When will they get it right? Peak season challenges and how providers are handling the 2018 Christmas period


Peak season for the retail sector is back, and online sales are through the roof once again. In the US, Black Friday sales have already been strong, with growth of 23.6% from last year. This is likely to continue – over the last peak season, in the United States, 76% of shoppers purchased at least 25% of their gifts online. A stronger US economy this year has clearly boosted consumer spending power, but similar shopping trends are also seen in Europe.

The results are generally positive for retailers but present significant challenges for logistics service providers. Coping with the additional volumes is tough and doing so whilst maintaining strong margins is even more difficult.

In the US, UPS and FedEx are both continuing strategies implemented in 2017. However, both have substantially increased peak season surcharges, passing on additional costs to retailers. FedEx has tried to keep its surcharges to unauthorised parcels (increasing these by 211% over last year) whereas UPS has applied them mostly to residential shipments using ground services (increasing these by 104% over last year).

UPS expects to handle 800m packages between Thanksgiving and Christmas, up 50m from last year. Jim Barber, Chief Operating Officer of UPS, said, “In the past couple of years UPS has been constructively dissatisfied with peak performance and the investments and upgrades in the most comprehensive peak plan ever are meant to address those shortcomings.”

Christmas of 2013 was particularly difficult for UPS. “Overpromising and Underdelivering” was the headline used by Forbes, after UPS failed to forecast demand properly. To rectify its mistakes, in September 2014, UPS nearly doubled its seasonal hiring and spent around $500m on measures such as automated sorting systems and package re-routing systems in the event of bad weather.

Further investments, to the tune of billions of dollars, have been spent on upgrades and expansion specifically for peak season; 2018 has seen UPS invest in nine aircraft in anticipation of another record year. The Wall Street Journal has reported that UPS can now handle 350,000 more pieces per hour in the US compared with last year. UPS has noted its shortcomings and over the last few years has been investing greatly to overcome them, in time for peak season.

Like UPS, after years of struggling with demand, FedEx has hired around 55,000 workers for 2018, 10% more than last year in expectation of a record Christmas period. Since 2017, FedEx has been working more closely with retailers to forecast demand and understand volume input into its network. The addition of new facilities and employment of further seasonal staff is also aimed at avoiding volume problems in the run up to Christmas.

The USPS meanwhile has been under severe margin pressure even before peak season. President Trump has made his unhappiness with the service’s finances clear and it will hike rates for the 2019 fiscal year. In the week beginning December 17, it expects to deliver nearly 3bn pieces of mail and packages.

Some early reports show that the investments made by the large US express providers are working. According to ShipMatrix Inc., a software provider that analyses shipping data, combined, the three providers logged the best on-time delivery performance since 2013 for packages shipped during the Thanksgiving week. UPS delivered 98.3% of packages on time, compared with 89.2% in 2017, while FedEx and the US Postal Service had on-time delivery rates of 98.9% and 97.9% respectively.

Despite perhaps not seeing the same consumer spending levels as in the US, European providers must deal with the same issues. Whereas Black Friday in the US is nothing new, European providers are having to manage volumes in earlier parts of the year than they were previously used to. The effects have been significant.

DHL’s parcels business has been under stress in recent years, and as of January 1, 2019, Deutsche Post DHL Group restructuring changes will come into effect. The Post – eCommerce – Parcel division is to be divided into two parts; ‘Post & Paket Deutschland’ (Germany) and ‘DHL eCommerce Solutions’ (International). The move aims to deliver long-term sustainable growth as well as cutting costs and increasing profitability. DHL Chief Commercial Officer of DHL, Katja Busch, has explained the difficulties at this time of year; “Perhaps the biggest clash we face is between the expectations of the consumer and the expectations we have of ourselves.” She continued to say, “Even now, it is still incredibly hard to earn anything as a logistics operator active in the e-commerce market.”

Across Europe, logistics service providers have been preparing for peak season since the start of the year. Royal Mail hired 23,000 seasonal staff and opened six temporary parcel sorting centres this year. DHL launched a Europe-wide driver recruitment initiative in November and Yodel invested in a new semi-automated technology which will process 17,000 out of gauge parcels an hour, at the centre in Wednesbury, UK, in time for the peak period.

It’s not just providers that have been stretched though. Over the last few years European airport capacity has often been pushed during peak season. At Schiphol for an example, in late 2017 and early 2018 it ran out of space and slot restrictions are expected to be in place until 2020. 

The peak season poses significant challenges every year and planning usually begins straight after the previous year ends. The exponential growth of e-commerce has created an increasingly difficult operating environment, which requires substantial capital expenditure to be able to handle additional peak season volumes. By now, LSPs have accepted that this is a price worth paying.

Source: Transport Intelligence, December 18, 2018

Author: Holly Stewart

GSCi

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