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
So, what is the near-term outlook for parcel shippers?
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.
More than half of home deliveries to U.S. online shoppers arrive either late, damaged, or to the wrong address, according to a study from e-commerce software vendor HubBox.
Specifically, almost one in three (27%) home delivery packages are currently delivered late, while almost one in six (15%) online orders are delivered to the wrong address. The results come from Atlanta-based HubBox, which works with networks and carriers to provide retailers with pickup access to over 400,000 locations worldwide.
Furthermore, the survey of more than 1,000 U.S. shoppers revealed consumers’ top five home delivery pain-points:
Orders delivered to the wrong house or block (37%),
Packages left with neighbors they don’t like or don’t speak to (30%),
Item arriving damaged (28%),
Delivery is late (27%), and
Having to wait at home for deliveries (25%).
According to HubBox, those frustrations have pushed nearly half (49%) of shoppers to consider out-of-home delivery collection points to overcome poor delivery service.
“Shoppers expect seamless experiences throughout their buying journey—and nowhere more so than in delivery and the last mile where shoppers’ anticipation of receiving their order is highest,” HubBox CEO Sam Jarvis said in a release. “Retailers that offer flexible and convenient delivery experiences, such as pickup points or BOPIS, ("buy online pick up in store") stand a better chance, and, if they can’t meet these expectations, they risk significant lost sales and future loyalty.”
In addition, more shoppers now expect compensation for late deliveries. Over half of shoppers (53%) expect money off their next order if a delivery is delayed, while 63% expect delivery charges to be waived. Another 54% expect a free delivery code for their next order.
“Late deliveries don’t just erode hard-won customer loyalty. Increasingly, as retailers are having to compensate customers for delayed orders, they eat away at already slim margins—and this at a time when the cost of fulfillment is rising and some carriers are charging additional fees for home deliveries,” Jarvis said. “By diversifying fulfillment options, such as adding local pickup, retailers can ensure demand can be met across their network even during peak trading periods such as Black Friday and the Christmas holidays while ensuring consumer experience is maintained.”
The way that shippers and carriers classify loads of less-than-truckload (LTL) freight to determine delivery rates is set to change in 2025 for the first time in decades. The National Motor Freight Traffic Association, which represents LTL carriers in North America, plans to introduce a new streamlined approach its National Motor Freight Classification (NMFC) system.
But the transition may take some time. Businesses throughout the logistics sector will be affected by the transition, since the NMFC is a critical tool for setting prices that are used daily by transportation providers, trucking fleets, third-party logistics providers (3PLs), and freight brokers.
The current system consists of 18 classes of freight that are identified by numbers from 50 to 500 based on a commodity's density, stowability, handling, and liability, according to a blog post by Nolan Transportation Group (NTG). Lower classed freight costs less to ship, while higher classed freight costs more. For example, class 50 freight would be dense commodities that can fit on a standard, shrink-wrapped 4X4 pallet, while class 500 freight would be low density, highly valuable, or delicate items such as bags of gold dust or boxes of ping pong balls.
In the future, that system will be streamlined, the NMFTA said. The new changes look to condense and modernize commodity listings by grouping similar products together. Additionally, most freight will only use a standardized density scale. This would apply to products that do not have any special handling, stowability, or liability needs. When freight does have special handling, stowability, or liability needs, those characteristics will be taken into account when determining the commodity's class. Additionally the digital version of the NMFC, the ClassIT classification tool, will be rewritten and relaunched.
When the updates roll out in 2025, many shippers will see shifts in the LTL prices they pay to move loads because the way their freight is classified—and subsequently billed—might change. To cope with those changes, Davis said it’s important for shippers to review their pricing agreements and be prepared for these adjustments, while carriers should prepare to manage customer relationships through the transition.
“This shift is a big deal for the LTL industry, and it’s going to require a lot of work upfront,” Davis said. “But ultimately, simplifying the classification system should help reduce friction between shippers and carriers. We want to make the process as straightforward as possible, eliminate unnecessary disputes, and make the system more intuitive for everyone. It’s a change that’s long overdue, and while there might be challenges in the short term, I believe it will benefit the industry in the long run."
Buoyed by a return to consistent decreases in fuel prices, business conditions in the trucking sector improved slightly in August but remain negative overall, according to a measure from transportation analysis group FTR.
