Shippers back in the driver’s seat as parcel market growth softens
A number of factors are conspiring to tap the brakes on two years of accelerated, pandemic-driven growth in parcel volumes. That means that unlike last year, shippers in 2022 are finding ample capacity and competition for their parcels.
Gary Frantz is a contributing editor for DC Velocity and its sister publication CSCMP's Supply Chain Quarterly, and a veteran communications executive with more than 30 years of experience in the transportation and logistics industries. He's served as communications director and strategic media relations counselor for companies including XPO Logistics, Con-way, Menlo Logistics, GT Nexus, Circle International Group, and Consolidated Freightways. Gary is currently principal of GNF Communications LLC, a consultancy providing freelance writing, editorial and media strategy services. He's a proud graduate of the Journalism program at California State University–Chico.
For those who remember the original Monday Night Football broadcast crew of Frank Gifford, Howard Cosell, and Don Meredith, when one team got so far ahead there was no doubt they’d win the game, Meredith would break into that old Willie Nelson favorite “Turn out the lights … the party’s over.”
Well, for the parcel express market, as pandemic-driven demand wanes, the 2022 peak season staggers to a close, and an uncertain 2023 looms on the horizon, that classic lyric seems to have found a new home.
Led by FedEx reporting an unexpectedly large miss in its September earnings call, the nation’s parcel express carriers are adjusting to a new post-pandemic reality. They’re dealing with an uncertain economy, persistent inflation, higher energy costs, shifting consumer spending priorities, and weaker-than-expected e-commerce traffic—all of which are driving slower growth and creating excess capacity.
THE TABLES HAVE TURNED
As the upshot of all that, “this year’s peak season put the shipper back in the driver’s seat,” says Satish Jindel, president of consulting and parcel data analytics firm ShipMatrix. Using ShipMatrix’s demand-supply model, Jindel predicted in September that this year’s peak season demand would hit 92 million parcels per day. Yet as peak season moves along, he’s scaling back those projections, noting that it now appears the market would be hard pressed to reach 90 million.
Some carriers continued to add capacity going into the peak, including the U.S. Postal Service (USPS), which upped its capacity to 60 million parcels per day from 53 million. Collectively, Jindel’s analysis estimated that the industry had excess capacity for this peak season of some 18 million parcels per day, leading to financial challenges for carriers—and a potential windfall for savvy shippers.
“The tables have turned,” Jindel notes, adding that the new status quo will require some adjustment on the part of shippers. “Because shippers have not been in the driver’s seat for two-plus years, they will face new challenges driving a new car, because the car is different now in numerous ways.”
By different, he means market practices and other changes that shippers need to consider. Among those: the impact of carriers assessing multiple additional surcharges; the shifting of some fuel surcharge amounts into base pricing; the rise of alternative parcel carrier options to the “Big Two”; and an aggressive Postal Service working to rationalize its operations and capture more parcel market share.
Jindel cites one other factor that has influenced peak volumes, especially late in the season: Amazon Prime Day.
“Amazon already had a Prime Day in October,” he notes. “That pulled forward retail sales into October from the normal peak. Consumers will already have spent that money,” partly because they are ordering earlier to avoid late-season missed deliveries like last year’s, he says.
“Those orders, along with other retailers who have advanced holiday sales offerings even earlier in response, will blunt retail sales later in the year,” Jindel believes. “And with most of those packages moving in Amazon’s network, that will further impact peak volumes for FedEx, UPS, and USPS’s door-to-door services. So they will feel the pain from those e-commerce sales being sucked into October instead of happening later in the year.”
ONE TREADMILL IS ENOUGH
Helane Becker, a long-time industry analyst for Cowen & Co. who covers the airlines and parcel carriers, recalls how in 2020 and 2021, cargo company executives were talking about how they were dealing with volume levels once projected for 2025.
