Parcel Market Trends & Advice for Shippers

It can be hard to believe that very much happens in a year, but that theory is put to the test when it comes to the parcel express market.

In fact, over the past 12 months we’ve seen major changes in pricing from the parcel duopoly of FedEx and UPS; the accelerated emergence of regional parcel players; and don’t forget we’re all watching the increasing power and reach of e-commerce giant Amazon as it grows its own delivery capabilities globally.

These developments require parcel shippers to do whatever it takes to stay on top of their parcel game from both a financial and operational perspective.

To help them along, Logistics Management has gathered Jerry Hempstead, president of Hempstead Consulting, a parcel advisory firm; David Ross, transportation and logistics director at investment firm Stifel; and Rob Martinez, president and CEO at Shipware, an audit and parcel consulting services company.

Our experts offer their insight into what’s driving parcel market trends and offers some practical advice for how shippers need to re-adjust to ever-changing market conditions.

How Would You Describe Today’s Parcel Marketplace?

Jerry Hempstead: All of the parcel carriers are doing well in volume and earnings - even the USPS is making money if you back out the Congressional mandates.

And it’s clear that e-commerce is driving the volumes. To top it off, service levels this year are at record levels and are predictable and consistent.

My observation is that there’s no statistical difference between the service performance offered by FedEx and UPS across a year’s worth of activity, although FedEx offers a faster delivery on ground to about 25% more city pairs than UPS.

This pressure on speeding up the promise and refining the networks to make the magic happen will only improve the consumer experience in parcel services.

Rob Martinez: As a professional in the parcel industry for nearly 30 years, I find today’s parcel marketplace tremendously exciting. It’s a dynamic industry that’s constantly changing.

The big three - FedEx, UPS and USPS - rolled out aggressive rate increases and pricing changes that require shippers to be even more vigilant in monitoring costs.

This past year, UPS leveraged its acquisition of Coyote Logistics to deliver a smooth peak season, and FedEx finalized the integration of TNT Express in April.

While FedEx and UPS continue to dominate market share, the USPS and regional parcel players are making inroads in their push for a seat at the table.

All the while, Amazon quietly continues to build out its delivery business.

Dave Ross: Jerry and Rob are right on. The parcel market is growing, changing, and we’re seeing even more two-way services - deliveries and returns.

B2C is actually growing much faster, led by the continued rise of Amazon, and UPS said on its earnings call that its package volume mix was 55% B2C - the highest ever seen, and it’s unlikely to stop there.

How Would You Describe The Current Rate And Pricing Environment For Parcel Shippers?

Martinez: FedEx and UPS are public companies, of course, and Wall Street rewards or punishes the shipping giants on margin - or yield per package.

Therefore, the more they make per shipment, the higher the stock valuation. As a result, the current rate and pricing environment is very tough on shippers.

While 2017 GRIs may have seemed modest, the changes in dimensional pricing have resulted in double-digit rate increases for many shippers.

FedEx changed its dimensional divisor from 166 to 139 for all domestic packages. And while UPS will match the 139 divisor, it only applies to packages exceeding one cubic foot.

Don’t forget, both carriers adjusted fuel surcharges weekly - rather than monthly - starting February 6, 2017.

Ross: I agree with Rob. The rate environment is very difficult, unless volumes are growing and the shippers can hit price breaks.

Pricing continues to rise, but many shippers are unable - or unwilling - to pass this increased cost through to customers, as “free shipping” has been pushed for a long-time by Amazon and is now expected by many on-line shoppers.

Hempstead: I’ll add that the key for shippers is that none of the air and ground base tariffs of FedEx and UPS will match in 2017.

That gets compounded because UPS has a much higher fuel surcharge - and both are going to be adjusting the fuel surcharge weekly this year as Rob had mentioned.

However, FedEx did make the predicted announcement that they were changing the dimensional divisor from 166 to 139.

An aspect that FedEx has not yet embraced is the 2.5% fee UPS imposed last year on transactions that are third-party billed.

The USPS announced that on January 22 Shipping Services prices will change by 3.9% percent on average, and DHL Express announced a 4.9% general average price increase for U.S. account holders, effective January 2, 2017.

Let’s Concentrate On The Dim Divisors Switching To 139. So What Are The “Red Flag” Warnings?

Hempstead: It’s hard to visualize what the change to 139 means for a shipper.

Let’s take a 10-pound, one-square-foot box at 12” x 12” x 12”. That’s 1,728 cubic inches.

Today, FedEx bills that box for the actual weight or dimensional weight by dividing by 166, which is 10.4 lbs. and that rounds up to 11. And 1,728 cubic inches divided by the new divisor of 139 will yield a weight of 12.4 lbs. rounded up to 13 lbs.

So, FedEx will not charge $12.91 [with 4% fuel] for a zone five package, and they will not charge $12.99 based on the 166 rule, but they will charge $13.55 for the 13 lbs. dimensional weight, or 5% more than the price for actual weight.

It’s another increase that’s hard for a shipper to plan for unless the customer asks the carrier: what’s this going to cost my business?

Ross: So, to build on Jerry’s example, don’t waste space in packaging. Pack enough so the freight is delivered safely without damage, but not much more, as you’ll be paying for the empty space.

The switch of the dim divisor is reflective of the significant increase in large package volume that has a higher cost associated with it than smaller packages - both with the sort and the delivery.

