It seems like just yesterday parcel carriers were gearing up for massive demand growth. Due to the pandemic, consumers were confined to their homes, increasing the intensity of online orders for groceries, home office supplies, fitness equipment, electronics, and other durable goods, leading to significant parcel volumes for carriers. At the time, industry forecasters were predicting parcel growth rates of up to 20% in the coming years with the explosive growth of e-commerce.

1. The Focus of Negotiations Lies in Long-Term Relationships

Jessica Dankert, Vice President of Supply Chain at the Retail Industry Leaders Association (RILA), points out that the current market is more like a shipper's market compared to the past few years. This provides leverage for large retailers who aim to control the rapid increase in transportation costs absorbed during the pandemic. Currently, there is much more available capacity in the market than imagined, and we expect shippers to leverage this, especially those who can flexibly transfer volume between carriers.

However, despite the pendulum of prices swinging back to shippers, savvy retailers will not abandon their strategic emphasis on strong relationships, communication, and cooperation with carriers. Maintaining this relationship is crucial for both parties. Retailers still seek "collaboration to sustain service," rather than solely pursuing the lowest price.

Moreover, while shippers have gained new negotiating power, these negotiations will fundamentally focus not only on strict transactions but also on longer-term relationships, and how shippers can obtain reliable, cost-effective service and adequate capacity.

Ryan Kelly, Vice President of Vertical and Alliance Marketing at FedEx, reinforces Jessica Dankert's viewpoint. Any shipper knows that it's not just about a package and a price; it's more about starting with a relationship. As a carrier, we want to understand the customer's business and the experience they want their customers to have.

Ryan Kelly also emphasizes the importance of planning, especially before the holiday peak season. It's essential to note that some retailers see shipping volumes five times higher than normal during peak seasons, and this surge in volume brings additional costs. Therefore, communicating with shippers and understanding their needs is crucial.

2. The "SWIFTIE Effect"

What factors shape the parcel market and lead to the current imbalance between capacity and demand?

Firstly, consumers' homes are now filled with durable goods, shifting discretionary spending from products to services such as entertainment, dining, and travel. ShipMatrix's Jindel refers to this as the "SWIFTIE Effect." Meanwhile, the additional capacity added during the pandemic is currently not being fully utilized, forcing carriers to make adjustments and adapt.

FedEx is a prime example. FedEx's "Drive" program aims to reduce costs by consolidating ground and express pickup and delivery operations and closing underperforming locations to rationalize its global network. TD Cowen analyst Helane Becker stated in a recent report that there is growing confidence in the feasibility of FedEx's transformation plan.

On the other hand, United Parcel Service (UPS) has now signed a new Teamster labor contract. By the end of the agreement, drivers will receive approximately $170,000 in wages and benefits annually. According to ShipMatrix's calculations, UPS is actively working to reclaim approximately 935,000 packages per day that were shifted to other operators during contract negotiations, with about 400,000 packages being diverted to FedEx, and the rest dispersed to regional carriers and the United States Postal Service (USPS).

3. Contributors to Excess Capacity

According to Jindel from ShipMatrix, the current processing capacity in the US market is estimated to be around 110 million parcels per day. However, the actual demand may only be about 68 million parcels. Moreover, demand hasn't increased, while capacity, or transportation, has been continuously increasing. For example, Amazon has increased its processing capacity by 2 million parcels per day by providing its network to independent shippers, directly competing with UPS and FedEx; major regional parcel carriers focusing on business-to-consumer deliveries are also implementing expansion plans to extend their operations to wider areas.

Additionally, Jindel considers the United States Postal Service (USPS) as the biggest factor contributing to excess capacity. USPS claims to have the capacity to handle 60 million parcels, but they actually need to handle only about 25 million parcels. In the future, they will take measures to absorb this excess capacity, which may lead to some changes in pricing behavior.

USPS also has an inherent advantage. According to ShipMatrix data, 60% of the weight of parcels delivered to residences is below 5 pounds and can be placed in mailboxes. USPS can lower rates for such parcels, which will compel its competitors to respond; otherwise, they risk losing this segment of parcels.

