By Satish Jindel
Since consumers live in their homes seven days a week, few would argue that the weekends are the two best days for delivering parcels to residences.
That was true when parcel-delivery carriers obtained signatures for residential deliveries. However, in today’s world with parcels delivered without even a knock on the door, the value of weekend deliveries has been diminished.
Carriers have been vocal about the high cost of last-mile deliveries to a residence compared to a business because of the poorer stop-density economics associated with residential deliveries. However, delivering online orders on Sundays only adds to the last-mile costs, in part because there is no weekend pickup volume at businesses to offset it.
Which brings us to FedEx Ground (NYSE: FDX), which starting next month will eliminate Sunday residential deliveries across 15% of its U.S. network due to the cost burdens on the FedEx Corp. unit and its 6,000 delivery contractors. Most of the cuts will be in rural and sparsely populated suburban areas where shipping activity is not robust.
This midcourse correction is a necessary one. While Saturday pickup and delivery routes also handle fewer parcels than weekdays due to lack of deliveries to businesses, Sundays are worse. With even fewer parcels, the Sunday service hurts productivity on Mondays and requires drivers to work on a day that commands premium pay at most other jobs. As a result, operating delivery routes on Sundays are very expensive for FedEx Ground and its delivery partners.
Despite those inherent obstacles, FedEx Ground in early 2020 expanded its nationwide residential delivery service to Sundays. At that time, it should have limited the expansion to just those cities with the delivery density to support the higher cost of such a service or in situations in which the service was needed to manage capacity for on-time Monday deliveries.
In fact, we now propose that FedEx Ground eliminate Sunday deliveries to not just a few rural areas or to 18,000 less-populated ZIP codes where deliveries are provided with a geographic surcharge, but to all 31,200 ZIP codes during nonpeak season periods.
It’s a matter of simple math. ShipMatrix data on millions of FedEx Ground parcels shows that deliveries to the 18,000 less-populated ZIP codes represent less than 9% of volume delivered to all ZIP codes. In addition, these 18,000 ZIP codes have a population density of less than 100 people per square mile, compared to 6,000 people for urban ZIP codes. Sunday deliveries to the 18,000 ZIP codes — excluding the peak periods of November and December — represent less than 5% of weekly parcel volume handled by FedEx Ground.
The FedEx Ground Sunday service, as currently constructed, also pushes against marketplace preferences. With most online orders now delivered with free shipping, retailers just want to ship at the lowest price. FedEx Express, FedEx’s air and international service, has long imposed a surcharge for Saturday deliveries. That surcharge is currently $16 per package. However, FedEx Ground delivers on Saturdays and Sundays without a premium price and at a much higher cost to itself and its contractors. If it needs to continue doing so, FedEx Ground should tender parcels to the U.S. Postal Service for last-mile deliveries, just like its chief rival, UPS Inc., (NYSE: UPS) does with low-priced parcels shipped under its SurePost service.
It’s apparent that FedEx Ground has bit off more than it could chew. In 2000, two years after it entered the U.S. ground-delivery business by acquiring the parent of Roadway Package System (RPS), FedEx introduced a Home Delivery service with its separate network of facilities and contractors. It soon merged the Home Delivery service with FedEx Ground to build route density with a combination of B2B and B2C parcels in the same van.
Two years after that, the 31,200 ZIP codes eligible were segmented with about 7,200 for suburban areas designated for delivery area surcharge and another 18,000 for rural areas with a higher extended delivery area surcharge (EDAS). In retrospect, the ill-fated 2020 expansion would have been very doable due to the ZIP code segmentation and surcharge implementation as long as FedEx Ground excluded rural and suburban areas from Saturday and Sunday services. Even on weekdays, the 18,000 EDAS ZIP codes represent a fraction of FedEx Ground’s traffic, which suggests the volume would be much lower if it were limited to B2C deliveries.
FedEx Ground and its driver contractors face an age-old problem, namely that the United States is a vast geography where many states have more animals than people. When I helped expand RPS nationwide in the late 1980s and early 1990s, I became intimately aware of the cost of delivery to rural areas and its huge economic impact on RPS.
Even with a focus on higher-density B2B traffic, RPS could not justify expanding service even on weekdays to rural areas of western states like Colorado, Utah and Wyoming, to name a few. The lack of density resulted in last mile per parcel costs that were several times higher than the total revenue for the parcel itself. Fortunately for RPS, the Postal Service had the same low price for deliveries to rural areas as for high-density urban areas.
The bottom line is that a broad-based Sunday delivery service, at this point in time, is a nonstarter. UPS doesn’t offer it. The Postal Service delivers on Sundays almost exclusively for Amazon (NASDAQ: AMZN), and even the economics of that service are questionable. Not to mention that delivering on Sundays is even worse from an ESG perspective.
Satish Jindel is the founder and president of consultancy ShipMatrix.