FedEx Corp. (NYSE:FDX) announced Thursday that its ground-parcel delivery unit, FedEx Ground, will launch year-round Sunday deliveries across most of the U.S. beginning in January 2020, and that it will accelerate the process of redirecting nearly all shipments now tendered to the U.S. Postal Service (USPS) for last-mile delivery into the unit’s own network.
The Memphis-based shipping and logistics firm also said it will increase the ground unit’s capabilities to process larger packages – typically parcels weighing more than 70 pounds and that may have unconventional dimensions. Those parcels account for about 10 percent of the unit’s volume and have been a challenge to handle efficiently because they cannot be run through its conveyor systems that are used for small parcels. FedEx said it will design facilities dedicated to larger packages and will add specialized equipment to its existing locations.
The launch of year-round Sunday deliveries – FedEx Ground operates on Sundays during the peak holiday season – and the diversion of postal deliveries into the unit’s network are the first major service enhancements announced since Raj Subramaniam took over in January as FedEx president and COO, putting him effectively in charge of the $69 billion a year company’s day-to-day business.
The Sunday deliveries are a response to consumers’ demands to have access to delivery services every day of the week. USPS has been delivering on Sundays for e-tailer Amazon.com, Inc. (NASDAQ:AMZN) since 2014. According to Ryan Kelly, a FedEx e-commerce executive, 59 percent of online shoppers and 70 percent of merchants would “definitely or probably” use Sunday deliveries, mainly for expensive and/or time-sensitive purchases. Kelly’s comments, which cited FedEx proprietary research, were posted May 30 on the website LinkedIn. FedEx declined to comment on any of its initiatives beyond the information contained in its May 30 statement.
The FedEx Sunday service may force rival UPS Inc., (NYSE:UPS) which doesn’t deliver on Sundays, to enter the seven-day-a-week delivery game for the first time in its 112-year history. The recently ratified collective bargaining agreement with the Teamsters union, whose members deliver all UPS parcels, established a two-tier driver classification allowing the company to schedule its drivers outside of the core Monday through Friday delivery cycle. Drivers working under the new classification are paid less than the company’s primary drivers who work Monday through Friday. However, it is doubtful that, even at the lower wage scale, UPS can lower its labor costs to match that of FedEx Ground, which uses independent delivery contractors and which may rely on part-timers for the Sunday deliveries.
The re-directing of shipments that are now tendered to USPS could be a significant blow to the quasi-governmental agency, which has relied on expanding parcel volumes to offset declines in its first-class and marketing mail business. Under the FedEx relationship with USPS, about 2 million parcels a day are currently directed to the postal infrastructure for final delivery to residences. As recently as USPS’ 2016 fiscal year, FedEx tendered 600 million pieces; FedEx has already diverted about 20 percent of that traffic.
USPS prices the service relatively cheaply because it must deliver to every U.S. address anyway. FedEx and UPS, which has a similar arrangement with USPS, benefit because they don’t need to dispatch labor and equipment. In addition, both get additional discounts for being large-volume customers.
The service, which at USPS is known as “Parcel Select,” has helped merchants and retailers keep down shipping costs, and allowed them to offer free shipping for e-commerce orders. In recent years, however, FedEx, UPS and Amazon, which account for most of USPS’ parcel business at more than 2.5 billion packages a year combined, have diverted volumes into their own networks by merging those shipments with packages destined for the same or nearby addresses. FedEx, which will accelerate the process starting this fall, plans to divert virtually all of its postal business by the end of 2020. UPS has been re-directing postal shipments for the past five years. Amazon is handling an increasing number of shipments through its own system, and it is believed that, over time, it will self-deliver in densely populated areas and use USPS for service to areas where it is less cost-effective for Amazon to dispatch its own equipment and drivers.
The re-directing trend is expected to continue as the private carriers, leveraging technological and infrastructure improvements, begin to create adequate shipment density on residential routes, something that has so far proven elusive. Satish Jindel, president of consultancy ShipMatrix, said Thursday that he expects UPS to follow FedEx’s lead by the end of the decade. At the same time, Jindel questioned USPS’ push to expand to seven-day parcel deliveries at a time when its three main customers are effectively throttling back.
USPS, for its part, warned as far back as February 2017 that its three customers were building their own delivery alternatives and that the multi-year, mostly double-digit growth of its shipping and package operations could be jeopardized as a result.
The challenge for FedEx will be to determine if it is cheaper to handle the parcels in-house rather than tender them to USPS. Jerry Hempstead, who runs a consultancy bearing his name and who spent decades in top posts at DHL and Airborne Express, which DHL acquired in 2003, said his experience at Airborne was that it was less costly to move parcels weighing more than 10 pounds in-house than to pay USPS to do it. Though package weights are rising as a wider range of goods are ordered online, the typical e-commerce shipments weighs in the 4 to 7 pound range.
