2023 Parcel Express Roundtable: Shifting dynamics in a vibrant market
Three of our top parcel industry sources offer their respective takes on the most consumer-facing segment of freight transportation and logistics parcel and last-mile delivery. Even though pandemic-related conditionshave changed, high pricing remains, which is increasingly putting shippers in the position of carefully considering their options.
While the economy has seen its fair share of ebbs and flows going back to the onset of the pandemic, the parcel delivery and last-mile logistics markets are still operating in what could be called equally nuanced and extraordinary times.
As the pandemic forced people to hunker down at home, many of them focused on things like ordering exercise equipment, home remodelling efforts, and other consumer-influenced demand purchases. This, in turn, created what could be called “boom times” for parcel and express delivery carriers, with consumers wanting and expecting goods soon after they clicked on their orders.
That was evident in the form of increasing volumes as well as carriers holding significant pricing power over consumers. Now, things have changed, with consumers returning to a more normal cadence and shifting spending from goods to services such as dining out, sporting events and travel.
However, one thing that has not changed is the fact that carriers are holding the line on pricing in the name of things like “revenue management” while cutting costs and keeping shareholders happy. This, in turn, has also led to consumers taking a closer look at their delivery options at a time when rates continue to head in one direction: up.
In our annual roundtable designed to keep shippers current on this dynamic market, Logistics Management is joined by a trio of leading market analysts to provide some guidance. This year’s panel includes Rick Watson, founder and CEO of New York-based RMW Commerce Consulting; John Haber, chief strategy officer for transportation and logistics services provider Transportation Insight; and Josh Taylor, senior director of professional services for Shipware, an audit and parcel consulting services company.
Logistics Management (LM): How would you describe the state of today’s parcel marketplace?
John Haber: Today’s parcel marketplace is in a state of transition. As carriers hedge their bets against a potential recession, shippers are frustrated with exponentially increasing prices, creating opportunities for new carriers to enter the market. Capacity demands have fallen, as e-commerce growth levels have eased with the post-pandemic return to normal.
Josh Taylor: The network constraints of the pandemic continue to fade further into the past as we’ll see the market resettle and mature in 2023. Demand for parcel shipping continues to soften, shifting the balance of power back toward buyers and shippers. And as its parcel volume drops, UPS is trying to satisfy investors by raising rates, increasing its dividend, and announcing $5 billion in planned buybacks.
FedEx, also lacking parcel volume, is more willing to undercut UPS on price to win desirable shippers. They’re also laying off thousands of management employees to cut costs.
Newer carriers had a smoother runway when supply was tight, but some may not survive the coming grueling duels for market share. And don’t forget, the potential for a Teamsters’ strike looms over UPS. They probably won’t strike, but shippers should seriously consider securing other shipping options to offset the risk.
Rick Watson: I would add that today’s parcel marketplace is characterized
by a high degree of change. The supply chain crisis and bottlenecks have largely eased as the world has slowly exited from the pandemic.
This has reduced the cost of containers globally. Overall, the supply chain is no longer capacity-constrained by trucks, planes, and facilities. However, persistent labor constraint remains.
Of all the providers, UPS has been the standout performer. UPS is slowly being overtaken by Amazon as one of the largest providers in the United States, as the company slowly sheds more Amazon volume every year. As a result, UPS is instead focusing on the profitable niches like small businesses and healthcare to put itself in a better position.
LM: Can you describe today’s rate and pricing environment?
Taylor: FedEx, UPS, and others imposed a 6.9% GRI for 2023, a record high, but many shippers report overall increases well above 10% due to package mix and the unrelenting rise of surcharge costs. UPS continues to transition more peak surcharges into permanent profit drivers, a practice FedEx followed in 2023.
While this will partially offset the lost revenue from shrinking demand and lower fuel prices, it means higher costs for shippers unable to negotiate relief.
