March 2022 marks the second full year of pandemic-driven life and business throughout the world, parcel delivery and last-mile logistics continue to reap the benefits of unprecedented levels of consumer-influenced demand.
This extraordinary period of time has ushered in new, long-term market conditions, including shippers dealing with consistent rate and pricing concerns, lack of labor availability, and historically tight capacity.
The impact of the pandemic continues to increase the relevance that the duopoly of UPS and FedEx has on the market, while Amazon continues to emerge out of the shadows to grow its own impressive footprint. In the meantime, new last-mile providers continue to carve out their own niche and give shippers much-needed options.
In our annual endeavor to keep shippers current on this dynamic market, Logistics Management is joined by a trio of leading market analysts to provide some guidance, including Rick Watson, founder, and CEO of New York-based RMW Commerce Consulting; John Haber, president of the parcel business unit 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.
Rick Watson: Today, the parcel marketplace is looking very similar to where it was in 2021. There are still numerous strains concerning the carrying capacity of networks as volumes continue to climb, and there are struggles with hiring as well as rising materials costs. As a result, shipping costs are high and steadily growing.
Josh Taylor: The aggressive price increases from the legacy carriers have lowered the barrier to entry for the parcel market. They can still largely impose their will on the market, but there are many well-funded teams of capable and creative people working to create new alternatives. Frustrations are running high with UPS and FedEx, making it increasingly easy to justify trying a new carrier.
John Haber: Today’s parcel marketplace is in the midst of a transformation while, at the same time, reckoning with a global pandemic. The outbreak of the pandemic brought forth a massive jump in U.S. e-commerce retail as stores temporarily closed and consumers remained hesitant to physically shop in stores once reopened. At its peak, e-commerce represented 16.1% of U.S. retail sales in the second quarter of 2020, but it has since leveled off to around 13% as of the third quarter of 2021.
Despite the leveling of e-commerce retail sales, consumers’ expectations remain the same - availability of goods, online or in-store, and options in terms of delivery times and last-mile locations. Retailers have taken notice of the jump in e-commerce and have been investing in omnichannel strategies such as pick-from-store, curbside pickups, buy online/pickup in-store, and other options that consumers now expect.
The sudden jump in e-commerce in 2020 stressed parcel networks, therefore causing delays as parcel carriers such as FedEx and UPS shifted their network focus from business-to-business [B2B] to business-to-consumer [B2C]. B2C is a more costly move for the parcel carriers, and as such, they introduced new surcharges and raised existing ones.
Taylor: UPS and FedEx are still dominant and frequently force each other - and all other carriers - to react to them. For example, if UPS raises rates on a large package to discourage shippers from sending it through the UPS network, all other carriers receive a flood of large packages unless they also increase their rates.
UPS is being clear that they want to do less work for more money, which is great for investors, but bad news for shippers. UPS is charging substantially more for shipping while lowering investments in its network and reducing hours, headcount, and volume in the operations and offices. FedEx is following, but the insourcing of SmartPost/Ground-Economy, as well as other organizational differences, have made it a bumpier ride.
Haber: All carriers have announced increased 2022 rates. Regional carriers such as OnTrac and LSO each announced an average annual rate hike of 5.9%. while USPS announced increases to its shipping services products such as Priority Mail Service (3.1%) and Priority Mail Express (3.1%). More price increases from the USPS are expected this year. Similar to OnTrac and LSO, Pitney Bowes announced a 5.9% increase in its e-commerce services.
The 2022 parcel rates from FedEx and UPS are among the highest on record. Even though FedEx and UPS announced an average annual rate increase of 5.9% for their services in 2022, the actual rate increase for many shippers is actually higher, around 10% depending on the contract.
New surcharges have been introduced, such as UPS’ Remote Area Surcharge, and changes such as FedEx’s additional handling and oversize surcharge determined by shipment zone. Parcel pricing is complicated, and with the increases and the number of new entrants into the parcel market, the need to audit parcel costs becomes even more important.
Watson: Right now, the rate outlook is very favorable for the carriers, and not so much for shippers. The increase in demand has not helped unprepared parcel shippers, as many companies have increased their own surcharges in order to allow their deliveries to reach consumers in a timely fashion. Increased rates have helped companies like FedEx and UPS, but they’ve certainly been a challenge for shippers themselves.
Haber: Shippers learned that they need to diversify their last-mile carriers - beyond UPS, FedEx, and perhaps the USPS. This way, shippers can fill their capacity requirements, gain the types of last-mile services they need, like same-day and two-day, and mitigate shipping costs. This is a change that will become permanent.
Shippers are also now realizing the importance of risk management plans and are using these plans to focus on costs, capacity, visibility, and service. Investments in visibility tools will likely gain strength this year for shippers to manage escalating supply chain costs.
