Commentary: E-Commerce Surge Will Reshape Parcel Carriers' Strategies
October 28 2020 - 5:29AM
Dow Jones News
By Alan Amling
The acceleration of business-to-consumer shipments during the
Covid-19 pandemic has been a boon to the big, national
small-package companies.
The spike in demand that came from a surge in online shopping
flooded the United Parcel Service Inc. and FedEx Corp. delivery
networks with shipments and allowed both companies to raise their
shipping rates. Their stock prices soared after initially dipping
as widespread lockdowns began in the early days of the
pandemic.
Yet changes in distribution strategies as a response threaten to
loosen the carriers' grip on the highly lucrative U.S.
package-delivery market, and raise important questions about the
business plans at the parcel carriers going forward that could have
dramatic implications on how retailers get goods to their
customers.
The rapid expansion of business-to-consumer parcel distribution
is already driving significant changes to distribution strategies
that are aimed at cutting logistics costs and making delivery more
responsive to consumer demands. Retailers and a growing field of
logistics providers are adding more warehouses close to population
centers and spreading more inventory around the country, a shift
away from the use of a small number of regional warehouses.
The companies are trading potentially higher inventory and
warehousing costs for lower shipping charges to get goods to
consumers within a couple of days. When products are stored locally
for delivery, the options for delivery expand and competition for
those shipments grows. According to New York-based market research
group IBISWorld Business, there are 228,000 couriers and local
delivery-service businesses in the U.S.
Deliveries to consumers' homes accounted for roughly 70% of U.S.
domestic volume for UPS and FedEx in the period after
coronavirus-driven lockdowns began, a sharp increase from
pre-pandemic levels, according to statements by company executives
during earnings conference calls earlier this year.
The package carriers charge based on weight, making these
lighter deliveries to individual consumers less profitable than the
heavier business-to-business shipments that have driven parcel
growth over the last half-century. The companies get a boost from
the economies of scale: Delivering 10 packages to a single business
location is only marginally more costly than delivering a single
package to a residence.
During the first quarter, UPS drivers made 15% more stops on
their routes and delivered packages that were 33% lighter.
The rapid growth of same-day and next-day deliveries amid
competition between the big retailers also poses a challenge to the
package carriers. To ensure that delivery standard and tamp down
higher delivery costs, Amazon.com Inc., Walmart Inc. and others are
taking greater control of their own distribution operations.
Last year, Amazon.com began shifting the delivery commitment for
Prime members from two days to one day, supported by the buildout
of over 400 local delivery stations fulfilling last-mile shipments.
Walmart has made "fast and free" a linchpin of its Walmart+
offering.
They're hardly alone.
In the first half of 2020, Costco Wholesale Corp. spent $1
billion for Innovel Solutions, a middle- and last-mile carrier.
Home Depot Inc. opened a dozen last-mile facilities, with plans for
100 more. Target Corp. is leveraging the use of Shipt, the same-day
delivery company it acquired in 2017, and now fulfills about 80% of
its e-commerce orders through its 1,900 U.S. stores. Many other
retailers are looking at how to turn their stores into fulfillment
centers for curbside pickup and delivery.
Local fulfillment changes the game, undercutting the advantages
of size and scale the big carriers enjoy in their national
networks, raising important strategic questions for the package
giants.
The national carriers could choose to invest in changes to their
own delivery networks compatible with the multiple trip
requirements of on-demand delivery. That would expand their service
offerings, but would be no easy undertaking.
Currently, UPS and FedEx have highly efficient route-based
systems optimized for two- to five-day delivery of ground
shipments. A crowdsourced delivery component would enable the
incumbents to compete for local business-to-consumer shipments and
could lead to bundling opportunities for their express and trucking
businesses.
Still, they could simply choose to effectively stand pat, taking
what business they can while leaving the tough economics of
last-mile delivery to regional carriers and the retailers who want
to invest in the business. UPS and FedEx could then build out
services for higher-margin, industrial segments like manufacturing,
health care and cross-border shipping that rely on their highly
integrated networks.
That would leave a U.S. private package market dominated for two
decades by two carriers looking far more fragmented, but perhaps
more responsive than ever to the needs of individual consumers.
Alan Amling is a teacher and researcher at the University of
Tennessee's Global Supply Chain Institute in the Haslam College of
Business. He is a former UPS executive.
(END) Dow Jones Newswires
October 28, 2020 06:14 ET (10:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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