Power to the parcel shipper in 2023
The US parcel shipping picture has completely changed in 2023. We get the outlook for this dynamic market with Josh Dunham, CEO of Reveel
If you were to chart demand and prices in the US Courier, Express, And Parcel (CEP) market over the last three years, it would look like a tsunami, with the wave cresting during the pandemic demand surge, before crashing back down as consumers shifted their spending patterns.
With this much uncertainty and variability in parcel shipping and rates, we sat down to get an inside look into the CEP market with Josh Dunham, CEO for parcel and shipping data and analysis firm Reveel.
A red hot US market cools
The exceptional pandemic-driven consumer spending on physical goods could not last forever. As restrictions eased and people felt more comfortable attending physical events, eating out and going on holiday, consumer discretionary spending swung towards services.
We ran Q1 2022 versus Q1 2023 for the number of packages delivered and we saw a decrease of 10.1%
That dynamic played out in various ways, from falling international shipping volumes and container rates, to gluts of stocks in major retailers’ inventories.
Dunham has seen it too in their market data: “We ran Q1 2022 versus Q1 2023 for the number of packages delivered and we saw a decrease of 10.1%,” marking a further dramatic decline from a Q4 2022 that saw delivery volumes miss expectations.
It’s not just consumer behaviour driving the changing landscape, but the money in their wallets also. High inflation and tightening fiscal policy has impacted real wages and reduced capacity to spend among the US population.
That is why Dunham doesn’t think we have hit the bottom yet for this reverse in CEP volumes: “I think as the economic conditions probably continue to slow down, you're going to see lower numbers going into the latter half of this year as well … I don't think we've seen as low as we're going to see … I don't think there's any doubt about that, it's just a matter of how much,” he comments.
The consumer mindset has really shifted to the point of more and more deliveries
He cautions against becoming too pessimistic though, as the “consumer mindset has really shifted to the point of more and more deliveries,” to home and the US shopper has become far more comfortable with e-commerce in sectors such as groceries. This means demand compared to “pre-COVID levels is going to stay increased. It's not going to go below or even at those levels, it's going to continue to stay higher than that.”
However, Dunham warns that there is a major cloud on the e-commerce delivery horizon in the expected strike by UPS workers. Teamster union members within the carrier’s 340,000-strong workforce voted by 97% in favour of strike action, which would kick in when current contracts expire at the end of July. This could create major disruption across the US parcel network.
Pricing power slips away from the big carriers
While the major shift in demand patterns does mean less purchases and therefore a weaker retail market overall, it does also herald a dramatic shift in the power dynamics in the US shipping space.
For the previous two years, the initiative has been with the major carriers.
During COVID, quite honestly, when you went to negotiate pricing, I mean, gosh, it was brutal, right? It was like a power shift had occurred.
“We always joke around, saying ‘nothing is sure except for debt taxes and then a FedEx and UPS rate increase’” laughs Dunham, but the last two cycles of price rises caught even his jaded eye in this regard. “Historically speaking, they would typically announce 4.9%, but going into the 2022 rate increase, they announced 5.9%, which at that time was really, really high. Then going into this year, they announced 6.9%. The highest we've ever seen.”
Add on additional costs and Reveel estimates that the true increase, on average, for shippers was “10.2% for UPS, and then for FedEx we saw 9.1%,” but in some instances “customers actually had up to a 21% increase,” says Dunham.
“During COVID, quite honestly, when you went to negotiate pricing, I mean, gosh, it was brutal, right? It was like a power shift had occurred.”
That era is now over though.
We've seen the carriers come to the table a little bit more. They are being a little bit more aggressive with their pricing, which is great for shippers
As demand has trended downwards, he says that “we've seen the carriers come to the table a little bit more. They are being a little bit more aggressive with their pricing, which is great for shippers.”
“I think as much as FedEx and UPS would like to increase, I don't think they're going to be able to announce a 6.9% increase going into next year,” he feels.
A more open market?
Indeed, the market heading into this year’s peak season and further out to next year could become even tougher for the big carriers, as “during and even post-COVID we've seen customers be more open to multi-sourcing - essentially using alternate carriers rather than just FedEx and UPS.”
Dunham found during the pandemic that shippers often faced high rates, tougher contracts, and even sometimes being turned down for shipments due to capacity constraints, leading many to get “burned” by the service on offer.
There is now more openness and competition in the market as a result. “We've seen a lot of desire or interest in regional carriers as well as the US Postal Service,” he says.
Then, that business “allowed regionals to invest in their infrastructure, to continue to get better and expand,” further strengthening their presence in many markets and creating the grounds for some consolidation.
While the expansion of services by alternative carriers helps competition, increases capacity and dampens down rates increases, Dunham cautions that companies need to be prepared for some trade-offs to enable it: “You have to be prepared to multi source from an operational standpoint, meaning do you have the technology to be able to do it? Can you support it? Do you have the kind of training in your warehouses and distribution centres to do it?
“The other component of it is the financial side,” he explains, giving an example of a current conversation with a client, where they are “trying to evaluate does it make sense? … What does that do to their discounts with UPS? How much money do they lose? Then to take that a step further, they have a penalty with UPS if their volume drops below a certain amount … So, [what we’re asking] is there enough savings with regional carriers and multi-sourcing?”
The emergence of Amazon in the space is great for shippers overall
For many though, it appears the answer is yes, especially in the context of their pandemic experience, and this appears to herald a more dynamic and competitive CEP market place.
Amazon to take a bigger role?
Regional carriers haven’t been the only ones eyeing up elevated volumes with interest, as Amazon now looks like it is “picking up their shipping arm again” after a brief pause during COVID putting “heavy, heavy investment into their distribution centres”.
While Dunham thinks that “the emergence of Amazon in the space is great for shippers overall” there is a longer-term risk from Amazon’s dominant position for e-commerce search volume, which could be leveraged to gain control over distribution and shipping through their terms of service.
“In order to be an Amazon Prime designated shipper, you've got to have stuff there in two days, so if you're using FedEx or UPS and you don't have a distribution centre close by your customers you're forced to either ship it [immediately] or use an expedited service, which is going to increase your cost by a massive amount.”
This potentially already therefore presents a challenge to meet, but “what would happen if Amazon changed the rule and all of a sudden, rather than it being two-day shipping, now it's one day?” he asks. In that scenario “Amazon's the only one in position to be able to do that effectively,” which would then funnel “shippers into doing Fulfilled By Amazon” and create yet another complex power dynamic for shippers to navigate.
The US CEP market is therefore in a moment of flux, seeing the script flip for the big carriers, the emergence of new players, a potentially problematic strike on the horizon, and a growing Amazon presence. This has brought revitalised competition and more bargaining power, but also a weaker consumer, the shadow of potential disruption and a need to invest to maximise the benefits of a 2023 that is evolving very differently from 2021 and 2022.