The parcel express market is undergoing what may be its most dramatic evolution since Fred Smith, then a Yale undergrad, wrote a 1965 term paper outlining the original idea for Federal Express: a system for accommodating urgent, time-sensitive shipments. A paper for which he received an average grade.
Fast forward to today's world of e-commerce and its explosive growth, where package volumes are projected to double from 50 million to 100 million per day by 2026. Then there is Amazon methodically building out its own fulfillment and delivery network and taking millions of parcel deliveries in-house, UPS getting FAA (Federal Aviation Administration) approval for drone operations, FedEx testing autonomous urban delivery robots, well-funded technology startups introducing new models seeking to disrupt the market, and finally, intense competition across the board as existing and new players look to shave costs and bring innovations large and small to the business.
What's sparked this transformation is a seismic shift in consumer shopping patterns and delivery expectations. "E-commerce is really [package and parcel] growth driven by free shipping. I challenge anyone to prove e-commerce would have grown as it has without free shipping," says Satish Jindel, president of Pittsburgh, Pennsylvania-based SJ Consulting Group. He emphasizes that online parcel shipping is not technically "free" since retailers are essentially paying the freight. As e-commerce volumes continue to grow, "that creates additional pressure on [retailers] to find companies that can handle it at a lower cost because they have to absorb it. So, carriers have to come up with cheaper and cheaper ways to handle [e-commerce shipments] and make money at it," he adds.
AMAZON REDRAWS PARCEL LANDSCAPE
Jindel says that the industry can thank Amazon, and particularly its introduction and promotion of its Amazon Prime subscription service, for hooking consumers on the free-shipping concept. Amazon says it has over 100 million paid Prime members globally. Estimates by research firm Consumer Intelligence Research Partners suggest with that market penetration, some 82 percent of U.S. households have a Prime account.
Jindel adds that in addition to the millions of consumers on Prime, over the past 10 years Amazon also has built a foundation of some 3 million-plus e-commerce retailers participating in its "Fulfillment by Amazon" fulfillment-services program. Both of which have basically redrawn the landscape for parcel express shipping.
Amazon itself says that its goal all along has been to build a world-class customer experience with top-notch resources, talent, and technology that allow it to get as close to customers as possible. The company says its U.S. logistics network has grown to include more than 110 fulfillment centers, 40 package sortation centers, 100 delivery stations, and 20 air gateways.
It's gone all in on its Prime program, which the company says offers members the fastest free-delivery options on the largest selection of "need it now" items as well as the most convenient delivery options, whether it be a doorstep, home or business, a drop-off locker on the recipient's way home, or even the trunk of his or her car.
With the launch of its "Delivery Service Partner" program in 2018, Amazon started creating new parcel delivery capacity dedicated exclusively to handling Amazon shipments—and doing so at a cost less than what it had been paying third-party parcel carriers. In the program's first phase, the e-commerce giant enlisted a cadre of new business owners to operate local package delivery fleets as independent contractors. The company then doubled-down on the program this year, encouraging Amazon employees to start their own package delivery businesses, sweetening the deal with an offer of up to $10,000 to cover startup costs and the equivalent of three months of the former employee's last gross salary to help these new business owners get their fleets up and running.
The program, the company says, has created hundreds of new small businesses, about one-third of which are owned and led by military veterans.
It's also allowed Amazon to pull in-house a huge chunk of parcel shipments formerly handled by third-party carriers and the U.S. Postal Service. "We see Amazon becoming a full-fledged delivery player for its own business," says SJ Consulting's Jindel. He estimates that Amazon is now handling over 50 percent of its own parcel shipments, or about 6 million a day. "That's three times more than DHL was delivering in the U.S. when it left the [domestic parcel delivery] market in 2008," he adds.
FEDEX CHANGES COURSE
Meanwhile, at FedEx, the company is aggressively positioning itself as a carrier of choice for e-commerce retailers going forward. Earlier this year, FedEx elected to terminate its parcel delivery contract with Amazon. Despite its decision to relinquish the giant e-retailer's business, FedEx remains bullish about its future. Citing the projected growth in overall e-commerce shipments through the next decade, the company says it's confident in its growth prospects, the quality of its services, and the attractiveness of its multifaceted service portfolio, which can address consumer needs as well as the complex supply chain needs of retail, commercial, and industrial shippers.
