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Parcel Pricing in 2010: The War to Come
by Joe Wilkinson
A change is coming to the parcel market; and it is not one that will be friendly to shippers. As we predicted the UPS/FedEx feeding frenzy to gain the disenfranchised DHL shippers is now over. The remaining US parcel carriers are now waking up to the fact that they now represent a virtual duopoly.
Stifel Nicolaus upgraded both FedEx and UPS on May 20, 2010. Morgan Stanley issued a positive research piece on FedEx the next week. While there are obvious macro-economic and market factors contributing to the carriers’ improved outlooks, there is another, more disturbing, common thread in the analysts’ research. Stifel’s Principal David Ross’ recent piece put it well, “In 2009, because DHL's business was concentrated around a relatively small number of accounts (that had low pricing to begin with), UPS and FedEx were price aggressive to get the volume into their networks. This had a negative impact on yields, but with DHL gone and USPS losing billions/year, we believe FedEx and UPS should show strong yield improvements over the next year or so. ” William Greene of Morgan Stanley said this of FedEx, “... an intense focus on yield mgmt should support better pricing trends in C2010+... “ In other words, UPS and FedEx expect higher per package yields going forward.
These industry experts are saying, in an understated and diplomatic way, what we have been seeing for the past few months. Both UPS and FedEx are changing the rules of the game. Prior to 2003 UPS and FedEx maintained very disciplined pricing strategies. Discounts were offered, but the two competed primarily on service (not on price), thereby maintaining yields for both. When DHL entered the US domestic parcel market in 2003, offering extremely aggressive pricing FedEx and UPS were forced to compete based on price, as well as service. When DHL left the US market in early 2009 prices were kept low due to the intense competition to pick up the DHL volumes. Now that DHL has exited stage left there are no restraining factors left in play.
The parcel carriers’ positions are strong at this point. They know it, and they are positioning themselves to take advantage of it. Shippers are being squeezed. Discounts are falling. Terms and conditions are tightening. What’s more, this situation is not impacting pricing alone. Carriers are using their increased leverage to squeeze shippers in others ways as well. Some interesting things we have seen in the past four months:
- Early termination penalties
- Attempts to separate shippers from consultants
- Higher volume commitments and attempts to force single-sourcing
- Failure to participate in RFQs/RFPs
- Reduced discounts
- Shorter agreement terms
We are poised for the toughest parcel environment in the last ten years. Are you prepared? There is a reason the parcel carriers are trying to separate you from expert advice. enVista can help you with this complex issue.
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