But there’s good news for shippers, too. Cracks are appearing in the strong seller’s market that enabled the past three years of unprecedented rate hikes. FedEx is undercutting UPS on price to win away desirable small- and medium-sized businesses. UPS hates the idea of relaxing its pricing discipline, but it won’t have a choice if it wants to win volume from smaller, more profitable shippers to replace the Amazon shipments it continues to shed.
Watson: For sure, the current rate and pricing environment continues to be strong for shippers as both FedEx and UPS raised their rates by 6.9% as Josh just mentioned, which is significantly above the historical averages of the past decade of approximately 5%. Despite some warning signs of demand weakness, the cost of labor continues to rise. It appears that carriers are using these expanded rates to plan for the worst possible future.
Haber: Josh and Rick are both correct. Carriers continue to increase rates, with FedEx and UPS setting the industry standard. Both announced general rate increases that are an all-time high, but keep in mind that few shippers will only see 6.9%, as common surcharges will increase at significantly higher rates.
As a potential recession looms, carriers are attempting to use rate increases to offset volume declines and ensure revenue growth is achieved.
LM: With March 2023 marking the third year since the pandemic became part of our lives, what do you think have been the biggest lessons learned for shippers, and what changes do you see as likely to become permanent?
Watson: Broadly speaking, most of the pandemic changes are not likely to become permanent—at least from a capacity perspective. One lasting acceleration of an existing trend will continue to be the importance of automation.
Over the next 10 years, it’s going to be very difficult to run a logistics business without significant investment in automation and digital technology.
Haber: The past three years have been difficult ones for shippers. As consumer demand skyrocketed, so did pricing. High prices from legacy carriers have opened the market to lower-cost options from alternative providers, and shippers are taking notice.
In the year ahead, I expect shippers to continue to negotiate, diversifying their last-mile carriers and embracing a myriad of service options to better navigate carriers’ skyrocketing prices. Gone are the days where shippers should depend solely on UPS and FedEx.
While much of the Western world has embraced a post-pandemic lifestyle, China’s COVID policies—including rolling lockdowns—continues to disrupt the supply chain. Pursuing supplier and manufacturing locations closer to home will continue in 2023, with American and North American locations prioritized over international ones.
Taylor: For many shippers, the pandemic highlighted the importance of carrier diversification. UPS and FedEx have always been in business to make a profit. At the same time, many shippers felt a sense of partnership and loyalty to their carriers. They trusted UPS and FedEx to always uphold their end of a tacit but mutually beneficial agreement.
Three years into the pandemic, this trust, which sometimes took decades to cultivate, is largely destroyed. Many shippers felt abandoned or exploited by historically high and frequent rate increases, redefined profitability calculations, unilateral changes to contractual incentives, short-notice refusals to carry planned volume, and even the outright cancellation of some customers’ entire contracts.
Even worse was the realization that these changes were not made to avoid an existential crisis, and the carriers were earning record profits as their customers struggled to survive. As a result, many shippers recognized the need to diversify their carrier mix.
They had more choices than ever before, and thanks to advances in carrier-agnostic shipping and tracking platforms, many found the process easier than expected and invisible to the end consumer.
LM: How are market conditions affecting service, and what role is the state of the U.S. economy playing?
Haber: UPS continues to focus on its better, not bigger strategy, but holes could begin to emerge as the economy becomes more uncertain, retailers struggle to unload high inventory levels, and a slowdown in consumer spending on goods.
In addition, fuel and natural gas costs and inflation continue to pose a problem. The costs can build on top of each other from the last-mile to the final-mile, and if there are returns or other reverse logistics tasks, those also get added. Good relationships between shippers and transportation providers are essential.
To help offset some of the costs associated with inflation, transportation management systems (TMS) can help professionals compare transportation costs, delivery times, and capacity availability between modes.
Taylor: Service performance has rebounded to pre-pandemic levels, but most service guarantees remain suspended. Service guarantees were one of the best tools shippers had to hold carriers accountable for performance failures.
Prior to the pandemic, shippers that audited their weekly invoices for late deliveries commonly recovered 2% to 6% of total charges. More shippers need to complain loudly and frequently to their carriers before this will change.