Not anymore. “So, by definition, if you pulled forward four to five years’ worth of growth [into one or two years], at some point, it is going to slow. It’s inconceivable that you are going to see 40% growth every year,” she says. Becker notes as well that consumers seem to have “kept their wallets in their pockets,” as more of their weekly paycheck goes to increasingly expensive food, fuel, and utilities, and as other spending once devoted to discretionary goods shifts to services.
“Once you have your treadmill or stationary bike or whatever you bought for your home during the pandemic, you really don’t need to buy another one,” she notes.
As for parcel carrier strategies for dealing with a shifting market, she observes that coming into peak season, “FedEx invested in and prepared for a level of volume” that did not arrive. In response, FedEx is “hitting the pause button, focusing on consolidating operations and cutting costs, then allowing [slower] growth to catch up to the facilities [it] has.”
UPS, on the other hand, has been focusing on “revenue quality” and, in Becker’s view, has been sounding the alarm on a slowing parcel market since earlier this summer.
In her experience covering both companies for many years as an industry analyst, Becker has observed that “FedEx has always thought of investing to stay ahead of growth. UPS always invested to catch up with growth.”
REGIONAL PARCEL OPTIONS EXPAND
Market makeup and capacity dynamics also are shifting due to the impact of Amazon’s now operating its own parcel delivery network, along with the rise of regional parcel carriers. They provide an often-attractive option to shippers, who are increasingly carving out some of their parcel volumes to give to regional players instead of putting all their package freight into one or two big national buckets.
One example can be found in two of the largest regional parcel network operators: East Coast-based LaserShip and West Coast-based OnTrac. Last year, LaserShip agreed to acquire OnTrac in a $1.3 billion deal. Now the two companies are in the process of expanding operations as well as launching connecting transcontinental services among points in their two primary regions, says Josh Dinneen, LaserShip’s chief commercial officer.
While it’s not at the level of the past two years, Dinneen says, 2022 definitely is experiencing a peak season. “No one is canceling Christmas.” But is demand softer? “All signs point to yes,” he says.
Nevertheless, he believes that there is excess capacity for “millions of packages,” which is providing shippers with better options for securing capacity at competitive rates.
Dinneen emphasizes that there is still profitable growth to be had in the parcel business, particularly within the regional markets, citing their lower cost structure and the ability to provide consistently good service. And despite weakening demand, LaserShip and OnTrac haven’t put the brakes on plans to invest in their network.
Dinneen says they are spending more than $100 million this year on expansion. The company in July launched transcontinental service between major hubs in Southern California; New York City; Columbus, Ohio; and Reno, Nevada. It just finished construction on a new automated sort center in Columbus. It will soon open a new, fully automated sort center in New Jersey, doubling its capacity to serve Eastern Seaboard customers.
Lastly, by year’s end, LaserShip will have moved into new, larger facilities in Charlotte, North Carolina, and Nashville, Tennessee. A Texas expansion with new sort hubs opening in Dallas, Austin, San Antonio, and Houston is on the drawing board for 2023.
The market, however, remains in a somewhat fragile state, facing pressures and challenges from all sides.
“Everyone’s cost of labor has increased materially,” Dinneen notes. “Amazon has announced another warehouse labor wage increase. The challenges will be labor inside the four walls, the costs of moving packages, securing sufficient rate increases, and keeping a consistent balance between capacity and demand.”
SHIPPER TACTICS GETTING MORE SOPHISTICATED
At the same time, shippers, out of necessity, are becoming more sophisticated about their parcel tactics and strategies, leveraging access to inexpensive, powerful new technology tools; better, more timely data; and far more accurate visibility into costs and alternatives.
“Talking to our clients, they want more reliability and more speed,” says Gaston Curk, chief executive officer of e-commerce shipping specialist OSM Worldwide. “Amazon has changed the experience for the end consumer. Customers want more predictability, [enhanced] visibility, better tracking.” He notes that shippers are concerned about market disruption going on today, from a slowing economy to a potential recession and other issues on the horizon, including “UPS entering negotiations with the Teamsters next year on a new labor contract. They’re afraid to put all their eggs in one basket,” he says.
