Small package market changes could benefit buyers
As carriers target mid-market shippers for growth, buyers may get more leverage
David Hannon, Senior Editor -- Purchasing, 3/17/2005 2:00:00 AM
The increased competition in the small parcel market is having a visible impact on market shares, which could be a good bargaining tool for logistics buyers. Longtime market leader UPS has seen some of its market share taken away by growing rivals FedEx, the U.S. Postal Service (USPS) and DHL.
While demand for parcel shipping remains high (as it does for all logistics services), increased competition in the market is keeping pricing in check—at least as compared with other logistics modes. But the tight capacity issues prevalent in other shipping modes like trucking, rail and ocean are not as prominent in the small parcel market.
According to market researcher JPMorgan, UPS's share of the domestic parcel market fell one percentage point from 48% to 47% last year. That's a small but important shift in the tide, according to market watchers. FedEx increased its share from 29% to 31% in 2004 and DHL seized about 7% of the market after a year where it made big investments in the domestic U.S. parcel market. And its share is expected to grow even faster. JPMorgan says DHL could capture up to 18% by 2006, following its $1.2 billion planned expansion in the U.S.
Shipping industry analyst group SJ Consulting in Pittsburgh has a slightly different chart. According to its numbers, UPS had more than half of the market share in late 2004 (51%). FedEx is around 27% and DHL in the 7% to 8% range, while the USPS garners nearly 13%.
Scott Davis, UPS's chief financial officer, says of its 2004 results: "Although we were disappointed with our U.S. ground volume growth in the fourth quarter, UPS delivered almost 3.6 billion packages in 2004—the most in our history. As a result, we will focus several new efforts in this area in the coming months."
UPS vowed to make some moves to win back more business—good news for buyers.
One of the ways UPS plans to gain back lost market share is to again target mid-market businesses generating $5 million to $250 million in revenue—a segment that it has not focused on as much lately. Mike Eskew, chief executive officer of UPS, said recently that the company has been focusing on becoming an "enabler of global commerce" for different types of customers through shipping, logistics and freight forwarding services building on its small package roots.
"UPS used to be the king of the mid-sized market, but they let that slide in the past few years as they got bigger and more internal efforts were shifted to bring in larger customers with more global business," says Satish Jindel of SJ Consulting. "They took their eye off that mid-sized market and that's where FedEx has come in and taken some market share because carriers don't have to offer such huge discounts to shippers in that sector."
At the same time, carriers view the mid-sized shippers as more profitable on a per-shipment basis because they do not request the steep discounts of a larger shipper. And, with demand high right now, carriers are looking for the most profit per shipment as opposed to the highest volume.
One way to gain mid-level business is to work more with parcel consolidators, says Jindel, because they offer better pricing at slightly lower service levels. FedEx capitalized on the need for such an alternative when it acquired Parcel Direct and renamed its FedEx SmartPost, which offers a low-cost network specifically built to tender low-weight, less time-sensitive packages into the U.S. Postal Service system, typically at the local post office level, for final delivery.
The Parcel Direct acquisition is a sign of the continued consolidation in this market. But in this case, fewer carriers may not automatically mean higher shipping charges, as long as the level of competition among the remaining providers stays high. Fewer carriers may mean bigger networks for each and more cost-efficiencies across the board, which eventually show up in the rates.
The global factor
Like all transportation modes, the players in the small parcel market have been focusing on global shipping trends. Jindel says shippers in the mid-sized sector of the small parcel market are struggling with global commerce and looking to partner with a major player that can help set up international networks on the fly.
"Shippers in that market don't have the people to deal with these new challenges [of globalization] so they can benefit more from an outsourcing partner like UPS helping them with financing, customs, and other services."
One of the factors contributing to the shift in market share, says Bear Stearns analyst Edward Wolfe, is that UPS had not responded quickly enough to the shift in manufacturing to China and other low-cost countries, leaving it with too much infrastructure and cost in its slow-growing U.S. market and too little capacity in the fast-expanding international business. UPS in late 2004 opened three new warehouse and distribution centers in China—Shanghai, Suzhou and Futian—plans to open another 20 facilities over the next two years. The new facilities are located adjacent to vital manufacturing centers. The supply chain management arm of UPS now plans to open 10 facilities in 2005 and another 10 in 2006.
"Our commitment to China extends beyond new buildings and air lanes," said Eskew in a company statement. "We recently took steps to expand the capacity of our air network by placing orders for 10 Airbus A380 freighters and 11 Boeing MD-11 freighters. We also are investing in technology and in training our people to offer a supply chain and package delivery capability that is second to none."
Other small parcel players are also aware of the global trends. While being considered as the new player in the U.S. market, DHL has a strong global footprint and reputation. For its part, FedEx entered China in 1984 and, in late 2004, was awarded 12 additional weekly flights to China by the U.S. Department of Transportation, bringing its total to 23. FedEx offers the only direct flight between the U.S. and the Pearl River Delta.
From the shipper perspective, globalization means more volumes and longer lead times for small package shipments. Darren Hartman, a vice president with logistics specialist Genco in Pittsburgh, says many small parcel shippers are feeling the impact of globalization in their shipping, but are not leveraging their new volumes effectively enough. For example, as international volumes and requirements grow, shippers often negotiate a new or separate contract for their international shipping based on a carrier's international rates for their international volumes alone. But by combining their domestic and international volumes, shippers can negotiate a better discount with a carrier that works in both realms. Carriers today are willing to negotiate more to keep big volume contracts in the current market.
New services, new pricing
Parcel carriers are also developing services to target shippers in specific industries. For example, when pharmaceuticals are delivered to homes or business customers, they require a signature for receipt, which provides a new level of service. Hartman says DHL has been most aggressive with pricing to gain market share. In one instance, DHL offered one of Hartman's clients a customized solution to fit the customer's requirements for a lot of next-day ground shipments at a more competitive price than any of the major players in the market. "DHL basically said they'd set up a linehaul to a terminal so this customer would get next-day service and UPS and FedEx would not do that," Hartman says.
But shippers complain that too many of the services now offered by small parcel carriers have been broken out into surcharges. "We went from eight surcharges in 1985 to almost 40 in 2005," says Jindel. "Today the surcharge list looks like a Chinese menu. They have everything broken out as a separate service. A number of the services may increase in price, but more of the pricing changes in the future will likely address the overlap between express and ground and not in the form of more surcharges."
Genco's Hartman says many shippers are at their wit's end in terms of surcharges as well (in fact, they come to Genco for that reason). Hartman says the base rate increases mean little today for major shippers because the number of accessorial charges and surcharges often outweigh the base rate increase announced each year.
"In 2004, for example, UPS had a base rate increase of 1.9%," says Hartman. "But one customer we worked with saw another 1% increase in accessorial charges that year and was hit hard in the charges for rural zip codes. There are 23,000 zip codes that UPS considers rural and now they get charged an extra $1.25 for anything shipped to those zip codes. So the total increase to this customer was 10.5%."
One pricing issue that Hartman warns shippers about is how the provider calculates its surcharges. He points out that some levy their fuel surcharge based on the net price or price after a discount, while others base the percentage on the gross price before a discount, which increases the surcharge. But when those charges are buried deep in a contract, shippers may not realize they have a choice.
"We have talked to a lot of shippers who are not educated on these issues and are surprised when we tell them about it," Hartman says.
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