The driver shortage is easing, and carriers are generally having an easier time hiring good warehouse workers. Plus, the large, frequent rates increases enacted by UPS and FedEx over the last few years encouraged the creation and expansion of viable, new competitors.
The biggest risk to service in 2023 is the potential for a Teamsters strike. This is the first—and likely only—negotiation for Carol Tomé, UPS CEO. The newly elected general president of the Teamsters, Sean O’Brien, has been in leadership roles since 2006, but this is the first negotiation he will lead.
His ability to retain his job and unionize Amazon warehouse workers likely rides on the outcome of this negotiation. Shippers should strongly consider securing network capacity outside of UPS as soon as possible.
Watson: The state of the economy really affects two things: the amount of demand, and the mix of that demand across categories. To date, despite the inverted yield curve screaming that we’re headed into a recession, the American consumer has held up pretty well from an overall point of view.
What you saw in 2022 was reprioritized consumer spending as inflation increased the price of essentials. From the point of view of the parcel market, this did not significantly reduce demand as such, but it did create different winners and losers within various categories.
LM: How are the more established carriers adjusting to the ongoing influx of new, last-mile competitors?
Taylor: There are dozens of last-mile competitors like Sendle, PARCLL, X-Delivery, Pandion, Veho, and Front Door Collective. Consolidators like DHL eCommerce, Pitney Bowes, and OSM Worldwide can provide true alternatives to FedEx and UPS.
Regional options like OnTrac/LaserShip, LSO, Spee Dee, United Delivery Service, GLS, Courier Express, and T-Force often have a much larger one-day ground delivery footprint than UPS and FedEx, saving time and cost.
The trend—and opportunity—in the parcel market is toward lower rates and better service through intelligent multi-carrier routing, zone-skipping, and hub induction, yet FedEx and UPS rarely address in public that these competitors pose a growing threat. However, their acquisitions of ShopRunner and Roadie prove they understand the value same-day deliveries and other final-mile capabilities can provide for large retailers.
Watson: New last-mile competitors are not disrupting the traditional carriers broadly. They’re providing a flexible way for shippers to provide fast service in situations where consumers require quicker turnaround times and the inventory is local. Additionally, we have the rise of middle-mile carriers like Amazon and Maergo entering the market.
Haber: With the concept of last-mile delivery continuing to grow, larger carriers and service providers need to find solutions to meet new customer demands effectively. Established carriers will need to embrace last-mile delivery and strategically allocate their assets to accommodate. Investments in new technology, automation, infrastructure, and key commercial partnerships will remain essential for established carriers to manage the complexities of last-mile delivery.
LM: Given Amazon’s constant growth and scale, it continues to be viewed as a viable parcel and logistics operation. How do you view where Amazon is now for both parcel and last-mile services, and where may it be headed next?
Watson: Despite Amazon’s current scale, I still feel that the company is early in its history for parcel and last-mile services. It’s coming up with its own solutions for every leg of the supply chain—from global cross-border to first-mile, to middle-mile, to last-mile. At this point, most of the infrastructure is still wedded to the Amazon Prime promise and not available to independent third parties.
Last year, Amazon introduced a program called Buy with Prime, which allowed brands not on Amazon to make a “Prime-like” promise on their websites. Amazon has two other services which are not tied to Prime: MCF (Multi-channel Fulfilment) and AWD (Amazon Warehousing & Distribution). Both programs are nascent, but the expectation is that Amazon will want to scale these solutions.
Haber: Amazon has continued to keep up with customer demands when it comes to delivery, and we can expect that to be the case going into 2023. Amazon will keep last-mile delivery as an essential part of its long-term strategy; however, it remains to be seen how aggressively they will pursue becoming a third-party parcel delivery provider across all customer segments, profiles and sizes. We will continue to see Amazon and others develop alternatives to doorstep delivery such as in-store, curb-side, and locker pickups.
