Editor's Note: How have rate increases by UPS, FedEx Ground and the U.S. Postal Service affected the industry's top consolidators? We posed this question to consolidator companies, and here are their responses.
Increased Volume
Overall, we have observed an increase in our B2C package volume since UPS and FedEx increased their rates in January. On the surface, the UPS rate increase was 3.5%, but the reality for B2C shippers turns out to be more on the lines of five to eight percent once the residential accessorial fees have all been assessed.
Shifting volume to consolidators has proven to be a smart move on the part of shippers for several reasons. Consolidators have been able to combine this new volume to existing volume, which in turn allows them to provide even better service to customers.
Additionally, with UPS facing the possibility of a labor strike or slow down in August, UPS customers are at risk of having to scramble for a reliable logistics provider at the same time as everyone else. Service disruptions make it hard on the entire industry, not the least of who are the shippers themselves who may fall victim to predatory pricing.
Consolidators are poised to absorb a large share of the displaced B2C volume should the eventuality of a strike occur. Customers that plan ahead and move their volume 60 to 90 days ahead of the anticipated strike date will realize a savings in the area of 25% to 28%.
Overall, the Postal Service's proposed June 30 rate increases remain favorable for consolidation customers. One marked change is the inclusion of Delivery Confirmation as part of the standard package rate. This will allow customers to provide the consumer seamless Web-based tracking on each and every package as it moves through a consolidator's network and on through the Postal Service system. Also, the increases in Priority Mail charges will encourage shippers who rely heavily on this service to reconsider the viability of shipping their merchandise ground, possibly seeking the services of a consolidator.
John Campanelli, President, RR Donnelley Logistics
Added Flexibility
In a macro sense, regular rate increases by UPS, FedEx Ground and the U.S. Postal Service have created a much more segmented market, thus creating more competition among these and other shippers. And that competition is good for the shippers' customers, all of their customers' customers and even the shippers themselves.
As shipping rates increase across the board, carriers can focus more on their particular niches to provide the best possible services and values for those niches. The result is more options for all customers. For example, a customer could use one carrier for its overnight packages, another carrier for its commercial packages and yet another carrier most likely a consolidator for its residential packages. That same customer could also choose to divide its use of carriers based on the carriers' strengths in other areas such as package weight or destination (e.g., rural vs. non-rural), which often bring surcharges into the picture.
In general, as the Postal Service rates increase, fewer numbers of UPS and FedEx clients transfer work to consolidators based solely on rates. This scenario forces consolidators to be more flexible with their current and prospective clients, who understandably are making more requests for unusual and unique solutions (e.g., shipping only a specialized segment of parcels based on weight, delivery zones or geographic areas). Collectively, this results in offering multiple levels of service, and it breeds creativity and an industry continuously on the cutting edge.
As part of its recent rate cases, the Postal Service has also increased work-sharing discounts for consolidators that enter packages into the postal system at the most downstream points possible: destination delivery units or local post offices. This allows shippers to become more competitive and more attractive to companies that desire shorter transit times (i.e., in-home delivery) for any segment or percentage of their businesses. At the end of the day, this spells more options and better value for any company that needs to ship packages from point A to point B.
Gavin Tierney, Corporate Pricing Manager, Parcel/Direct
An Attractive Alternative
Each year, UPS and FedEx have a rate increase that directly affects large parcel shippers. Often, these new rates also contain additional hidden costs like rural surcharges, fuel surcharges and extra attempted delivery charges. When added to pricing that includes ground or air and service times from three days to overnight, the shipper must continually monitor pricing and service to meet its delivery commitments at a reasonable cost. It is because of these continual rate increases that the Postal Service can offer shippers an alternative to UPS and FedEx.
Until the work-sharing discounts started in 1999, most postal parcel shippers had no delivery expectations and shipped all time-sensitive packages with other private transportation companies. With the introduction of work-sharing discounts in 1999, there came a change in the perception of many parcel shippers about time-sensitive parcels. Many consolidators receive parcels daily. The packages are sorted, barcoded and manifested before they are delivered into the DDUs by critical entry time, which is normally around 7:00 AM. A percentage of these packages are delivered in home the same day. For the first time, the Postal Service can offer large parcel shippers much better rates than UPS or FedEx and very similar delivery times when utilizing a third-party consolidator.
As the Postal Service enters 2002 with a rate increase, there has been no proposed increase in DDU rates. This is significant for DDU delivery companies because the cost of capital expenditures necessary to sort, manifest and truck packages to thousands of DDUs every day is high. By keeping these postal rates down, it encourages partners to make investments of time and equipment into the future. Raising DDU rates would clearly be a deterrent to any future investment.
Postal consolidators have a bright future with large parcel shippers because of annual increases they have come to expect from the likes of UPS and FedEx. This bright future could become clouded should the Postal Service decide to change its current system of offering work-sharing discounts to maximize the postal system. This seems unlikely in the current market as more and more parcels are delivered directly into the DDUs. The Postal Service can now concentrate on what it does best.
The Postal Service's strength is completing the last mile of the delivery cycle and getting mail and parcels to every home in
Mike Sullivan, CEO, PFI
Rapid Growth
Our answer can be summed up in two words: they've helped. The rate increases, either recently imposed or currently planned by others in the parcel transportation industry, have not only affected our business, they have affected shippers and consumers alike.
It has taken many years for the cost of transportation for industry competitors like UPS and FedEx to reach a point where the shipper really feels the pinch. Companies that ship to residential locations are burdened with trying to meet customer expectations at a cost that doesn't keep those same customers from buying in the first place. This is difficult to do when shipping and handling costs can be as much as the sale price of the item itself. The higher the transportation cost, the higher the shipping and handling cost. That higher shipping and handling cost can easily lower the sales volume. A lower sales volume requires reductions in corporate spending and higher product prices, which can reduce sales. Before you know it, a company can be in a death spiral, fighting for its life.
Months before the recent rate increases of FedEx and UPS, the rules were already being rewritten as a result of the September 11 terrorist attacks. Shippers were already looking hard at bottom line profitability and end consumers were looking harder at their personal budgets. Do I need to buy that new sweater that costs 25% more because of the name brand, or will this one do? Does this brand of sunglasses really work better than these that are $30 cheaper? Does all that tracking and tracing really add enough value to cost 30% more? Is it really worth $10 more to get it delivered on Saturday through this carrier, or will that carrier that doesn't charge extra suffice? These decisions were already being made all over the country, and the general consensus was price matters now more than ever! Throw in another annual rate increase, and those that weren't already looking at their bottom lines started looking.
While it is absolutely true the Postal Service is also raising rates this year, the increases are marginal in the Parcel Select service offering. These modest increases have widened an already lucrative margin between competing residential ground services and Parcel Select. Parcel consolidators have benefited from this widened gap. There is, however, a balance to this good news. The increasing margins have generally created a lucrative market that new players are entering into rapidly. These new players increase overall competition, which is forcing downward price pressures, marginalizing profits in many markets.
Shippers can benefit from this new competitive marketplace and can realize savings in the shipping department. In some cases, the savings are passed on to their customers or re-invested into new and better ways to do business. Profitability is increased, and the business grows. End consumers can benefit from the lower costs as well. Whether it is from lower shipping and handling charges or from lower sale prices of merchandise because of better overall margins for the shipper, consumers can win, too.
Specifically, our business is growing more rapidly as a result of price increases in the marketplace. The other benefits outlined demonstrate a solidifying, stabilizing force that should promote steady, long-term growth in the industry as a whole.
John Fluty, Vice President of Sales, DDU Express
