When the eCommerce boom hit, brick-and-mortar retail was disrupted. But the shipping and delivery business got a big boost.
Two decades later, the tables have turned.
Now eCommerce players and startups have begun disrupting mainstream shipping and delivery companies they once relied on to ensure timely, trackable package delivery.
And that disruption is forcing the “big three” — FedEx, UPS and USPS — to rethink their respective strategies. Even amid slumping revenues and struggling business models, the executives of those companies have defended their plans for growth, and spoken out about the complicated nature of the logistics model that new players won't easily be able to jump into.
Take FedEx, for example. Its less than stellar earnings report didn’t keep it from suggesting that competitors without an embedded shipping background may struggle to gain the same trust and footprint in the market that an established company like FedEx has.
"Research has indicated time and time again that a uniformed person with proper identification showing up at your doorstep is an important issue for customers,” Mike Glenn, Executive VP of FedEx, said in a conference call earlier this month. “Consistency of customer experience is very critical in that regard. So when you talk about the challenges of building a network, the scale, the input costs, the technology issues and the customer experience required to deliver what customers expect of companies like FedEx and our primary competitors, it’s a pretty tall hill to climb.”
The barriers that emerging players in the shipping industry will face include the “extremely capital intensive nature” and “sophisticated information technology,” said Glenn, noting that it won't be easy to overcome.
Little comfort perhaps at a time when FedEx posted a net loss of $895 million on a revenue of $12.1 billion.
Now, Glenn didn’t quite go so far as to point any specific fingers, but it could be more than an interesting coincidence that his statement came during the same week the news surfaced about Amazon's possible consumer-powered delivery service. Amazon hasn't publicly confirmed its plans, but multiple media reports suggest that the eCommerce giant might be looking to slice off some of its extra delivery costs by paying people to deliver packages instead of traditional carriers.
Sort of why they use to enlist the help of the taxpayer-funded, money-losing USPS to help it deliver packages, including on Sundays.
Most estimates peg Amazon's delivery figure to hit about 3.5 million packages a day, which makes for a pretty big hurdle for them to clear if it had designs on nixing traditional shippers from the mix altogether. What's more likely, of course, would be using consumers strictly for packages that get delivered in locations with distribution centers.
At a time when Amazon is booming in sales — but hard pressed to turn a profit – that tackling the shipping expense could be part of its ticket to turning profitable again.
Shipping On Demand
Consumers want what they want when they want it and used to be a-OK with a 5 to 7 day delivery window as long as it was free. Amazon’s one-hour shipping in some markets is all about scratching that consumer itch, and consumers expect that to be free, too.
Amazon isn’t alone in this pursuit, as Walmart has upped its eCommerce game by testing an unlimited shipping pilot called ShippingPass, which would cost subscribers $50 a year, and would allow those customers to have any item shipped for free in less than three days.
Outside of subscription models — which may soon become the next trend — for the eCommerce shipping market, there’s always the question of how the logistics market can realistically keep up with rising shipping costs, while keeping the consumer expectation that shipping will be free. That can put pressure on margins to be sure.
Amazon isn't the only player who could disrupt the shipping and delivery space. Uber seems to want a piece of that logistical pie, too.
The service hasn't officially launched, but in April, Uber announced the launch of its same-day retail delivery service called UberRUSH. UberRUSH initially launched as a package delivery pilot in NYC to help consumers get something delivered across neighborhoods in a timely manner, but more recent reports indicate Uber wants to sneak its way into becoming a delivery service for merchants.
How eCommerce Gave UPS A Boost
While FedEx has taken a hit in its earnings, UPS has managed to stay afloat with its role in the eCommerce delivery market. During its first quarter earnings, it managed to post a profit of $1.02 billion, which was a 10.5 percent increase from the quarter a year prior. UPS also posted a Q1 revenue of $6.36 billion, a 5.3 percent increase. An increase in online retail has been a particular high point for UPS, which has shifted its business model to appeal to the eCommerce boost in recent years.
“Another great example of a growth opportunity for UPS is online retail. To strengthen our position as the eCommerce shipper of choice, we are expanding the access point network, our unique network of retail locations that both improves the consumer's experience and provides better stop economics,” UPS CEO David Abney said during the company’s earnings call with analysts.
What UPS has done that has helped to shift its profit model is change how it charges for ground packages. Instead of relying on weight to price the packages, UPS now prices based on the size of a box. This plan encouraged eCommerce sites and online merchants to use smaller boxes, and for those which didn’t, they paid the extra costs.
“[eCommerce profitability] is a big priority for us, and it’s a combination of product design, improved convenience, reduced costs and some revenue management,” Kurt Kuehn, UPS’ CFO said in an interview. “It’s not our goal to just increase costs to customers. It’s to have a win-win where they reduce their materials, expense, and we get to reduce our operating expense.”
While UPS managed to post positive results to kick off 2015, USPS has fallen into the same trap as FedEx. USPS' most recent quarterly earnings report showed a quarterly loss of $1.5 billion in its second quarter, and that's on a rising revenue of about $223 million on a $16.9 billion total.
Change In Shipping Culture
To help set itself apart, the USPS has been testing new digital service models, and ramping up its delivery models — which includes Sunday package delivery and grocery delivery in four cities. It has also been testing out a Metro Post same-day delivery service.
Ironically, as the USPS has been increasingly disrupted by the startup culture, the postal delivery service has attempted to operate more like a startup than a two-century-old former government agency. The USPS has also recently implemented end-to-end monitoring of mail and packages, smarter automation in mail-processing facilities, and the dynamic delivery routing.
“Test it and fail, and fail fast, but test it,” USPS Chief Information Officer Jim Cochrane said in an interview. “That’s a change in our culture.”
Outside of eCommerce giants like Amazon looking to shake up the shipping market, or growing startups like Uber, the major shipping companies also face increased competition from even more specialized startups like Shyp and ShipBob. They join the list of on-demand shipping services that are attracting more small business customers who are seeking less expensive shipping options.
In April, ShipBob picked up a million-dollar seed investment, which will help the Chicago-based company launch its service this summer in Brooklyn, where it aims to help small businesses such as antique stores and craft stores ship their goods to customers. While Shyp is focused on businesses with occasional deliveries who fit more into the on-demand needs, ShipBob focuses on business customers who will provide a steadier stream of shipments.
No wonder the traditional shipping players are having to disrupt their own models. Between keeping up with the emerging startups that want to prove they can do it better, faster and cheaper, eCommerce giants like Amazon, and market disruptors like Uber — FedEx, UPS and the USPS have steep competition.
FedEx's Glenn suggested the latest players looking to join the shipping space have a "pretty tall hill to climb," and perhaps he's right. But that doesn't mean FedEx and the other traditional shipping companies don't have the same hill to climb.
The question is: Who's going to get to the top first?