Taylor: The benefit to Amazon of launching common-carrier pickup and delivery services is low. Currently, gaining access to Amazon Logistics requires a seller to also pay for Amazon storage and fulfillment—now including products fulfilled by Amazon, but sold off platform.
Buy with Prime extends Amazon’s trusted and familiar payment features, returns options, product ratings, and sponsored ads to a company’s own website all for a fee. Amazon could absolutely evolve itself into a traditional carrier if it wanted to, but there are still easier, more profitable opportunities to pursue. For the sake of competition, I hope I’m wrong.
LM: How do you think the 2022 peak season went compared to 2021 when the onus was on consumers to buy and order goods earlier than normal?
Haber: Last peak season, consumers shopped earlier than usual, putting increased parcel delivery pressure on carriers. This was further compounded by COVID guidelines and restrictions (which all varied state by state), supply chain shortages and long lead times. By 2022, parcel carriers had responded well and were more equipped to manage higher volumes on a consistent basis. Parcel carriers are generally more prepared now for any upturn in 2023 due to the past few years of learning.
Taylor: The hardest part of peak 2022 may have been decoding the footnotes to either carrier’s peak residential surcharge. At the time of writing, FedEx’s Q3 fiscal-year ’23 earnings [which cover December 2022] were unavailable, but UPS reported a year-over-year volume decline of almost 4% in the fourth quarter of 2022, or almost one million packages per day.
The peak spike was also less dramatic than in 2021 [24.0% versus 27.0%]. No peak is easy, except in relation to other peaks, which this one was. The carriers are incredibly good at what they do, and they continue to get even better. On-time delivery performance [OTDP] is a popular metric, but not one I find incredibly useful without more context.
For reference, ShipMatrix reported that UPS performed best for the fifth peak in a row (97.5%), followed by FedEx (95.2%) and the USPS (94.3%). However, this metric doesn’t account for a few important things, such as severity of lateness. In the OTDP calculation, a package delivered one day late counts the same as a package delivered eight days late.
UPS’ projected delivery date can be up to two days later than FedEx’s, depending on the day of week it ships. FedEx could deliver that package a day late, and it would still arrive a day before UPS could get it there. Knowing that UPS performed better to lower standards has limited applicability.
Watson: While we’re still waiting for the final numbers, the peak season seemed to proceed relatively smoothly overall. Fourth quarter demand, from early accounts, appeared approximately flat to last year, when considering the impact of inflation at the time.
For the most part there was a tug-of-war between consumers trying to get the best deals and brands trying to start the season earlier. That said, ‘Cyber Week’ demand seemed to be up, given how much demand was moved earlier in 2021, that returned to normal in 2022. Additionally, consumers were unusually price-conscious in 2022, which concentrated more demand on Cyber Monday.
LM: What advice do you have for parcel shippers in 2023?
Taylor: Don’t wait until July to seek out alternatives to UPS, and ask more questions. While it’s true that few experts predict UPS drivers and warehouse workers will walk off the job, it’s also true that logistics managers will get fired if they don’t have a backup plan in place should the Teamsters decide to strike. Contingency set-ups are complex, take time, and will sell out soon.
For the carriers, complexity creates confusion and profit. The names and structures of some surcharges seem chosen specifically to encourage shippers to make incorrect assumptions about them, overlook them, and pay them without protest. Don’t assume you know.
Talk to your carrier rep about every change their company makes, and don’t be afraid to keep asking questions until you’re ready to be grilled about it in the elevator by your CEO.
Watson: My biggest advice for parcel shippers is to not expect this elevated pricing environment to return to normal anytime soon. With the cost of parcels rising, most shippers should at the very least experiment with using alternative regional carriers so that they can control their own destinies.
Haber: Shippers must stay organized and nimble in adjusting and meeting customer demands. Parcel shippers need to better understand the universe of providers available that can provide great service at reasonable prices. Carrier diversification and a focus on risk-management strategies will be extremely important in 2023, especially with a very concerning global economic outlook as well as impending labor negotiations.
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