Historically, brick-and-mortar retailers, e-commerce businesses, and other small parcel shippers have had limited leverage in negotiating small parcel rates in a supply market that behaved as a duopoly. Current industry dynamics have shifted market power to shippers, and the Ankura Performance Improvement Practice has been successfully helping clients reduce costs by 15% to 20%. Shippers should act quickly, as we estimate the window of opportunity may close in 6-12 months.
Finally, Shippers Have the Upper Hand!
While growth has moderated slightly from the dramatic increases seen during COVID, consumer expectations for fast, inexpensive service continue to remain high.
Expansion of Amazon's capacity and services has taken share from UPS and FedEx creating excess capacity in their networks.
In addition to Amazon, the emergence of new last-mile delivery services has taken additional volume, intensified competition, and is providing alternative partners for shippers.
Key Industry Developments
- Excess capacity and increased driver availability, a major shift from the peak shipping levels experienced post-pandemic, is driving increased competition in the industry.
- Hidden tariff changes, such as expanded delivery area surcharges, increased fuel surcharges, and other fees are being implemented by UPS and FedEx to boost declining revenue without appearing to increase rates.
- Improved AI data tools and delivery management capabilities drive more efficient shipping, through improved mode/freight class selection and make it easier for shippers to optimize with multiple suppliers.
- Possibility of autonomous vehicles and drone delivery could transform the industry over the next few years.
Key Events Driving the Industry Dynamics
- UPS's highly publicized union negotiations started in Dec
'22, which narrowly averted a strike in July '23 which
would have been the U.S.'s largest in 60 years. The new
UPS contract put $30B of new money in secured wage hikes, more
full-time jobs, and workplace improvements for Teamsters. It was
approved in August '23.
- FedEx saw the potential for disruption from the 2023 UPS
contract negotiations and actively positioned itself as a reliable
alternative by urging shippers to switch due to a potential UPS
strike. Many shippers that were previously exclusive to UPS
hedged by routing a portion of volume through FedEx.
- Amazon has shifted its focus from building its infrastructure
DCs and trucking to two key evolving dynamics in logistics: (1)
Adoption of a data-first strategy and (2) replacing manual data
integration methods with machine learning (ML) automation to drive
increased efficiency.
- Fueled by the increase in retailers with ship-from-store
capabilities, alternate last-mile carriers are leveraging their
network to expand their services to traditional last-mile delivery.
Some examples: Instacart broadened out from its grocery base,
DoorDash expanded to grocery and convenience, and ShipT supports a
number of retailers beyond their parent Target.
- Walmart has reached $2B in monthly store-fulfilled sales by adding parcel stations to its stores to receive packages from fulfillment centers and deliver to customers' homes via its proprietary Spark Driver program, or other 3rd party services.
Opportunities for Parcel Shippers
Ankura estimates the window for shippers to capitalize on current market opportunities will close in 6-12 months.
Shippers should act soon to:
- Take advantage of the current competitive intensity
by re-bidding contracts and potentially
introducing alternative vendors to UPS and FedEx for some portion
of last-mile deliveries.
- Develop a deep understanding of pricing complexity
to enter "fact-based" negotiations with
full knowledge of how not just rates, but minimum charges and
surcharges impact total costs.
- Evaluate opportunities to leverage capabilities of
alternative last-mile carriers to create additional
competitive tension and reduce costs for certain customer
segments.
- Re-align fulfillment strategy- adjust network shipping nodes, review package sizes, and optimize mode selection to cost-effectively meet consumer expectations.
Ankura Performance Improvement Fundamentals
Ankura's Performance Improvement Team has a proven track record of executing strategic plans to achieve sustainable performance improvement and targeted operating results aimed at maximizing EBITDA, cash flow, and ultimately shareholder value.
Our expertise extends to optimizing distribution and logistics. We work alongside clients to reduce costs and improve efficiency by streamlining inbound and outbound logistics. Our team's hands-on experience ensures cost-effective solutions for transportation modes, shipping rates, and on-time delivery.
Ankura leverages its vast internal resources to assemble the perfect team for each client's unique challenges, guaranteeing optimal outcomes for complex problems.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.