Anyone who works in the parcel delivery business knows that life holds three certainties – death, taxes, and UPS Inc. (NYSE: UPS) and FedEx Corp. (NYSE:FDX) moving in lockstep on almost everything. The first two are immutable. The third one, though, perhaps not so much.
To be sure, the tag team still exists. Both launched seven-day-a-week deliveries within a few months of each other. UPS followed FedEx’s lead earlier this year and dropped holiday peak season residential delivery surcharges, though it took UPS about two years longer to act. Yet 2020 will likely see increasing divergences between the two, though the smoke will not clear until UPS announces its rate schedule (FedEx already has).
Nowhere will the separation be more profound than in the hot-button segment of last-mile residential delivery. For years, FedEx and UPS have relied on the U.S. Postal Service (USPS) for final-mile delivery of parcels that the two companies have inserted deep into the postal infrastructure. Deliveries are typically made in one to five days, depending on various factors.
The services, FedEx’s SmartPost and UPS’ SurePost, have been popular with shippers because of the low costs associated with using the USPS network. They have also generated decent revenue for the carriers, though with very low margins. FedEx has announced a 5.2% general rate increase for 2020 on last-mile deliveries.
But the landscape has changed. FedEx said earlier this year that it will shift all of its SurePost parcels – about 2 million per day – into its own ground network by the end of 2020. By contrast, UPS said it would increase its engagement with USPS to coincide with the launch of its seven-day delivery schedule in January. It’s unclear if UPS’ tighter knot with USPS extends only to Sunday deliveries or signifies a broader commitment than has existed in recent years.
If it is the latter, it represents a shift in strategy because almost every move UPS has made towards USPS has been adversarial. UPS, like FedEx and Amazon.com Inc. (NASDAQ:AMZN), has for some time diverted parcels for last-mile delivery – typically in densely populated urban areas – into its own delivery network. UPS has also experimented with special “zone 1” pricing for short-haul deliveries, though the initiative hasn’t taken off. For years, UPS has been embroiled in rate and service disputes with USPS before the Postal Regulatory Commission, the federal agency that oversees USPS’ rate and service actions. The International Brotherhood of Teamsters union, which represents about 255,000 UPS package employees, has publicly trashed SurePost as taking delivery business from union workers and has long sought to end its existence.
According to one source at the Parcel Forum in Dallas, UPS will continue to in-source last-mile parcels and also maintain a relationship with USPS because it feels it is a more pragmatic direction.
For FedEx, the diversion of so many parcels into its network is seen as a risky, audacious move. Integrating 2 million pieces per day is a tall order, and it is an open question if FedEx can do it cheaper than USPS has been able to. Parcel Forum attendees speculated that FedEx no longer wants to pay both independent home delivery drivers and USPS, and wants to in-source to build density. It is betting that combined density improvements and the elimination of USPS as a vendor will offset any cost increases that may come about from bringing the business in-house.
“It is very clear that FedEx is prioritizing control of delivery,” Mark Taylor, manager of consulting at supply chain consultancy enVista Corp., said at the Parcel Forum.
Ravi Shanker, transportation analyst for Morgan Stanley & Co. (NYSE:MS), said at the Forum that FedEx may need the SmartPost volumes now that it has severed all U.S. ground and air delivery ties with Amazon. Still, FedEx is swapping the devil it knows for the devil it doesn’t, according to Shanker. “SmartPost exists for a reason,” he said.
Taylor, who presented on the two companies before an overflow crowd, said UPS has done a masterful job of spinning the story that SurePost is a faster, cheaper service because UPS inducts parcels deeper into the USPS infrastructure than does FedEx. No one knows if the reality jibes with the message, however. To FedEx’s credit, its actions are helping to close the messaging gap, Taylor said.
The battle is high stakes for reasons that, by now, are well known – the growth of e-commerce, the demands of consumers for free shipping, Amazon’s expanding footprint and USPS’ continued presence. E-commerce has transformed the carrier-customer relationship and changed the way businesses ship. Business-to-consumer (B2C) shipping has taken control of the market, and it will continue to dominate.
E-commerce has even revolutionized B2B shipping. In years past, a business might not have adequate visibility into its inventory. Thus, it would place a purchase order for a dozen boxes and have them shipped and stored. Today, that same business can order products one or two days before they are needed just for the task to be accomplished that day. The storage room becomes a walk-in closet.