The company noted in its recent earnings call that 98.8% of U.S. revenue comes from customers using two or more FedEx operating companies. And e-commerce remains "one of the greatest opportunities for our industry," says Ryan Kelly, vice president, global e-commerce marketing for Memphis, Tennessee-based FedEx Services.
By its own estimates, the company projects 56% of overall e-commerce market volume growth through 2026 as addressable for FedEx. Kelly also cites the potential for the nation's 32 million small and medium-sized businesses to grow with e-commerce. "They're an important customer base," he says.
Lastly, the company is moving ahead with plans to rationalize its operating network through "additional cost-reduction initiatives," parking and retiring a portion of its air fleet after peak season "to better match capacity with demand," according to its recent earnings announcement. As older aircraft are cycled out, the company expects to see lower costs through better fuel efficiency and reliability, and lower maintenance expense.
THE REGIONAL PLAY
E-commerce is also fueling the growth of regional parcel delivery firms such as Chandler, Arizona-based OnTrac, which covers the eight largest Western states with 85% of its deliveries going to residential addresses. The company has added over a million square feet of facility space in the last three years, and this summer put the finishing touches on a new $36 million automated sort hub in Reno, Nevada, it's first. "We're putting our money where our mouth is," says Mark Magill, OnTrac's vice president of business development.
From Reno, Magill says, OnTrac delivers next-day over a footprint extending 850 miles north and south, as far as Ferndale, Washington, and Yuma, Arizona, respectively. It is moving to seven-days-a-week operations for the 2019 peak season and will extend that year-round starting in January 2020.
The new Reno hub, central to OnTrac's service area, will help the company support its primary customers—big e-commerce retailers—and their peak season volumes. "If you don't service them during peak, they won't use you the rest of the year," Magill says. He explains that OnTrac, with its regional focus, is more cost-competitive and nimble than the national carriers. "If you are a big online retailer, I'll knock 20% off your ground rate," Magill says. "We'll spot a trailer, pick it up as late as midnight, and do next-day delivery. And we'll pick up on Sunday and make Monday deliveries."
OnTrac's regional model is mirrored in other parts of the country as well. LaserShip covers the East Coast; LSO (formerly Lone Star Overnight), based in Texas, covers much of the U.S. Southeast; and UDS (United Delivery Service) operates in the Chicago area and surrounding Midwest states.
STARTUPS JUMP IN THE RING
The parcel express market is attracting its share of startups as well, some of whom are leveraging a very internet-like model—crowdsourcing—to build out new networks of drivers for same-day parcel deliveries.
Roadie Inc., based in Atlanta, has established a technology platform and on-demand same-day delivery network that utilizes "on the way" crowdsourced drivers—those already going toward the place where a shipment needs to be delivered. Using an Uber-like mobile app, drivers sign up—and get paid—for "gigs" or part-time delivery assignments, for example, picking up a purchase made locally from Home Depot online and delivering it to a recipient located in the direction the driver is already headed.
"The future of delivery is about how well your e-commerce strategy integrates with your ground game in and around the physical communities where your customers live," says Marc Gorlin, Roadie's founder and chief executive officer. He notes that retailers are increasingly moving toward "localized" supply chains, optimized for fast, efficient same-day final-mile delivery to homes and businesses. "By tapping into employees, customers, or other drivers in close proximity to stores or warehouses, we're quite literally positioning ourselves along the most common routes between retailers and the local communities they serve," he says.
Gorlin notes that with Roadie's "on the way" model, "someone is already heading in the right direction and utilizing the extra space in their car to make money—on a drive they already are taking. [It's a] completely new type of delivery system with the flexibility to handle variable volumes and distance at a predicable cost." He describes Roadie's approach as a "faster, more efficient delivery model that fundamentally improves the economics of distribution," giving many businesses—and their customers—the benefit of optionality, flexibility, and scalability.