FTR’s Trucking Conditions Index improved in August to -1.39 from the reading of -5.59 in July. The Bloomington, Indiana-based firm forecasts that its TCI readings will remain mostly negative-to-neutral through the beginning of 2025.
“Trucking is en route to more favorable conditions next year, but the road remains bumpy as both freight volume and capacity utilization are still soft, keeping rates weak. Our forecasts continue to show the truck freight market starting to favor carriers modestly before the second quarter of next year,” Avery Vise, FTR’s vice president of trucking, said in a release.
The TCI tracks the changes representing five major conditions in the U.S. truck market: freight volumes, freight rates, fleet capacity, fuel prices, and financing costs. Combined into a single index, a positive score represents good, optimistic conditions, and a negative score shows the opposite.
The firms’ “GEP Global Supply Chain Volatility Index” tracks demand conditions, shortages, transportation costs, inventories, and backlogs based on a monthly survey of 27,000 businesses.
The rise in underutilized vendor capacity was driven by a deterioration in global demand. Factory purchasing activity was at its weakest in the year-to-date, with procurement trends in all major continents worsening in September and signaling gloomier prospects for economies heading into Q4, the report said.
According to the report, the slowing economy was seen across the major regions:
North America factory purchasing activity deteriorates more quickly in September, with demand at its weakest year-to-date, signaling a quickly slowing U.S. economy
Factory procurement activity in China fell for a third straight month, and devastation from Typhoon Yagi hit vendors feeding Southeast Asian markets like Vietnam
Europe's industrial recession deepens, leading to an even larger increase in supplier spare capacity
"September is the fourth straight month of declining demand and the third month running that the world's supply chains have spare capacity, as manufacturing becomes an increasing drag on the major economies," Jagadish Turimella, president of GEP, said in a release. "With the potential of a widening war in the Middle East impacting oil, and the possibility of more tariffs and trade barriers in the new year, manufacturers should prioritize agility and resilience in their procurement and supply chains."
Weather conditions in central Florida are forecasted to rapidly improve throughout the day as Hurricane Milton spins out into the Atlantic, leaving behind a trail of wind and flood damage.
Nurtured by historically hot waters in the Gulf of Mexico, the furious storm was stronger than Hurricane Katrina at peak pressure, and registered the lowest barometric pressure—and thus the most destructive storm power—in the Gulf since Hurricane Wilma in 2005, according to analysis by Everstream Analytics.
Fortunately, it weakened slightly to a Category 3 hurricane by the time it made landfall in Siesta Key, just south of Tampa Bay, at 8:30 pm on Wednesday night. However, extremely heavy rainfall totals caused major flooding in the northern portion of that region, soaking Tampa, St. Petersburg, and Clearwater. It also triggered storm surge levels of 4-9 feet, and spun off scores of tornadoes. The National Weather Service issued 126 tornado warnings in Florida on October 9 alone, which was the most in Florida history.
Supply chain impacts of that weather are occurring largely where the flooding hit, and have caused major disruptions on port operations, roads, rails, air travel, and interruptions to business operations – possibly for an extended period. The interior sections of Florida will also likely have significant impacts via overland and river/creek flooding and damaging winds (fallen trees), according to Jon Davis, chief meteorologist, Everstream Analytics.
As the weather clears, businesses in the citrus belt of central/southern Florida will also start to measure the damage. At this time of year, most of the citrus remains unharvested on the trees, so the impact on crop yields could be severe. And Davis says that tree damage is always the biggest concern since it impacts production for years.
But the group also warned that the true rebuilding process usually lags behind the initial emergency response. “During the first 48 to 72 hours after a hurricane, most of the work on the ground is focused on search and rescue efforts,” Kathy Fulton, ALAN’s Executive Director, said in a release. “Because of this, ALAN usually doesn’t receive the first substantial wave of donated logistics requests until after that, when humanitarian organizations can get in, conduct their initial assessments, and determine what’s most needed.”
“We know that can be frustrating for organizations that want to do something tangible as soon as possible. But we hope they will still be willing to provide their logistics help when the need arises, whether it’s in a few days, a few months – or even beyond that,” Fulton said. “The devastation Hurricane Milton and its many tornadoes have caused is heartbreaking. We mourn for those who have lost family members, pets and homes, and we are already working hand-in-hand with various non-profit partners to deliver help.”
Editor's note:This article was revised on October 10 to add input from ALAN.