More to FedEx's 7-Day Delivery Announcement Than Meets the Eye

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There’s more to FedEx’s 7-day delivery announcement than meets the eye

Here’s everything you need to know about the real impact of FedEx’s big announcement, including what UPS has to say.

On May 30th, FedEx announced a new plan offering 7-day-a-week Ground delivery.

From the company statement: “FedEx Ground delivers seven days per week during the holiday peak season, and beginning in January 2020, this service will continue year-round for the majority of the U.S. population. The company is also rapidly integrating FedEx SmartPost package volume into FedEx Ground standard operations and increasing large package capabilities.”

There are some obvious reasons for this change. It is primarily an acknowledgement that the market for small parcel delivery has evolved significantly in recent years. This includes the general switch towards more business to customer deliveries driven by the growth of ecommerce and. the increased expectation of faster delivery by both shippers and their customers. The sentiment is supported by the comment posted on LinkedIn by Ryan Kelly, VP of Global eCommerce Marketing at FedEx shortly after the announcement.

A changing small parcel marketplace

In addition to more demanding shipper and customer expectations, the competition faced by FedEx is both growing and changing. For one, Amazon already providing 7-day a week service in many markets. The ecommerce giant is also continuing to make well documented investments on logistics infrastructure with the stated goal of creating reliable and low cost 1-day delivery across the country.

At the same time FedEx is facing increased competition in the form of new delivery models developed by text start-ups like Uber. Regional small parcel carriers are also stepping up to meet the growth in demand.

What does the announcement mean for the competition?

This change will be complex for FedEx to implement. It is also something the carrier’s largest competitor, UPS, and competitor/partner, the USPS, will have to address.

UPS:
Not surprisingly the announcement immediately placed attention on FedEx’s largest competitor, UPS, and the question of ‘how quickly would UPS follow suit?’ In an interview with Bloomberg the afternoon the FedEx announcement was made, UPS CEO David Abney was asked if UPS would be offering 7-day delivery to match FedEx. Abney said, “We are looking at it right now, in our last labor contract we have language that covers Saturday and Sunday. So we are pretty far down the path. We will talk about it when we are ready to review.”

Regardless it seems UPS will be in a difficult position to easily follow suit. But with FedEx gaining such a big competitive advantage, there is obvious pressure to make it work as soon as possible. It should be noted again that the change does not take full effect until 2020 so there is some time. One important contrast between the two carriers, also worth noting, is that the labor model for how each company makes residential deliveries is different. UPS drivers are employees, while FedEx drivers are contractors.

The following is speculation but with the details of how well Saturdays and Sundays are covered, as described by Abney in the latest labor contracts, is still unclear. It’s hard to know what shape a final solution allowing UPS to deliver on Sundays would take. One option could be to hire part-timers, non-Teamsters for that particular service. But there’s undoubtedly a lot of work to be done to create a workable solution.

USPS:
The announcement concerning SmartPost and how that volume will be rapidly integrated into the FedEx Ground network is also noteworthy. “Eventually all of those SmartPost packages will be delivered directly by FedEx Ground. It’s not that the service is going away, it’s just that the final delivery will be handled by FedEx Ground, as opposed to the US Postal Service,” said Patrick Fitzgerald Senior VP of Integrated Marketing and Communications at FedEx.

The impact on the USPS is obvious, this change means fewer packages and less volume in its network. The financial implications for the USPS, as well as how this change affects the relationship between FedEx and the USPS will be seen in time. For FedEx and its customers, the changes will be impacted as well. For example, in contrast to UPS, FedEx has long kept its network segregated. This means that when a shipper routed a package SmartPost the USPS would deliver it.

In the past, UPS would have been more flexible, their networks are more holistic. A SurePost, UPS’s competitor to SmartPost package, could be easily upgraded to a quicker transit service, of UPS identified packages, going to the same or nearby addresses. FedEx is adding perhaps greater flexibility that will similarly benefit the shipper in terms of time and transit.

As a final note, our 2019 GRI analysis, illustrated the premium that SurePost UPS shippers are paying over SmartPost FedEx in 2019. Since, with the implementation of this change, FedEx itself and not the USPS will be delivering more SmartPost volume. The carrier’s operating cost will presumably go up, this means SmartPost shippers need to be on the lookout for a potential mid-year rate increase. If FedEx doesn’t hike SmartPost rates before the 2019 peak season, we expect the 2020 increase to be hefty, but potentially close the retail price gap against UPS.

What should you do next?

We have commented many times over the past several years that the actions taken by FedEx and UPS in relation to cost factors such as base rates or changes to how costs are calculated, fake GRIs and DIM, reveal how the companies as market leaders are still trying to figure things out. The growth of ecommerce and the entrance of Amazon into their marketplace are now recognized as clear and present dangers to the status quo. The real cost impact for customers is also yet to be seen.

In recent years both FedEx and UPS have implemented more frequent and less predictable fees and surcharges squared aimly at the business the customer delivery market. It’s logical, that as both carriers attempt to work through this 7-day delivery challenge this will continue. Whatever year end GRIs are announced for 2020 will be very telling.

For better or worse, our take is that this announcement by FedEx creates more questions than answers. FedEx is playing catchup with this move and UPS is being left even further behind. It will be very interesting to see how UPS responds. Regardless every shipper should stay on the lookout for more frequent announcements related to service changes and rates from both carriers, and when those announcements happen contact info@transimpact.com for a fast, free, no obligation analysis of what that change will mean to your company’s small parcel shipping costs and bottom line.

Thank you for listening. For a free, no obligation, analysis of your logistics spend visit TransportationImpact.com. Have a great day!