He also cites the evolution of the U.S. Postal Service, “which is transforming as we speak,” Curk notes. “Traditionally, they were a letter carrier. Now they are evolving to become more competitive [in parcels and packages] with UPS and FedEx, as a more reliable and cost-effective option.”
GIRDING FOR THE LONG TERM
Adds ShipMatrix’s Jindel: “Keep in mind that the Postal Service has a monopoly on first-class mail and that gives them a monopoly on your mailbox”—and it’s a federal crime for anyone else to use that consumer’s mailbox. “They can deliver a letter and package at the same time,” and most of the time, they don’t have to take a package all the way up to the front door or porch, like other parcel carriers. “A letter carrier can make up to 300 stops a day. On average, UPS and FedEx can get to 200 stops a day. That’s a huge cost advantage for the Postal Service.”
The softer market and demand/supply imbalance is not a short-term phenomenon, Jindel believes. “It’s not temporary; it will continue well into 2023.” Shippers, he says, “should leverage this opportunity for more reasonable prices and for reliable capacity and consistent service. The [pricing] pendulum has swung back to the shipper. Enjoy it while you can.”
Nearly one-third of American consumers have increased their secondhand purchases in the past year, revealing a jump in “recommerce” according to a buyer survey from ShipStation, a provider of web-based shipping and order fulfillment solutions.
The number comes from a survey of 500 U.S. consumers showing that nearly one in four (23%) Americans lack confidence in making purchases over $200 in the next six months. Due to economic uncertainty, savvy shoppers are looking for ways to save money without sacrificing quality or style, the research found.
Younger shoppers are leading the charge in that trend, with 59% of Gen Z and 48% of Millennials buying pre-owned items weekly or monthly. That rate makes Gen Z nearly twice as likely to buy second hand compared to older generations.
The primary reason that shoppers say they have increased their recommerce habits is lower prices (74%), followed by the thrill of finding unique or rare items (38%) and getting higher quality for a lower price (28%). Only 14% of Americans cite environmental concerns as a primary reason they shop second-hand.
Despite the challenge of adjusting to the new pattern, recommerce represents a strategic opportunity for businesses to capture today’s budget-minded shoppers and foster long-term loyalty, Austin, Texas-based ShipStation said.
For example, retailers don’t have to sell used goods to capitalize on the secondhand boom. Instead, they can offer trade-in programs swapping discounts or store credit for shoppers’ old items. And they can improve product discoverability to help customers—particularly older generations—find what they’re looking for.
Other ways for retailers to connect with recommerce shoppers are to improve shipping practices. According to ShipStation:
70% of shoppers won’t return to a brand if shipping is too expensive.
51% of consumers are turned off by late deliveries
40% of shoppers won’t return to a retailer again if the packaging is bad.
The “CMA CGM Startup Awards”—created in collaboration with BFM Business and La Tribune—will identify the best innovations to accelerate its transformation, the French company said.
Specifically, the company will select the best startup among the applicants, with clear industry transformation objectives focused on environmental performance, competitiveness, and quality of life at work in each of the three areas:
Shipping: Enabling safer, more efficient, and sustainable navigation through innovative technological solutions.
Logistics: Reinventing the global supply chain with smart and sustainable logistics solutions.
Media: Transform content creation, and customer engagement with innovative media technologies and strategies.
Three winners will be selected during a final event organized on November 15 at the Orange Vélodrome Stadium in Marseille, during the 2nd Artificial Intelligence Marseille (AIM) forum organized by La Tribune and BFM Business. The selection will be made by a jury chaired by Rodolphe Saadé, Chairman and CEO of the Group, and including members of the executive committee representing the various sectors of CMA CGM.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”