DHL to exit U.S. express shipping market
By David Hannon -- Purchasing, 12/11/2008 2:00:00 AM
Logistics buyers take note: the small parcel market just got a lot less competitive. Logistics provider DHL announced in November it plans to exit the ground and air express markets in the U.S. and focus its remaining U.S. resources solely on import/export business.
According to a statement from DHL, beginning January 30, 2009 "DHL's U.S. Express business will focus entirely on its international offerings and will discontinue its domestic-only air and ground services." As part of that move, DHL will close its U.S. ground hubs, and lose 9,500 U.S. jobs at DHL Express on top of the roughly 5,400 positions already reduced since January.
DHL, which is owned by Deutsche Post, has been battling with well established rivals UPS and FedEx in the U.S. market since it bought Airborne Express in 2003. Earlier this year, DHL announced it was outsourcing its air freight to UPS, a sign many market watchers took as an indication DHL was losing interest in competing in the U.S. market. That deal is still in negotiatons.
In a conference call with the media, John Mullen, CEO of DHL Express, said DHL has spent more than $10 billion in the past five years trying to make DHL a major player in the U.S. market, but that UPS and FedEx were simply too difficult to compete against.
"We invested a massive amount of money into the U.S. market to try to be a credible third choice and achieved a lot of success operationally, but the reality is the market reach they have and the brand awareness they have has made it just impossible for us to make it economically viable," Mullen said. "The combination of the weakness in the market and the very severe economic conditions on top were just too much to go on supporting."
Mark Kolde, vice president at consulting firm InSource Logistics in Hilliard, Ohio, tells Purchasing that the news was somewhat surprising to shippers given that earlier this year, DHL had committed to the U.S. market. But in the weeks leading up to the announcement, Kolde says the writing began to appear on the wall, as DHL cut back its sales force and rumors began to fly. "We started to see the writing on the wall, but it's still unfortunate because there was so much more potential for DHL in the U.S. market," Kolde says. "The DHL we see after January 30 will look much like the DHL we knew pre-Airborne merger, which focuses on their core competency of international shipping."
While DHL's exit from the market will not be a good thing for shippers looking to get competitive bids in the market, as DHL was typically the low-cost bidder, Kolde says it would not have the same impact as if FedEx or UPS were leaving the market. "DHL's bids did not always correlate to a move by UPS or FedEx," Kolde says. "Shippers that have to transition to UPS or FedEx should not expect those providers to match DHL's rates."
But at the same time, in the sluggish freight market UPS and FedEx both are hungry for business, particularly in the domestic air segment, says Kolde. So shippers with high volumes in that sector may see competitive rates. "That air business is going to one of them, so you can expect competitive bids for the most desirable packages," Kolde says.
The biggest short-term impact of this deal for shippers may come in terms of service levels and not rates right away. Kolde warns that DHL operations and service levels could deteriorate in the weeks leading up to the Jan. 30 deadline, as many DHL employees will be leaving the company and have little incentive to provide high levels of service.
"In an already lower than expected peak shipping season, this could be adding insult to injury to big shippers using DHL—lower volumes and reduced levels of service," says Kolde.
Shipper Shannon Jean, president of TechRestore in Concord, Calif., tells Purchasing DHL's decision was not totally unexpected by many shippers. "The systemic billing and infrastructure problems that we encountered in 2005 and 2006 were the initial symptoms that culminated in today's announcement," Jean says. "We moved our our small parcel shipments to FedEx in 2007. Unfortunately, we see the DHL announcement as emboldening FedEx and UPS on their planned 2009 rate hikes."
Market analyst Ed Wolfe of Wolfe Research says in a note that small parcel rates may actually decline in the short-term, due more to the economy, but trend up in the longer-term with the removal of a major player in the market. "We continue to believe...that the much greater potential positive impact for FedEx and UPS would be improved pricing in the U.S. market, where DHL has been the low-price provider...Over time we would expect DHL's departure to lead to multiple points of improved pricing."
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