Parcel market dilemma: Excess capacity with stagnant demand

By Satish Jindel

The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.

The parcel market is facing a supply-demand imbalance of the type and magnitude not experienced in the past 30 years or longer. Given the stagnant demand and no new initiative on the horizon to encourage consumers to spend more money on goods, supply will exceed demand for the next three or more years.

It started with the sudden COVID-19 pandemic-related surge in demand during 2020 and 2021, which led to an expansion of capacity among the three national carriers: UPS Inc., (NYSE: UPS), FedEx Corp. (NYSE: FDX) and the U.S. Postal Service. Then, with venture capital and private equity funds flush with hundreds of millions of dollars, and the craze for investments in any enterprise claiming to be in the last-mile business, a lot of new players entered the market.

In addition, seeing Amazon.com Inc. (NASDAQ: AMZN) grow its last-mile delivery network at a dizzying rate, other retailers including Walmart, Target and American Eagle Outfitters started building their own private last-mile delivery capability.

So with just the three national carriers and Amazon’s private fleet, industry capacity exceeds 110 million parcels per day. As of June 2023, the market demand was about 70 million parcels per day. With capacity far in excess of demand, the parcel market is in for a very uncertain future.

Then with the explosive growth of deliveries to residences during the pandemic, the carriers  leveraged their fixed infrastructure of sortation centers to offer delivery on Saturdays and Sundays, which further increased capacity by about 30% at relatively low cost. (One way to rapidly eliminate excess capacity is by eliminating delivery service on Saturdays and Sundays.)

Economics 101 would suggest that such spread between demand and supply should lead to price reductions. That would be wishful thinking on the part of shippers since a reduction in carriers’ shipping charges does not increase demand.

On the contrary, with UPS facing higher labor costs and FedEx experiencing costs related to integration of the express and ground networks and demands from its shareholders for higher returns, they are not inclined to lower their shipping charges.

With a tentative labor contract, UPS gains the ability to deliver on the weekends. In addition, it has to add more full-time jobs, and a senior package car driver’s wage and benefits will increase to $170,000 per year by 2028. So, unless UPS shows discipline, these factors could lead to targeting market share gain with more capacity to lower its cost per package.

Since the pandemic ended, while capacity has expanded, demand has been stagnant. First, consumers started returning to stores. Second, pure online retailers like Warby Parker, Wayfair and Bonobos, faced with losses from online sales, are now adding stores.

And while online retail got a huge boost from Amazon’s free shipping, which was soon embraced by other retailers, it is no longer a novelty. On the contrary, many retailers are now raising their order value for free shipping. While sales of online orders may increase, a higher dollar value for an order actually results in a decrease in parcel volume since it converts two or more smaller parcels into one larger one.

Shippers will have to look to Amazon to disrupt pricing in the parcel industry just as it did in brick-and-mortar retail. With huge backhaul capacity to handle a few million parcels per day, its recent re-introduction of door-to-door parcel service is being targeted at the most profitable small and medium-size customers of FedEx and UPS.

Another wild card for pricing change could come from the Postal Service, which has capacity to handle 60 million parcels per day while actually handling only 26 million per day. If it elects to target market share gain, it could do so at a rapid pace by giving attractive rates to consolidators like DHL eCommerce, Pitney Bowes Inc., OSM Worldwide, and others. That would help the Postal Service attract more business to consumer parcels by leveraging its monopoly on placing lightweight parcels in the mailboxes for better protection from weather and theft.

ShipMatrix Inc. data on hundreds and millions of parcels shows that over 60% of parcels delivered to residences are under 5 pounds and can be placed inside a mailbox. Since the cost of delivering an 8-ounce package to a mailbox is no greater than a large envelope of the same weight, the Postal Service could lower its rates for such parcels, which would force its competitors to respond or lose that volume.

(Satish Jindel is president of ShipMatrix Inc., a consultancy)

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