As I write these annual industry recaps, I am always surprised at how much volatility there is in the domestic parcel sector. While e-commerce sales continue to drive parcel volumes higher every year, there are also major changes taking place behind the scenes. Factors such as the battle for market share among the major carriers, the changing profile of the freight itself, and big volumes from new origins are all having a significant impact on the parcel market.
For years participants in the parcel sector have recognized that FedEx and UPS functioned as a duopoly with very few bona fide challengers. While the United States Postal Service (USPS) has been on the scene longer than either of the commercial carriers and continues to be the biggest deliverer of parcels around the country (see figure below), many shippers do not regard USPS as a service equal.
Pitney Bowes' Global Parcel Shipping Index, 2023-2024
Recently Amazon has also become a big player in the parcel market and in 2023 became the second largest provider in terms of volume. However, Amazon functions very differently than the three carriers mentioned above. The difference between Amazon and the others is that the latter are full-service providers; that is, they pick up parcels at origin, run them through their own systems, and then deliver to destinations around the country. Conversely, Amazon functions primarily as a shipper of products that are already housed inside its warehousing network. As a result, Amazon avoids all of the issues with picking up individual parcels from businesses or individual homes.
Any evaluation of the parcel sector must consider that Fedex and UPS built their businesses via industrial accounts, which typically ship multiple parcels between origin and destination. E-commerce is radically different, requiring a single package to move from origin to destination. This change caused operational and cost issues for the carriers, which responded by implementing dimensional weight pricing in 2015.
A new factor in parcels is the growth of Temu and Shein—Chinese e-commerce companies that ship directly from where product is manufactured in China to U.S. homes. The two companies have created a thriving business model by taking advantage of the de minimus trade rule that allows companies to import packages without paying duties and with less required documentation as long as they are valued under $800. A decade ago, the number of de minimus parcels coming into the U.S. was 140 million per year, it is now over one billion.
The Biden administration recently announced an increase in U.S. Customs scrutiny of parcels originating in China and stronger application of existing tariffs to slow and reduce these shipments. Although the U.S. has one of the highest de minimus thresholds in the world, there is now a lot of political pressure to revise the rule because of the great success that these two Chinese merchants are enjoying in the U.S. In fact, Amazon is responding by introducing a similar direct shipping program from Asia that bypasses its warehouse network; this is Amazon’s effort to avoid losing customers to Temu and Shein.
Given these general trends in the market, let’s take a closer look at each of the major players.
FedEx looks to restructuring
Fedex will be combining its express and ground operations.
Photo courtesy of FedEx
Earlier this summer, FedEx announced a major restructuring, which will combine its express and ground operations—something that founder and longtime CEO Fred Smith always avoided because of labor concerns and the desire to focus on individual business units. In spite of Smith’s resistance, there was longtime pressure on FedEx to combine the units because of the potential for annual cost reduction in the multiple billions of dollars.
FedEx is now doing a strategic analysis of its less-than-truckload (LTL) business, which is the largest in the North America. Currently FedEx’s LTL business is separate from its parcel business, and there is a strong possibility the company will go a step further and spin it off as a separate company. Interestingly, UPS already spun off its LTL business several years ago.
As a supply chain veteran, I do not think spinning off the business is the best move. I have long thought the combination of parcel and LTL was a powerful offering. LTL is a growing factor in e-commerce due to its freight composition (too large or too heavy for parcel). The ability to provide both services to a single account appears to me to have more value than ever.
UPS: Has Tomé lost the “Midas touch”?
UPS is still dealing with the ramifications of the contract it signed with the Teamsters Union in 2023.
Courtesy of UPS
And what about UPS? Since Carol Toméascended to the CEO slot in 2020, her performance has mirrored that of King Midas, whose touch turned everything to gold. As happy as UPS shareholders have been with Tomé, last year did give them reason to fret due to contract negotiations with the Teamsters.
In anticipation of potential labor trouble, a significant portion of UPS customers moved some or all of their business to other providers. And while there was no strike, the Teamster workers gained major concessions in pay and benefits, which UPS will have to make up through operational efficiency or rate increases.
As a result, UPS’s parcel volume declined and has not yet returned to precontract levels. A more urgent negative that popped up for UPS was its second quarter earnings for 2024, which were weak enough that their stock price dropped 12% within minutes of the earnings call.
On the call, Tomé explained that many UPS customers are downgrading from air express to ground service and from ground to the lower Sure Post service in which UPS moves parcels close to their destinations and then turns them over to USPS for final delivery. (FedEx has a comparable service that is branded as Smart Post.)
This transition to lower-cost services has apparently been driven by improvement in the service levels of the lower-cost programs. They have become so good that customers have moved away from higher priced options, which are only marginally better.
Amazon faces rising logistics costs
Amazon is now the second largest parcel shipper in terms of volume.
Photo courtesy of Amazon
While the three major commercial parcel carriers have all experienced degradation in parcel volume and in pricing during the past year, Amazon has seen big volume increases, as it takes on more control of its own business.
Amazon is an interesting business to watch as it continues to grow and speed up service, ramping up pressure on competitors. Amazon's e-commerce revenue is growing about 5% this year, compared to the U.S. economy, which is increasing about 3%.
However, as has been the case for years, Amazon’s logistics cost will go up even faster, at about 8%. These rising logistics costs are why I advise consulting clients not to try to match Amazon. They also are the main reason why I do not see Amazon wanting to go head-to-head with UPS and FedEx as a full-fledged parcel service provider to the general public.
Five to watch
- Rate pressure from the big three commercial carriers—USPS, Fedex, and UPS—will continue, as they look to fund growth while satisfying investors and customers.
- Smaller shippers that are not under contract will absorb the biggest percentage increases.
- Inefficient shippers will also be under price pressure to offset the higher cost to service them.
- Fedex and UPS will be scrutinizing holiday shipments more closely, so expect additional volume restrictions and pricing actions on individual shippers.
- As the big three ramp up pricing, shippers will find it worthwhile to investigate service alternatives.
The bottom line is that shippers who work closely with their preferred carriers while communicating regularly and accurately will do better in cost and service than those that are more distant.
