Logistics Management Group News Editor Jeff Berman recently caught up with Jerry Hempstead, principal of Orlando-based Hempstead Consulting. The pair discussed a wide range of parcel-related topics, including: the impact of COVID-19 on rates and pricing; peak surhcharges; the e-commerce supply chain; and the current status of the United States Postal Service, among others. A transcript follows below.
LM: How do you view the current state of the parcel and express delivery markets? What have been the biggest changes since COVID-19 truly kicked in?
Jerry Hempstead: So much has changed rapidly in the last 100+ days. What usually takes a year of preparation for Peak Season, the carriers had no preparation at all, when the COVID-19 pandemic shut down the country. And when everybody was forced to go hunker down, our lifeline to the outside world was the parcel industry. And if people had not learned before, they have learned now how to buy their things on the Internet and how to be an e-commerce customer. As a result of that, what normally takes ten months of planning by the carriers before peak begins was thrust upon them overnight. The volume went up past what we normally see at the Christmas crush. It affected FedEx, UPS, the USPS, and Amazon’s own fleet of drivers, and DHL E-Commerce (the former Airborne Express) is also bursting at the seams. You have all of this B2C business, which tends to be bulky and single-pieced deliveries replacing a decline in the B2B business, because many businesses were closed, at the local level. As the businesses closed, B2B went down, which was the old bread and butter, and now the bread and butter is the B2C business in a big way. The business has changed profoundly, and, in my humble opinion, it is not going to go back.
LM: How do you view the current state of rates and pricing? What type of impact has COVID-19 had?
Hempstead: Both UPS and FedEx implemented surcharges on their hybrid mail products, SmartPost (FedEx) and SurePost (UPS), and they enacted surcharges for residential delivery on a select number of customers. You really needed to have extraordinary volume to get ahead with it. We saw large surcharges on international business coming in and out of Asia, because so much lift was taken down when the passenger flights dropped and the below deck capacity dried up, so those rates went up significantly. It was very interesting in the numbers how positively it affected UPS on its second quarter earnings call, and FedEx did not do as well as UPS on international. We have seen new surcharges from both carriers…they have been very open and honest on their Wall Street calls about “managing revenue quality.” The previous buzzword was “yield management.” It is all about getting more money out of the packages that you are currently handling. How do you do that? Well, you raise base prices or the accessorial charges or the discounts, or a combination of them. We saw that in May, and we are going to see more of that in the fall. I don’t think either company is going to be shy with residential surcharges during peak.
LM: Amazon clearly remains a major presence in the market. Where does it fit into everything, as it relates to the UPS-FedEx duopoly and last-mile logistics and everything else, too, as it relates to parcel?
Hempstead: There are two big pieces of the Amazon story that affect the USPS as one of the players and UPS. As you reported, Amazon has been building out its own fleet of delivery vehicles and hiring drivers, buying vehicles, and leasing the vehicles to the drivers and trying to deliver as much of the traffic themselves on their own network. But they have not been able to handle every zip code with the 50,000 trucks they acquired, some of it has to be spun off and given to other carriers. The two big choices for Amazon—since FedEx did not want to play anymore—were the USPS and UPS. Granted, Amazon has been making every effort, of late, to move business off the USPS and on to its own delivery vehicles because it is cheaper, and they have far more control if an Amazon driver is delivering the packages rather than the USPS. But the USPS got a ton of business from Amazon along the way. The recent rate increases on package business, for Amazon, I think, sped up the process for Amazon looking at expanding its own fleet of delivery drivers, but then with COVID-19, it also drove a lot of packages on to the USPS network, because of its partnership with Amazon. A lot of volume from Amazon is going through the UPS network today, which explains part of what was seen in the second quarter numbers from UPS that were just out of sight. For example, its hybrid postal business almost doubled, up 96% annually, for its SurePost product. That is incredible and what is fascinating to me is that FedEx is trying to migrate away from its hybrid product, SmartPost, which it has had for a long time. And UPS is going in the other direction, with its SurePost product growing like a weed.
LM: Why is FedEx making a move to shift away from SmartPost?
