- With the rise of e-commerce, the revenue mix for parcel delivery is shifting from businesses to the consumer.
- Growth in residential packages helps UPS and FedEx volume but challenges profitability.
- If Amazon succeeds in disintermediating UPS and FedEx, other large shippers will follow.
Recently, Amazon announced that it will partner with the United States Postal Service to deliver goods to its Prime subscribers on Sundays. The company will launch the program in cities to minimize operating losses, but the spread of Amazon’s warehouses across the country ensures that more and more customers will have Sunday delivery as an option. As Dave Clark, Amazon’s president of customer service, stated, “We’re excited that now every day is an Amazon delivery day.”
Until now, the Postal Service and the parcel companies – UPS and FedEx – have avoided Sunday delivery, due to higher operating costs and weak business demand. But, with the rise of e-commerce, the revenue mix is shifting from businesses to the consumer. Today, over half of UPS’s holiday volume is to residences, up from 30% 10 years ago. These packages are less time-sensitive, smaller, and lighter than business shipments, and consequently generate less revenue.
To combat this, UPS has improved the productivity of its ground network. For example, the company enhanced its route planning through a telematics system, leading to fewer miles driven and lower fuel consumption. Also, the My Choice customer interface has resulted in a decline in redeliveries, which can dramatically increase operating costs.
Further, the parcel carriers and the post office offer “postal injection” to online retailers: UPS and FedEx deliver packages from a shipper’s warehouse to the closest post office, and the mail carrier provides the final mile delivery. For this product, both parties benefit, as the parcel companies avoid the most expensive portion of a delivery and the postal service increases its utilization, as mail trucks pass every address in the United States daily.
While just 3% of revenue, Amazon is UPS and FedEx’s largest customer, and growing quickly, as the 46% jump in Cyber Monday revenue proved. But, Amazon wants to serve its customers directly. Whether a brilliant publicity stunt on 60 Minutes or a serious effort to challenge the status quo, the “Octocopter” for same-day delivery cuts parcel companies out of a growth market. In fact, Amazon already delivers groceries in Los Angeles and Seattle, and now uses its own trucks for Sunday deliveries in London.
The sharp increase in e-commerce shipments is a mixed blessing for the parcel carriers. The shift to online has supported volume growth, but profitability suffers without corresponding productivity gains. More importantly, if Amazon is successful in vertically integrating delivery, others will follow and deprive UPS and FedEx of a significant engine of growth.