All year long, parcel shippers were advised to diversify their carrier bases in order to reduce their reliance on FedEx Corp. and UPS Inc. Heeding that call, however, was easier said than done. It will likely be just as challenging next year.
The parcel-delivery world of 2022 will look very much like it did in 2021. For the third year in a row, the big carriers will hold the upper hand, and they will use their leverage to make hay while the sun shines. Volumes will remain elevated as e-commerce activity escalates to unprecedented levels. Demand will continue to exceed supply even though the national carriers are adding meaningful capacity to their networks and migrating to seven day a week deliveries to improve fluidity.
UPS (NYSE: UPS), and to a lesser extent FedEx (NYSE: FDX), will remain selective about the shipper business they decide to handle. Enterprise shippers will likely face year-round caps on their volumes as the big boys make more room for small to midsize customers whose carrier relationships are stickier and less price-elastic.
Delivery surcharges will proliferate in cost and in quantity, and they will become, perhaps more than ever, mechanisms for profit instead of cost pass-throughs. Carriers worked hard in 2021 to capture as much surcharge revenue as possible. They will remain equally vigilant on that score during 2022, with a focus on heavy or outsized dimensional shipments that cannot be moved through a conveyor and require some form of special handling.
Shippers enter the year knowing they will pay more than in 2021. What they want is timely and reliable service for all their volumes, with deliveries executed by carriers that understand that business-to-consumer (B2C) deliveries are more complex and multidimensional than straightforward business-to-business (B2B) service ever was.
Large-volume shippers may find relief by using more regional delivery carriers. But it will be far from a slam dunk. Regional carriers are already slammed with year-round volume spikes, and it is unclear how effectively they can manage even more business without it affecting their service levels. Large-scale traffic that FedEx and UPS can generally handle with few hiccups might overwhelm a regional carrier with relatively limited resources and a more restricted geography.
FedEx and UPS will continue to extract their pounds of shipper flesh for volume diversions. Because the carriers link discounts and rebates to weekly revenue thresholds, shippers diverting meaningful volumes may lose their coveted price breaks should their remaining business fall below those thresholds. FedEx and UPS also deploy such strategies as volume penalties and early termination contract language to keep shippers tethered.
Shippers will be diverting traffic because they want to, and because of the volume caps that will remain in place, because they have to. Yet they must remain mindful of the consequences of their actions, said Rob Martinez, co-CEO of Shipware LLC, a parcel consultancy. “The last thing they want to do, to save 10% on the 30% of their shipments they can divert, is to cause a 20% rate increase on the 70% that stays with their primary carrier,” Martinez said.
The story of 2022 will not be that shippers need to spread their volume wealth but what steps the supply side will take to accommodate them. The most important could be in what direction Amazon.com Inc. (NASDAQ: AMZN) takes its delivery strategy. Except for extremely rare cases, Amazon delivers orders placed directly through its website or on behalf of merchants using the e-tailer for warehousing, fulfillment and delivery services. Amazon’s plans to expand beyond its own ecosystem were tabled by the COVID-19 pandemic and have never been revived. Amazon does not offer pickups, an essential component of an integrated delivery operation that is second nature to FedEx and UPS.
Amazon also may decide that its resources are better allocated to opportunities such as rapid grocery delivery and that it could take market share from FedEx and UPS by winning fulfillment and delivery business from former FedEx and UPS customers. Not since DHL made its ill-fated acquisition of the old Airborne Express in 2003 has a bona fide national carrier emerged to compete for enterprise traffic. Amazon has the scale and resources to be that carrier, if it so chooses.
The second wild card is the evolution of a national delivery network out of the October merger of regional carriers OnTrac and LaserShip. In terms of geography and customer size, the two are the largest players in the regional subset. But there are service gaps, notably in the Midwest and Southwest. As big as both carriers are — OnTrac in the west and LaserShip in the Northeast, mid-Atlantic and Southeast — they cannot tie together the country like FedEx and UPS and thus don’t present a significant threat. Yet any move toward a third national network — combined with the deep pockets of private equity owner American Securities LLC and the high-attage CEO leadership of Mark Holifield, who ran Home Depot Inc.’s global supply chain for 17 years — will augur well for shippers desperate for viable alternatives.
The third is the U.S. Postal Service. The Postal Service is all-in on parcel, largely because it’s the only category that has demonstrated volume and revenue growth. It added more than 40 parcel-processing facilities for the peak holiday delivery season. It is totally revamping its delivery van fleet with more parcel-friendly designs. And it has in Postmaster General Louis DeJoy a businessman and logistician who will aggressively court shipper business, especially now that FedEx no longer partners with the Postal Service and that Amazon is dramatically curtailing its relationship with the agency.
For all its obstacles, carrier optimization strategies, if properly implemented, will generate significant benefits for the shipper, said Martinez. These include faster delivery, custom tailored pickup and delivery, same-day delivery service options, ease of doing business, simplified contracts and billing, better customer service and lower cost, he said.