FedEx and UPS are just raising the price to account for this increased cost pressure on their operations.

How Are Market Conditions Affecting Service, And What Role Is The “Uneven” U.S. Economy Playing?

Hempstead: Because of e-commerce, the carriers are handling more packages than ever. And generally speaking, the U.S. economy has had little impact on the top line or bottom line of the carriers.

In addition, the revenue of the integrators is now so balanced globally they’re more affected by global trade conditions than domestic, but the bulk of the transactions handled by both FedEx and UPS are domestic air and ground.

If someone wants to purvey their items on the Internet and use a carrier that has it all, then they have to use one of the two carriers to deliver the goods and pay the price.

The carriers have made the investments so that the service levels are not now severely compromised. In fact, service levels this year are the highest recorded.

Ross: There is no material impact on service from current market conditions. The uneven U.S. economy is tilting the shipment profile more to B2C than B2B, as the consumer side has been doing better than the industrial side for the last couple of years.

What Does The Future Look Like For Amazon?

Hempstead: Let’s put it this way: Amazon is gradually building out its own logistics network; they have opened 20 of their own regional sort centers; and they’ve started their own air network contracting with ATSG and Atlas airlines.

Where they have critical mass they do their own drops into the USPS network and use Parcel Select for the last mile.

They’re innovative and willing to go out on a limb. They’re testing drone delivery of parcels; they’re building an Uber like app for freight; and I’m sure driverless delivery and line haul vehicles have been discussed.

However, they’re still a customer of the integrators and most likely will continue to do so for a long time.

Although Amazon will try to clip away the business they give to others to deliver, their incredible growth will continue to force co-opetition with the big parcel delivery firms.

Martinez: To follow up on Jerry’s comments, Amazon’s steps to build out its delivery business certainly has the industry abuzz.

Amazon’s stated goal - rather than to compete with the likes of FedEx and UPS - is simply to minimize their reliance on the national carriers.

But make no mistake about it: Amazon is already into the transportation business in a big way.

In the past few years, they’ve amassed a fleet of delivery vehicles, negotiated extended leases on forty 767 air freighters, announced plans to invest $1.5 billion in an air cargo hub in northern Kentucky, and recently started acting as a freight forwarder by handling ocean shipments from China.

While the national carriers publicly feign disinterest in Amazon’s recent moves, only stating that Amazon remains a very good customer, secretly they have to be nervous.

Hempstead: Rob and Jerry nailed it. They’ll be getting bigger and bigger, but we don’t know how big and in what areas and what challenges will come with increased scale.

Certainly, the company is investing more in logistics, and we expect them to do more in-house where it makes sense, but we don’t believe they want to put FedEx out of business as we’ve read in headlines.

How Do You View The Current State Of The USPS, Given Their Ongoing Financial Travails?

Ross: The USPS is better than people give them credit for in that it has a good value product and it’s critical to the e-commerce supply chain.

They just need to work out their pension issues and raise the stamp price a bit and they’ll be fine.

Martinez: I agree. And despite the doom and gloom we all hear about declining First Class Mail and financial losses at the USPS, its shipping and packages business unit has actually been doing very well.

Following 2015 volume growth of 14.1%, the business segment has continued its strong performance with volume growth of 13.8% for fiscal 2016 and revenue growth of 15.8%.

Still, the USPS lost $5.6 billion in fiscal 2016. However, most of the loss was driven by mandated future retiree health benefits.

Remove that from their income statement and the USPS would have recorded positive net income of approximately $200 million.

With the continued growth in e-commerce, the service is well positioned to flourish in the years ahead.

I don’t think shippers have anything to worry about, especially if the USPS is able to achieve legislative relief on the onerous prefunding obligations.

Hempstead: David and Rob are spot on. And don’t forget, the USPS is the only delivery company that goes to every address in the U.S. six days a week and is experimenting with Amazon deliveries on Sunday.

The model is so perfect that the largest customers of Parcel Select outside of Amazon are FedEx (Smartpost), UPS (SurePost), DHL (e-commerce) and Newgistics.

In fact, Parcel has been the shining star for the USPS, and their future is to some degree pinned to the continued success of their package services.

So far they have been executing well and have been investing in the required enhancements to the services, in particular tracking - and there are more improvements coming.

What Advice Do You Have For Parcel Shippers In 2017?

Ross: My simple advice is to know your freight and know your options.

Hempstead: Indeed, and keep in mind that the devil is in the data.

The carrier being utilized knows more about a shipper’s business than the shipper does.

The integrators have armies of data analysts and massive computing power that allows them to tweak pricing to extract revenue and navigate through the next price increase.

They know to the penny how much additional revenue will be garnered with each rule change and tariff price change, in both base rates and accessorial charges.

Martinez: I’ll add that for parcel shippers going into 2017, managing transportation spend has become even more complicated.

Taken in combination with the 2017 GRI, dimensional pricing changes are very significant.

However, just like discounts on published pricing, dimensional divisors are also negotiable.

Shippers are also wise to decrease dimensioning through improved packaging.

Shippers should leverage the competitive marketplace, including the USPS, regional parcel carriers and package consolidators.

And while parcel in 2017 has become more complex and costly, winners will be those shippers that take the time to analyze, optimize and diversify their parcel networks.

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