Parcel-delivery industry pundits predicted at the start of 2023 that it would be the year of the shipper. For the most part, that forecast has come to pass. Now as 2024 comes into fuller view, indications are that shippers will be in even higher cotton than they are in 2023, or for that matter, in the past four years or longer.
The two national carriers, FedEx Corp. (NYSE: FDX) and UPS Inc. (NYSE: UPS), are pushing discounts that are extraordinary in their depth and breadth, according to parcel consultants who have reviewed contract proposals presented to their shipper clients. At a minimum, one needs to return to the pre-pandemic period to see pricing as shipper-friendly as what is being offered today, consultants said. Nate Skiver, founder of consultancy LPF Spend Management LLC, said he doesn’t recall a period of such heavy discounting pressure since the Great Recession of 2008-09.
Discounts are being offered almost across the board and to big and small businesses alike, consultants said. Price breaks are being used to acquire new business and retain existing accounts. Small to midsize businesses (SMB) that typically lack the buying power to qualify for sizable breaks have become eligible for discounts normally set aside for enterprise customers with big volumes. Bigger shippers can command better rates because their volumes go a long way toward providing the shipment density the carriers need to fill their expanding networks.
“Discounts that were reserved for companies with multimillion-dollar annual shipping budgets prior to August are now being given to shippers that, in extreme examples, spend less in a year than those larger shippers spend in a week,” said Josh Taylor, senior director of professional services for Shipware LLC, a consultancy. “This includes unprecedented discounts off base rates and even [discounts off] surcharges like fuel, large package, demand/peak, additional handling and literally dozens more.”
FedEx, UPS and other carriers impose hefty surcharges for the handling of outsize packages that generally aren’t run through their processing systems.
FedEx and UPS are also offering to pay each other’s early termination penalties and providing signing bonuses to both new and existing customers, said Taylor, who has analyzed contract proposals on behalf of multiple customers. FedEx has been more insistent than UPS about including minimum commitment clauses and early termination language in its contracts, he said.
The discounts accelerated in August after the Teamsters union agreed to a five-year contract with UPS. The Atlanta-based carrier set about recapturing between 1.2 million and 1.5 million daily parcels diverted to other carriers, while looking to win new business. FedEx, the U.S. Postal Service and regional delivery carriers, meanwhile, were just as adamant about keeping the diverted business, while going after new accounts as well.
Overhanging all of this is the presence of Amazon.com Inc.’s (NASDAQ: AMZN) new stand-alone shipping service, Amazon Shipping. Amazon’s rates are extremely competitive, according to consultants. In addition, it levies no residential delivery fees or weekend delivery surcharges, thus widening the gap with competitors.
Today’s rate wars may seem amplified compared to the 2020-22 cycle when pandemic-related delivery volumes spiked hard and carriers had the effective run of the pricing table. In contrast, delivery demand today is quite soft, mirroring the broader goods-ordering weakness pervading the general economy. Parcel carriers invested billions of dollars during the pandemic and post-pandemic years to expand their processing networks. Now faced with huge sunk costs and a downshift in demand, carriers have turned to discounting in a bid to elevate their volumes.
Skiver said that the UPS-Teamsters contract situation is contributing to the current discount cycle as the carrier tries to win back business. However, the weak demand picture is likely a much bigger factor driving carrier pricing strategy, he said. To that end, the current environment would persist even if UPS and the union were not in a contract-renewal year, he said.
Not every consultant is seeing widespread discounting. Mike Erickson, founder of AFMS LLC, said that although FedEx and UPS are aggressively courting each other’s business, the current level of discounting is not unprecedented. “There may be some one-offs for a specific target account, but we’re not seeing large-scale, deep discounting going on,” Erickson said. The companies are “both very calculated in how they approach discounting.”
As the macro economy and e-commerce go, so goes delivery demand. With 2024 growth forecasts bumping along in very low single digits, nothing in the cards over the next 13 months signals a meaningfully upward reversal in demand. If those forecasts turn out to be accurate, it could have a profound impact on the state of the U.S. parcel market.
The past two-plus years have seen a proliferation of new entrants in parcel shipping. They have also seen expansion on the part of regional parcel carriers like OnTrac, LSO, GLS and Better Trucks, among others. All carriers will face an uphill battle as long as there is less demand to go around. However, should UPS, FedEx and the Postal Service’s discounting efforts succeed in narrowing the cost gap between them and other players, that could persuade shippers who might have opted to shift their business to stay with the big guys. A combination of the two may make it difficult for many providers to sustain their models.
According to Skiver of LPF, shippers prize carrier simplification as much as low prices. “It is just easier to work with fewer carriers,” he said. It may augur unfavorably for regional carriers should more shippers choose to consolidate most or all of their business with FedEx and UPS, and get cheaper rates to boot, he said.
The result of all this is a rethinking of the popular mantra of carrier diversification, Skiver said. In the current environment, the diversification approach may either “stagnate or lose ground,” he said.