He adds it is also a great model for handling surges in business, such as peak season shopping, when forecasting demand—and need for delivery resources—can be problematic at best. "Our crowdsourcing model succeeds because ... we can deploy just-in-time resources at the time of need because that latent capacity in our network is already on the road," Gorlin explains. "As delivery volume goes up, the number of active drivers in our system goes up as well—while delivery times and costs remain the same."
Roadie says it covers 89% of all U.S. households, is able to make deliveries to 11,000 U.S. communities, and has some 150,000 drivers in its network.
TIPPING POINT?
But is same-day delivery a growth market that has legs, or is it destined to be a niche service used sparingly to solve an emergency need or to satiate the consumer's occasional thirst for instant gratification? And what about the sustainability of it all?
Tom Enright is a London-based analyst for research firm Gartner Inc., where he serves as vice president, global retail supply chain research. He talks continuously with retailers about their needs and wants, and the challenges of changing consumer demands and different fulfillment models in the fast-paced age of e-commerce.
He thinks consumers and retailers are approaching a tipping point that could foreshadow a new era of what he calls "responsible retailing."
"Consumers [still] want to avoid paying shipping if they possibly can," he says. "We've seen for many years now that 70% [of consumers] will take action, such as opting for the slowest delivery [or adding to their order value], to avoid shipping charges." And while studies reveal that many consumers say they want same-day delivery, the numbers for those who actually pay the upcharge are minimal.
Enright says market research also is uncovering an emerging trend: Half of retail e-commerce shoppers are willing to consider a greener shipping option, as long as it still saves them money. "Consumers recognize that one person on a motor bike delivering one package, then another a few days later, is not the best for the environment," he notes.
There now seems to be movement in another direction: incentives that encourage customers to limit the number of online orders that become "one-off" parcel shipments and avoid parcel shipping entirely. Enright notes that consumers respond favorably when offered an extra discount on their online purchase if they agree to pick up the order themselves at a nearby store—which retailers like because consumers who make store pickups almost always buy something else while at the store.
Another emerging trend among consumers is to forgo the day-specific delivery choices, such as same-day or one- or two-day, in favor of another option: delayed delivery. In this case, they're accepting incentives to better plan their online purchases and allow them to be "batched," so the retailer can consolidate several orders and make one larger delivery (instead of several individual ones) at some later point on the calendar, which the consumer can select. Importantly, consolidation also enables the retailer to use fewer boxes and less packaging material—another win for the environment.
The next level of this could find retailers with multiple brands providing incentives to the consumer such that when the consumer shops online at the different brands, the parent brand can consolidate those "across brand" purchases over a period of time and then make one delivery. Think of an online shopper buying a shirt at Old Navy, jeans at The Gap, and a jacket at Banana Republic—and receiving them all in a single delivery. Or a combined North Face and Lee Jeans purchase delivered together, at the consumer's direction, a week from Thursday.
Combining shipments from multiple retailers for consolidated delivery to individual ZIP codes has tremendous upside for reducing shipping costs, says Enright. It's a move away from the traditional model of "I'm a retailer, and I have a one-order shipment for the parcel carrier to pick up" to one where groups of retailers join in consortiums and participate in powerful shared digital freight-management platforms. Purchases are not only consolidated but combined with other of the consortium members' shipments going to the same ZIP codes, increasing route density—lowering the carrier's costs and ultimately, what it charges the retailer.
In this model, once the sale is made, technology directs the merchandise collection among brands or stores, picks the optimal fulfillment site and directs the consolidation, does the rate shopping and routing, and selects the carrier and service requirement. The retailer is now part of a progressive and cooperative digital freight community, where the consortium is combining shipments from multiple retailers for consolidated delivery to individual ZIP codes.
It's engaging consumers and incenting them financially—and with an upside sustainability kicker—to accept longer leadtimes with fewer individual shipments, all of which optimize a retailer's fulfillment efficiency. "That could be a real game changer," says Enright. But it will take a fundamental shift in business culture and practice for it to happen, he believes.
Gartner, Inc.
