News broke last week of UPS pre-warning Q4 earnings sending shock waves along Wall Street. After acknowledging missteps during the 2013 holiday season, it laid out a plan of improvement which included investing heavily in its network throughout 2014. Even though it improved delivery to customers, it paid a heavy price and as a result announced operating profit was negatively impacted by higher than expected peak-related expenses.
“Rapid expansion of e-commerce has created a complex operating environment during peak season” – Kurt Kuehn, UPS CFO
Indeed, rapid changes thanks to e-commerce and the technology behind it have resulted in an upset in the traditional ways in which parcels are handled. How to respond? One analyst with Stephens Inc. noted that UPS tried having a lean capacity network and then a full capacity network and neither worked.
In another situation in which it is trying to respond to the rapid changes as well as rising delivery and shipping costs, Amazon is rumored to be changing its network favoring regional parcel carriers, the USPS and its own delivery fleet to address shipping.
Meanwhile, technology-based companies such as Uber are dabbling in delivery. These changes from Amazon, Uber and others should serve as a wakeup call to the express and small parcel industry.
Amazon’s net shipping costs increased 24.0% from 2012 to 2013 and a 45.3% CAGR since 2002. While we will not hear of 2014 shipping costs until its earnings report on January 29, it’s quite likely these costs will be high. And, this will likely hold true for 2015 as shipping costs will jump for many retailers, pure-play and physical-based, as the two leading US delivery companies not only implement the usual annual rate increase but also a change in which pricing is calculated – dimensional weight pricing – which will likely increase shipping prices even further.
“The primary concern for us is that we want to make sure we’re getting an appropriate price for the value of service we’re providing,” –FedEx spokesperson
Meanwhile, built primarily on open-sourced language, Uber, Zipments and other similar same-day delivery businesses are taking advantage of the rising use of smartphone apps along with the use of freelancers and/ or contractors. This in turn allows them to operate with far less overhead versus traditional delivery providers. But is this really the future of small parcel delivery?
Higher shipping costs may in fact drive companies to use such delivery services – UPS utilizes unionized labor while FedEx utilizes a traditional-based contractor one. The difference is that for Uber, Zipments, Postmates, Deliv and others utilize a peer-to-peer system – one that is not paid to wait but instead is paid when delivery is made.
Perhaps instead of increasing shipping costs such as a planned 2015 holiday surcharge, maybe a combination of UPS’ well-respected network along with an “Uber-like” ability to quickly adapt to changing needs (For example, utilize P2P in select geographic markets) may suffice.
In either case, have your say on Ti’s LinkedIn discussion page: “Do you believe Uber and crowd-sourcing are the future of the last-mile delivery market”?
Also, check out Ti’s latest report, “Global E-Commerce Logistics” which covers this topic along with market sizing, regional analysis and more.
GLOBAL SUPPLY CHAIN INTELLIGENCE (GSCi)