In addition, diversifying manufacturing and supplier locations is becoming increasingly important. Relying on manufacturing in only one location such as China is risky, and as such, some manufacturing will likely return to the United States as well as to countries in closer proximity to the United States - such as Canada and Mexico.
Watson: The main takeaway from the pandemic should be to make sure your business is adaptable. Shippers in general have had to face a huge influx in demand and build strategies to accommodate them. If your company isn’t able to handle large volumes of demand, you’ll fail. The pandemic has also stressed the growing importance of delivery services and convenience for consumers. Expanded delivery options for consumers and businesses are for sure something that will stick around beyond the pandemic, as people love easily accessible goods and services.
Taylor: John and Rick are spot-on, and I think there are two other things. One is that single-sourcing with FedEx or UPS is becoming a thing of the past. Carrier diversification is necessary now to ensure companies always have a way to reach their clients. And another is that just-in-time supply chains reduce carrying costs, but also carry significant risks. Nearshoring to Mexico and other North American countries has its own drawbacks, but at least it doesn’t rely on a port.
Watson: As far as the economy, inflation of both materials and labor costs is affecting shippers in a big way. The major carriers, FedEx and Amazon, in particular, are dealing with chaos costs due to the inability to hire quickly enough to meet their demand or staff their facilities.
More regional players are coming into the game. The bigger players like UPS and FedEx are having to apply restrictions due to large peak volumes from top retailers, especially in e-commerce. Although this was somewhat mitigated this year by the surge in demand earlier in the fourth quarter of 2021. Because of the restrictions, shippers are having to take advantage of the regional players whenever possible, as they’re also looking to find better options to lower transportation costs.
Taylor: Scarcity - sometimes manufactured scarcity - is affecting all modes of transportation and driving up costs. UPS and FedEx have used the pandemic as cover to stop guaranteeing most services; create permanent peak surcharges; raise the fuel surcharge tables, and remove discounts from less-profitable clients.
The e-commerce boom is sending more packages to residential locations, which carriers will tell you are more expensive to serve and make these larger rate hikes necessary to maintain service. In related news, UPS earned more profit in the fourth quarter of 2021 than in any previous quarter in the company’s history. They did not carry a record number of packages.
Haber: Congestion in upstream supply chains have had a trickle-down effect to the last mile, resulting in delays and causing retailers and other shippers to stock-pile inventory in a move from just-in-time to just-in-case. During the holiday season, because of port congestion, retailers such as Bed, Bath & Beyond, and Abercrombie & Fitch ran low on inventory.
In addition, labor issues have been a problem, particularly for FedEx Ground and Amazon fulfillment facilities. In both situations, the carriers have had to route packages to facilities in their networks that could handle the process and delivery which is causing extra costs such as third-party transportation. Attracting and retaining workers for all supply chain providers will continue to be a major issue this year.
Taylor: UPS wants everyone to believe that new, last-mile competitors don’t pose a threat to its business. UPS has been especially frank about saying that they only want customers who value paying more for their end-to-end service. At the same time, both UPS and FedEx introduced same-day delivery services aimed at large retailers and acquired companies like Shoprunner and Roadie. They know change is inevitable, but for now, it pays more to do less.
Haber: Josh makes a good point. I will also note that carriers need to expand last-mile capabilities even further and pay attention to the quickly changing landscape of last-mile competitors. Investments in infrastructure, technology, service levels, solutions, time in transit, and strategic partnerships are critical. In addition, automating facilities is a requirement to lower costs/improve efficiencies as well as speed up the last mile.
Watson: Consumers are progressively looking for local, same-day delivery solutions. As Josh mentions, UPS recently acquired Roadie, a last-mile provider that enables local same-day delivery with operations throughout the United States. The move will help UPS increase growth opportunities and potentially add additional small package capabilities. On the other hand, FedEx has continued to pull the last-mile volume that used to be with USPS into their own network.
Haber: In 2021, peak season began much earlier than in past years because shoppers feared that they would not receive packages on time - this was a common trend throughout the holiday shipping season in 2020. We expect the 2022 peak season to start much earlier as well. Shippers that start planning for the peak season in June or July will be far too late, as they need to start developing their plans, looking at their options, and laying out their timelines now to be prepared on time.
Not only do shippers need to plan earlier, but they also need to change the way they look at distribution and leverage strategic partners. Securing capacity early is crucial, but being open to other creative last-mile alternatives is equally important. For example, utilizing a direct ship approach in which multiple customers’ volumes are combined and directly injected into a network for delivery, or perhaps utilizing an alternative last-mile delivery network that includes regional carriers.