Hempstead: It has done internal studies finding that if it can increase the density of its ground network by moving more packages immediately into its own system, it will be able to drive down the cost per package on its ground business and therefore be more profitable then it was. But I don’t think FedEx has seen that result, of late, in its numbers. What it has done is started to migrate the SmartPost product into its Ground network to have its ground deliveries delivered by them. And they have kind of married together its home delivery and FedEx Ground deliveries. There are a lot of moving parts at FedEx, but the yield, especially on the lower weight shipments, the postage rate, is so low for a postal product called Parcel Select that FedEx cannot move it on its own trucks and convert it away from the USPS and still have that piece be as profitable as it was before going through the postal network…especially for the pieces under one pound.
LM: Looking at the UPS, there is a lot going on there, given the new Postmaster General and its Shipping and Packages Group is doing well, too.
Hempstead: From just a business point of view, its Parcel Select product, which is the growing piece, with SmartPost, SurePost, Amazon, and DHL E-Commerce all using it. There is only one company that goes to every residential address in this country six times a week, whether or not you want it coming to your house with your bills, it is coming. A guy named John Kelly, at the USPS, came up with this idea to sell that capacity. It already had terminals and drivers and delivery vehicles to sell that capacity to the parcel companies for the last mile, and they came up with Parcel Select, and it made perfect sense. The USPS did not have to add one incremental cent to handle any of this, because it already had the terminal, driver, and truck. These were all new packages….and then along came, at the right time, the explosion of the Internet and that growth we have seen with that and now COVID-19. So, the parcel product for the USPS has three pieces to it. There is what we will call Express Mail, or Priority Mail Express. There is Priority Mail, which is a very popular product, especially with retail customers, and then there is Parcel Select, which services UPS, FedEx, Amazon, DHL, and Pitney Bowes. All of that is growing where the First Class Mail business is in decline, because, when you think about it, nothing important comes to your house anymore in the mail. If it is important, you put it on the Internet or use an express carrier. If you go through your mail every day, the carrier coming to your house is not bringing any important First Class transactions. Instead, he or she is carrying basically Third Class, or advertising, mail, which is going to your house. The focus of the President, unfortunately, has been on the parcel business, and he has this ongoing war with a major e-commerce company and blaming it on parcel pricing. Granted, FedEx, Amazon, and others have NSA’s with the USPS and don’t pay they published price. They get a discount off of that and even with that the volume they have is extraordinary and they are entering into the USPS at the best place at which the USPS can handle it—at the DDU (destination delivery unit), or the post office closest to your home. You don’t want to mess with that. But the USPS had been messing with it, which then really exacerbated the problem with Amazon moving business away from the USPS onto its own vehicles and UPS….because if you raise the prices, then they have some other place to go with it that is less expensive and less hassle, they will go that rate. The President has a focus on raising parcel rates at the USPS. The new Postmaster General is not free to raise prices, at his discretion or that of the President. The Postal Regulatory Commission (PRC) sets prices and pricing behavior, because, at least on the First Class product, the USPS is a monopoly. The President can talk until he is blue in the face…there are limited powers that the PMG has with pricing, so it will take its price increase in January, like everyone else does. Ignore all the [USPS] rhetoric that you see.
LM: Regarding peak surcharges, how would assess the prospects for the 2020 Peak Season? Will it happen, in the traditional sense, or is consumer demand not matching up with what we would view as a typical peak or is it too early to tell?
Hempstead: It is a great question, and I have pondered this a bit. What is going on today with e-commerce is maintenance. You don’t want to go out of your home and are hunkered down and don’t want to have much social interaction, due to the pandemic. So you go online and order a set of headphones from Amazon, rather than go to a retailer, or your order something from Target and it gets delivered to your house. That is completely separate and distinct from the fourth quarter buying behavior for the holidays, and I think we will have a peak on top of the peak beginning right after Labor Day. People are going to shop. It depends on the timing of the next COVID-19 check to your house, whether people will have additional disposable income to buy stuff for their family and friends for the holidays. Yes, we are at levels today that approach the peak of 2019, but it is going to be even bigger in 2020.