Parcel Delivery: FedEx and UPS Facing New Challenges

Introduction

For many years, FedEx and UPS had a duopoly in the U.S. parcel delivery market. This allowed them to make substantial profits with little competition. However, the landscape is changing, with companies like Amazon and Walmart providing strong competition, especially in the B2C delivery market, which is overtaking the B2B market that FedEx and UPS were built to serve.

UPS Earnings Release and Market Reaction

The second-quarter earnings release from UPS on July 23 caused a stir among investors, leading to a 12% drop in the stock within minutes of the earnings call. The surprise was the revelation that UPS customers are shifting from Air Express to Ground service and from Ground to the cheaper SurePost, which involves using the U.S. Postal Service system for final-mile delivery.

Changes in FedEx and UPS Services

These changes should not have been unexpected if the market had been paying attention to what the carriers were saying in prior earnings calls. Both FedEx and UPS have been promoting their improved Ground service, which they claimed offered faster transit times than their competitors. However, this also created competition for their own Express and Deferred services.

Decline of Express and Deferred Volumes

The decline in Express and Deferred volumes actually began more than two decades ago with the acquisition of RPS by FedEx and the industry's guarantee of day-definite ground service. Additionally, with the growth of e-commerce over the past 10 years, 65% of all domestic parcels are now being delivered directly to consumers. This has led to an increase in last-mile deliveries being done by smaller companies, which operate with a lower cost structure.

Impact of Private Fleets by Major Retailers

Another significant development is the growth of private fleets by major retailers. For example, Amazon delivers over 22 million parcels per day using drivers employed by its network of delivery service partners. Walmart is also following a similar strategy.

Shift in Parcel Travel Distances

With the push to fulfill online orders from facilities closer to the consumer, the percentage of parcels traveling shorter distances has increased, while those going longer distances have decreased. This shift, along with the rollout of cheaper services, indicates that consumers are willing to accept slower delivery for a lower price.

Future of Parcel Delivery

Given these significant changes, by the 2026 peak season, the private fleets of major retailers and local companies are expected to deliver more parcels to residences than FedEx and UPS combined. This could amount to more than 40 million parcels per day, and FedEx and UPS need to prepare for this future.

Bottom Line

The parcel delivery landscape is changing dramatically, with FedEx and UPS facing new challenges and competition. The rise of e-commerce, the growth of private fleets by major retailers, and changes in consumer preferences are all factors contributing to this shift. It will be interesting to see how FedEx and UPS adapt to these changes. What are your thoughts on this? Feel free to share this article with your friends and discuss it. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.