Watson: The short answer is to diversify where you put your stock. If it’s centralized at one or two facilities, it becomes more likely there’s a bottleneck at one facility that will affect a significant portion of your business. However, if your stock is spread closer to consumers at 10 facilities to 20 facilities, then you have many different routes to reach the consumer, all of which might have different labor availability.
The rush of 2020 was primarily created by the fact that almost all retail stores were closed. Into the middle and late 2021, we didn’t see the same crush of volume simply because shoppers - except for December during Omicron - were back in stores more consistently.
Taylor: I’ll break it down into two parts. First, get closer to your customers. Find a good 3PL if you don’t control multiple locations. This comes with higher carrying costs, but gives you access to many more carrier options than you would have if you were still shipping from across the country. Second, if fulfillment isn’t the right fit, for now, many regional carriers make it easy to send pallet-loads of packages directly into their facilities where they break them down and deliver them - often the next day.
Watson: Amazon is in a position where it wants to handle almost 100% of its volume. The last report I heard was that it crossed 60% to 70% and climbing.
In the past two years, it has doubled both its staff and its fulfillment capacity. I think this means a few things. It will take some time to digest and operationalize all this new space, staff, and capabilities, and I wonder if Amazon doesn’t use this new capability to significantly expand Fulfillment by Amazon (FBA) and make it more functional for third-party shippers outside of Amazon.
Consider this question: What if every Shopify brand was using unbranded Amazon fulfillment? It certainly is an interesting question. One space that Amazon doesn’t really compete in at the moment is in the 15-minute to 30-minute sector. My guess is that you have Amazon watching this space, but even at their thin margins it’s not convinced this is a profitable segment.
Amazon has set up an amazing fulfillment network and is already on its way to delivering more packages than UPS and FedEx. They are already a competitor and will have instant credibility if they choose to further open up their network to non-Amazon sellers. Amazon watched UPS and FedEx closely for years and will use what they learned to avoid a lot of growing pains.
Haber: Amazon is struggling with the need for more workers in its fulfillment facilities and for its middle- and last-miles and is delayed in completing its same-day/next-day prime delivery service announced in 2019. It’s also threatened by unions - a redo of a union vote in Alabama is scheduled for February and could be the beginning of other votes in the United States.
Despite all of the above, Amazon will continue to invest in its logistics network in the United States and elsewhere around the world. It could potentially bring back its test of third-party delivery services that rivaled UPS and FedEx, but it’s doubtful it will happen this year due to other obligations it faces.
Taylor: Buyers and sellers listened to the advice to shop early. Sales started well before Black Friday, and buyers responded. The weather also cooperated more than normal, and as a result, UPS, USPS, and FedEx all achieved on-time delivery percentages in the mid-to-high-90s.
Haber: Consumers bought early for fear of not being able to find items closer to the holidays. Average on-time delivery performance was good for all three of the major carriers, as Josh mentions. Keep in mind that there was more foot traffic in stores, so that also alleviated some last-mile demand as customers bought in stores or picked up online orders in stores.
Watson: I think it was overwhelming for a lot of carriers, especially USPS who scored low on customer satisfaction and on-time deliveries. The volume influx has raised many challenges, and only a few were able to sufficiently handle them. UPS stood out as one that has managed their network well, as they hired to their plan and avoided chaos costs. FedEx and Amazon both had issues with hiring, and as a result, encountered routing issues and chaos costs primarily due to problems staffing their facilities.
Watson: My biggest advice is to partner with your chosen carriers carefully. With supply chain disruption still in play in 2022, you should still expect changes. You need to stay in sync with your preferred carrier partners if you’re going to be able to navigate the coming disruptions.
Taylor: Shippers need to keep an open mind, get creative, and be proactive. Best practices from even a few years ago are already outdated. Establish relationships with multiple carriers, and treat your drivers and carrier reps with respect - but remember that statements like “customer first” comes with a convenience clause. Listen to carriers’ earnings calls. You will be surprised at the difference between your rep’s shipper-facing message and the investor-facing message delivered by the C-suite.
Refuse to commit to a carrier unless they offer you an equal commitment. For example, if you agree to ship 95% of your volume with a carrier for the next three years or face a steep fee, get it in writing that the carrier will pick up, process, and deliver 95% of your packages at predictable rates.
Haber: Supply chains are not stable, so contingency planning, mitigating risks and leveraging strategic partners will be important. While there are some indications that capacity may open up this year, it’s still important for shippers to focus on cost, visibility, capacity, and service levels.
Revisit plans for these focus points often because the market will continue to change quickly. Adapting quickly will be the key, and if you’re pinned down by restraints, you will be left behind.
Image Credit: Daniel Vasconcellos
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