new product introductions.
Moreover, as their business evolves and needs change, “they might even want other services like warehousing, product handling, fulfillment, or a custom solution. We have to be prepared for all that,” he adds.
The other area where Hewitt is seeing not only increased interest but also more formal conversations and requests is around sustainability. Today, formalized sustainability programs “are part of [the customer’s] ethos, value statement, and shareholder commitment. [They] want a partner aligned with those values” and able to help them meet goals and objectives, he notes.
DHL Express’s U.S. network has 120 facilities that operate some 3,500 routes per day, with 8,000 pickup and delivery drivers and another 4,000 workers at its hub in Cincinnati. The company operates 300 flights a day connecting its depots, and through its DHL eCommerce division, partners with the U.S. Postal Service to complete local last-mile parcel deliveries.
THE BIGGEST COMPLAINT
In a flat market, parcel carriers are looking for any and all opportunities to generate revenue. One area that continues to draw the ire of shippers: surcharges and accessorials. “When the market was imbalanced and demand [was] exceeding capacity, I could understand peak surcharges,” notes Satish Jindel, principal at freight data analytics firm ShipMatrix. “But today with industry capacity at 120 million yet volume running only 80 million, why [would you] have a peak surcharge?” he asks.
Jindel adds that the pain is exacerbated by a proliferation of new and revised surcharges hitting shipper pocketbooks. One example: recalibrating certain ZIP codes, which previously had no extra charge, in order to apply a “rural route” or other type of extra delivery fee. “Shippers are tired of these newcomers and extra charges and are actively taking advantage of capacity being so much more [available] and switching carriers to others outside of UPS and FedEx,” Jindel says.
Looking to the remainder of the year, Jindel says he does not expect parcel market volumes to change much in Q2 “and even for Q3 and Q4 compared to prior years.” He adds that “the increase is likely to be around 3% due to continued inflationary pressure and more [consumer] spending on services and entertainment, instead of goods and physical products.”
Micheal McDonagh, president of parcel for broker AFS Logistics, which has $4 billion of parcel freight spend under management in the U.S., has a similar view. “I believe FedEx and UPS will continue to look for ways to raise revenue in a weak volume environment. There is no extra cost to them in adding fuel, special service, or other surcharges, and I see that continuing.”
He notes as well that with carrier general rate increases and rising surcharges, many customers are reexamining their shipping strategies, seeing how much they can shift to lower rate and service levels. “It’s all about elasticity of delivery, taking a much harder look at cost but balancing that against acceptable delivery times,” McDonagh says. To that end, businesses are changing shipping practices, “planning and shipping orders earlier—for example, on Tuesday, using two-day service—instead of Thursday for next-day [delivery],” he observes. “If you pay attention to your zones, shipments within 600 miles are still getting good two-day service” at much less cost, he adds.
FOLLOW THE INVENTORY
Thanks to Amazon, the consumer’s appetite for next-day and even same-day delivery has seemingly become insatiable. That mirrors a shift in supply chain practices around where sourcing occurs, warehouses are sited, and inventories staged. Basically, the last decade has seen inventory moving closer to the end-user. That has accelerated demand for more, smaller warehouses in more communities; expanded opportunities for more localized, last-mile next-day delivery; and prompted a rush of new entrants carving out specific niches in the parcel business.
One such example is last-mile delivery specialist Jitsu.
Jitsu (which recently changed its name from AxleHire) doesn’t subscribe to the “you call, we haul” model of accepting virtually any product or commodity that comes its way. Instead, it has focused strategically on a highly defined customer segment, that being “key, high-value brands who believe the delivery experience is integral to the brand value and customer satisfaction, depend on absolute on-time delivery and zero claims, and want enabling technology that provides robust visibility and analytics from start to finish,” says Raj Ramanan, Jitsu’s chief executive officer.
“We are very discerning [about] who we work with,” he says. Its customers, such as American Eagle, HelloFresh, and Nespresso, tend to be retail or e-commerce brands “with a lot of high-end, high-value retail goods, apparel, wine and spirits, meal kits, and durable medical equipment,” Ramanan explains. Deliveries can be anything from one pound up to 50 pounds, with one to five pounds being the most frequent, and 35 pounds the average.
Jitsu operates an “asset light” business. It has set up 40 warehouses in 21 major metropolitan areas, where it houses and stages customer inventories for inbound processing, cross-docking, sorting/comingling, and delivery. The company says it currently can cover 40% of the continental U.S., with 90% of its deliveries next-day and 10% same-day. Jitsu claims an on-time delivery rate of >99%.
Its delivery workforce is a combination; 60% are independent “gig” drivers (aka, the Uber or Roadie model) and 40% “Delivery Service Partners,” which are parcel trucking businesses that focus on last-mile delivery and have five to 10 trucks of their own. Forty percent of its gig drivers are women.
Driver pay is based on a combination of factors, such as number of packages and stops, distance traveled, local impacts such as congestion, and other measurements unique to a community. It’s a pay model that “continues to evolve to reflect market fairness and driver feedback,” says Ramanan.
Load planning, route assignment, optimization, and visibility software is home-grown, which Ramanan cites as an advantage. When a Jitsu driver shows up at a Jitsu warehouse or satellite hub, “they pick up an already prepared, ready to load, consolidated set of deliveries” with a recommended route and optimized delivery sequence downloaded to the Jitsu app on their phone. Customers receive text messages indicating in-route progress of their shipment as well as delivery confirmation.
“The driver experience is pretty slick,” says Ramanan. “We try to make it as painless and simple as possible for a driver to complete a route and make the most money.” For example, when a driver registers with Jitsu, the company takes note of the type, size, and capacity of their vehicle and how many packages it can take, and then plans loads accordingly. That reduces driver stress, allows for pre-planning accurate loads for the vehicle type, and maximizes the number of deliveries a driver can effectively complete during the time that driver wants to work, he explains. A driver also can log into the app the night before and see the next day’s load plan for his or her individual vehicle.
Retailers and e-commerce businesses using Jitsu also have real-time visibility into their inventories at Jitsu warehouses, with the ability to see what deliveries are scheduled for that day, how those deliveries progress during the day, delivery confirmation, and how much inventory remains.
THINK TOTAL COST, NOT JUST LOWEST PRICE
Total cost of delivery—and helping brands understand its value as a key decision-making metric—is something Jitsu works hard to educate its customers about, Ramanan says. “The cost of a bad delivery has to be considered [in the overall evaluation] as well as returns and complaints,” he emphasizes. “The delivery experience is fundamental to the overall customer experience. If you miss a delivery, or it arrives late or in partial form, you don’t blame the driver, you blame who you bought the product from. And that influences your [the consumer’s] decision to use that retailer again.”
