FedEx Corp. and UPS Inc. are expected to generate close to $200 billion in combined annual revenue by the end of their reporting years: UPS’s on Dec. 31 and FedEx’s on May 31 of the following year, depending on how the holiday season goes. It’s understandable that a combination between regional parcel service operators LaserShip and OnTrac, which have a combined yearly turnover of $1.7 billion, would not be on the majors’ radar.
The Vienna, Virginia-based company The $1.3 billion purchase of Chandler, Arizona-based OnTrac by LaserShip in mid-October will create the first countrywide carrier built on regional networks. The agreement has sparked a lot of buzz in the realm of last-mile deliveries. It’s also good news for large package carriers who have been dealing with recurring demand spikes, ultra-tight capacity, and FedEx (NYSE: FDX) and UPS (NYSE: UPS) requests to accept increased rates and surcharges, or be volume-restricted, if not cut loose entirely, for the past 18 months.
The partnership is backed by American Securities LLC, a private equity firm with huge means. Will Manuel, a managing director at American Securities and chairman of LaserShip, has great hopes for the company in a delivery world turned upside down by the COVID-19 outbreak. Last month, Manuel backed it up by appointing Mark Holifield, the former CEO of Home Depot Inc.’s (NYSE: HD) logistics and supply chain divisions, as the combined entity’s CEO.
Before the coronation, though, some perspective is required. According to consultant Shipware LLC, the LaserShip-OnTrac company accounts for barely 3% of FedEx and UPS combined volume and 1.5 percent of combined revenue. Regional carriers, such as LaserShip and OnTrac, are already at or near capacity, and it’s unclear how much of FedEx’s and UPS’ share they could take while still providing adequate service, according to Shipware. “Even if [LaserShip/OnTrac] doubled their volume capacity — which they won’t be able to accomplish for a long time — they’d still be small” in comparison to the behemoths, said Rob Martinez, co-CEO of Shipware.
If necessary, FedEx and UPS will raise concerns among shippers about redirecting volumes to the merged company, citing inferior technology and the lack of a truly nationwide network capable of scaling to meet shippers’ diverse needs. The big boys’ ace in the hole is their customers’ fear of losing volume discounts if they shift even a little portion of their business. According to Martinez, many FedEx and UPS contracts have exclusivity and early termination clauses, and carrier discounts and refunds are based on volume and continuous exclusive use.
“Try diverting 20% of your traffic to the regionals to save 5% and watch your costs grow 10% on the remaining 80% of the volume that stays with FedEx and UPS but misses out on the maximum revenue incentives,” he said.
Even in aggregate, regional carriers are Lilliputians in the land of the twin giants, according to Kelly Picard, CEO of Hackbarth Delivery Services Inc., a small carrier based in Mobile, Alabama. Nonetheless, cost-conscious e-commerce shippers prefer doing business with regionals because they typically receive better pricing, according to Picard. She added that the regionals are also important as safety valves if FedEx and UPS continue to enforce capacity restrictions.
Regional carriers, according to conventional wisdom, offer competitive rates due to their low overhead. To some extent, this is correct. However, according to Picard, regionals do not cover all ZIP codes in their territory, instead “cherry-picking” those with high volume density and quick travel times. The carriers were able to deliver more products within certain time frames, at lower prices, and with fewer delivery surcharges as a result of this. The shipper benefits from the efficiency achieved by these routes, which explains why the regionals’ price-service proposition might be tempting, she added.
PRIOR TO AND AFTER
For parcel delivery, last year was a “before and after” year. It’s unclear if the jarring changes made regional carriers — and, in particular, the promise of a national network — more appealing. Prior to the epidemic, this did not appear to be the case. Shipware surveyed shippers with a combined yearly package spend of $2.5 billion in 2018. According to the report, 74% of people do not use regional carriers, and only 7% are actively involved with them. Moreover two-thirds of respondents stated they only use FedEx or UPS, and 70% said switching would be too difficult due to operational costs and complexity. In 2018, almost 26% stated they increased their use of regional carriers, with nearly half saying they will do so more frequently in 2019. About a third said they preferred regionals because of their service, but they didn’t save any money compared to UPS and FedEx.
Any impact of the LaserShip-OnTrac combination on UPS and FedEx will be a long time coming. History, on the other hand, serves as a warning tale. According to SJ Consulting, a consultant, UPS controlled 64 percent of pick-ups in the US ground parcel industry in March 1998, which was dominated at the time by business-to-business (B2B) deliveries.
FedEx completed the acquisition of Caliber System Inc., whose Roadway Package System (RPS) arm had been quietly nibbling at UPS’ competitive position for 13 years, in October. FedEx established a formidable U.S. ground-delivery arm, known as FedEx Ground, to fight UPS, using the comparatively modest RPS as a springboard.
According to SJ statistics, UPS’ share of the global ground delivery market had plummeted to 35% by 2020. FedEx, which had a 9.8% market share in 2000, has grown to 20.4 percent by 2020, according to the company’s figures. The growth of e-commerce fulfillment, which shifted deliveries to the more competitive business-to-consumer (B2C) segment, and the introduction of Amazon.com Inc. (NASDAQ: AMZN) as a delivery player have skewed the market share shifts. Since launching its delivery network seven years ago, Amazon has seized a major share from UPS. Since its ground unit arrived, no one can deny that FedEx Ground has done the same.
UPS considered at the time that RPS was too minor to merit any attention, according to Satish Jindel, the founder and CEO of SJ and a FedEx adviser on the Caliber transaction. UPS has learned not to repeat such conduct if and when a new model enters the field, according to Jindel, after more than two decades of share loss in its core business.
According to Jindel, the FedEx-UPS duopoly existed in the B2B world, where delivery times, routes, and behaviors were predictable and basic. Jindel dubbed e-commerce and B2C fulfillment “31 varieties,” implying that there are numerous ways to skin the cat. In this scenario, FedEx and UPS are far from perfecting deliveries, and that is where the merged entity and regional carriers may make gains, he said.