4. Driver Shortage and Additional Costs

John Janson, Vice President of Global Logistics at SanMar, believes that the impact of UPS contracts and high wages, coupled with the expansion plans of regional carriers and Amazon's decision to open its network to all parcel carriers, may result in an unexpected consequence: a shortage of drivers.

One challenge is that the new UPS contract will put pressure on the driver market. With UPS offering high salaries, how will other regional and last-mile carriers recruit and retain talent? It can be said that this puts significant pressure on drivers for FedEx, regional carriers, and even Amazon.

Today, finding capacity is no longer a problem with the peak season approaching. John Janson stated, "I don't see any signs that the market will undergo significant changes in the next 6 to 12 months; it will continue to be as it is now."

However, it is important to emphasize that even in a market with a shortage of capacity, carriers are still looking for every opportunity to increase or regain revenue, whether through rate increases or additional fees. Therefore, logistics managers and planners must stay ahead in this game. Especially shippers need to be particularly cautious, needing to be very clear about where your parcels are going, in what region, and whether the size or delivery location of the parcel may incur additional costs.

For example, UPS recently issued an update outlining changes to service times and fees for some remote postal code areas, stating that during delayed times, UPS will not deliver or pick up packages in these postal code areas, adding an additional day to the delivery commitment time for packages to these areas.

Janson sees this as an example of carriers moving the goalposts on service, with shippers not receiving any benefits; not only will the delivery time be delayed by a day, but there may also be additional surcharges. On the same route, with the same pickup and delivery locations as before, without additional service benefits, UPS can generate more revenue simply by reclassifying postal codes into another category.

5. Will There Still Be a Peak Season?

Although demand and volume are declining, some business professionals still expect the parcel industry to experience a peak season, even if it may be subdued.

Michael McDonagh, President of Parcel Business at logistics service provider AFS Logistics, believes, "We will continue to see a peak season. In fact, we've always had a peak season, especially during certain holidays when people buy more. So, I don't see anything stopping that trend. While this peak season may not be as busy as 2021, it may remain consistent with last year."

Dankert from RILA also remains optimistic about the arrival of the peak season. Depending on the vertical market, we expect strong sales during the holiday peak season, according to retailer plans. Additionally, consumer confidence is fairly good, and consumers are still willing to spend.

Although this peak season may not be a "breakthrough" peak season, retailers have been working to clear old inventory over the past two years, so consumers have fewer choices. Consumers are eager for some new products to come out, and retailers have heard this message and are responding. This may bring some hope to parcel carriers.

As the year-end approaches, retailers are focusing on consolidating relationships with parcel carriers to ensure cost-effective service and having all internal affairs arranged properly, meaning having good communication and internal coordination between functional groups.

Aligning supply chain teams with marketing, sales, finance, procurement, e-commerce, and product planning teams is the foundation for accurate planning and forecasting, efficient supply chains, and processes. Collaboration combines the right people with the right information to provide carriers with accurate forecast information they need to plan their operations and provide retailers with the service they expect for their customers.

6. Game between Shippers and Carriers

As demand for capacity remains imbalanced, shippers are re-evaluating the freight rate increases they had to endure over the past two years. Jindel from ShipMatrix suggests that shippers now have a one-time opportunity to correct this situation. They need to consider their shipping characteristics and when and how parcels are delivered, and then decide who can bring the maximum value at the lowest cost. This requires bidding on shipper business but in an analytical and strategic manner, rather than just focusing on price.

Because it's not just comparing freight rates, it also involves understanding a confusing and complex list of surcharges, all determined by the size, type, delivery location, date, and distance of transport of the parcel. Moreover, this assessment also needs to include an internal examination of how shipper parcel operations and management practices affect the carrier's ability to efficiently service transportation and make money from it.

Currently, shippers are in a dominant position, but this situation will change over time, as it has in the past.

Dankert from RILA states that it is noteworthy that shippers have more flexibility and control. Especially as shippers establish their benchmarks and strategies, and carriers respond to demand levels, adjust their networks, and seek strategies to counter shippers through pricing, surcharges, fees, and how they deploy assets. It will be interesting to see how everything unfolds.

Source: "Beset by loose capacity and weak demand, where do parcel express carriers go from here?"

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