Competing in a diverse parcel market
Photo 273885252 | Business © Olan Dah | Dreamstime.com
FedEx proved it could cut its way to profitability. However, what it could not do was to grow its business. Neither could UPS when it announced its Q4 earnings in January.
UPS’ overall revenue for the quarter ending December 31 declined 7.8% to $24.9 billion, operating profit declined 22.5% to $2.477 billion, and net income fell 53.5% to $1.6 billion. Total average daily volumes fell 7.5%.
“2023 was a unique and difficult year, and through it all, we remained focused on controlling what we could control, stayed on strategy, and strengthened our foundation for future growth,” UPS CEO Carol Tome said in a statement.
Meanwhile, FedEx reported that overall revenue for the quarter ending February 29 declined 2.3% to $21.7 billion, while operating income increased 19.2% to $1.24 billion. Net income for the quarter increased 15.1% to $3.51 billion. Express average daily volumes fell 2.9%, with no change in Ground and Freight average daily shipments per day declined 4.1%.
“For the third consecutive quarter, we delivered operating income growth and margin expansion in a declining revenue environment,” said FedEx CEO Raj Subramaniam.
Last month, in response to UPS’ Q4 earnings, I wrote on how the parcel market has changed since the pandemic.
Much of the change in response to FedEx and UPS activities during the pandemic as noted in this Bloomberg story:
“Since the pandemic hit in 2020, FedEx’s revenue per package soared 33% as retailers leaned on e-commerce to keep their businesses afloat. FedEx and UPS commanded higher prices and limited volume from some large shippers during the peak season at the height of the pandemic because their networks were full. The bargaining power pendulum has now swung back in favor of shippers. The tailwind of higher prices could now turn into a headwind.”
FedEx and UPS lost much of their luster in the post-pandemic parcel market.
But one can only cut their way to growth for just so long. The same can be said with raising rates to improve and/or protect revenues.
Volume Characteristics
Regarding FedEx and UPS volumes, the post-pandemic parcel market continues to favor B2C. While UPS is the only carrier that provides a percentage of volume type in its quarterly presentations, it is also a good general representation for FedEx. FedEx historically has delivered more B2C than UPS by only a couple of percentage points.
As noted in a previous post, B2C is where FedEx and UPS are experiencing increased competition from retailers expanding their reach into last-mile deliveries, Amazon taking the lead in delivered volumes, parcel management technology tools like transportation management system (TMS) solutions, and regional parcel carriers redefining themselves and expanding beyond their traditional regional boundaries.
B2B Parcel Market
The B2B parcel market is slowly evolving, and, like the B2C parcel market, FedEx and UPS will probably lose volumes as well due to the number of other players entering the B2B last-mile market.
The B2B market itself is also changing. Retailers such as Williams-Sonoma, Home Depot, Lowe’s, Kirkland’s Home, and AutoZone are expanding into this market to diversify their offerings. Many of these retailers typically utilize their B2C carriers as B2B carriers but could opt to switch to another carrier because of cost or the size of the parcel/freight. LTL providers also play in this space.
FedEx will benefit from this shift. Its Freight division is considered the largest LTL provider.
Photo 114433559 | Fedex Freight © Oksanaphoto | Dreamstime.com
However, UPS sold its LTL carrier, UPS Freight, in 2021 to TFI International. According to the statement announcing the sale, “The decision to sell UPS Freight was reached following a thorough evaluation of the UPS portfolio, and aligns with the company’s “better not bigger” strategic positioning.”
UPS is also evaluating the possible sale of its truck brokerage service, Coyote Logistics, which it acquired in 2015. During UPS’ Q4 earnings call, Tome described Coyote Logistics’ business model as “highly cyclical” with considerable earnings volatility.
UPS’ decision not to own the necessary assets to deliver larger B2B items on behalf of some of its customers, such as Williams-Sonoma, could possibly be a mistake.
Meanwhile, 3PLs and freight forwarders, including SEKO, AIT, GEODIS, Redwood Logistics, and Maersk, have also entered this space. Many utilize parcel management technology tools that track and manage a group of carrier partners. These tech tools may also use crowd-sourced carriers or traditional ones. 3PLs and freight forwarders can also offer B2C delivery services using such tools.
Another example and the biggest threat for FedEx and UPS is Amazon Business, launched in 2015 to address the SME business market. According to Amazon, Amazon Business achieved $35 billion in annualized sales in 2023. More than 6 million customers are now buying on Amazon Business. Including ninety-six Fortune 100 companies such as Intel and Citi, as well as organizations like Johns Hopkins University, Seattle Children’s Hospital, and the United Service Organizations, and U.S. governmental entities, including the state of Utah and the U.S. Air Force according to an Amazon blog post. “Amazon Business supports integrations with Coupa and over 100 other procurement, payments, and ERP systems. We also support purchasing directly on Amazon.com for organizations that do not rely on an e-procurement system,” said Alexandre Gagnon, vice president of Worldwide Amazon Business, in the post.
In March, Amazon Business introduced ‘Prefer Small and Medium Enterprises’ tool which is “designed to boost the discoverability of the tens of thousands of SMEs operating on Amazon Business. It’s designed to cater to the needs of multinational enterprises, FTSE100 companies, universities, government agencies, and healthcare organizations looking to support up-and-coming businesses.” The free feature highlights sellers with fewer than 250 employees and less than €50 million in revenue to procurement workers. https://www.yahoo.com/tech/amazon-making-easier-buy-smbs-120020394.html
FedEx and UPS
Photo 142561843 | Business © Jerome Cid | Dreamstime.co
Photo 142561843 | Business © Jerome Cid | Dreamstime.com
FedEx and UPS are taking the necessary steps to remove costs from their networks and further improve delivery speeds. However, the two carriers are protective of their rates despite the efficiencies they gain from automation and cuts. The surcharges and higher rates are perceived as the cost for the services FedEx and UPS are known for, such as their tracking capabilities, on-time deliveries, and customer service.
However, UPS has an added cost that could make it more challenging to gain new business, at least for the first half of this year. “Costs will weigh on us in the first half of the year, primarily due to the high labor cost inflation associated with the new contract, UPS CFO Brian Newman told analysts in January.
FedEx and UPS have often been regarded as a duopoly, but that is no longer the case as new entrants enter the last-mile market, existing competitors expand their services and geographic reach, and technology solutions give shippers more control over parcel management.
FedEx and UPS will now have to compete against a diverse competitive field to win parcel volumes. However, their capabilities spanning across the supply chain should be helpful if the capabilities can work together as a single company instead of disparate parts. Both companies have recently launched online platforms to make it easier for shippers to utilize their abilities. In addition, FedEx’s DRIVE initiative, combining its Express and Ground divisions and presenting itself as One FedEx, is a step in the right direction.
- Cathy
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I wear a number of hats these days. Catch my weekly column on air cargo, freight forwarding, and the express markets on Air Cargo Next. I’m also helping out the Reverse Logistics Association as a research manager, and at JOC, I help out as a research analyst and write a weekly LinkedIn newsletter, Freight Forward, summarizing JOC & other published articles and providing an outlook for the week ahead.