E-commerce buyers are demanding ever-faster delivery of orders, even though the economics of such service are anything but profitable for providers. John Haber, founder and CEO of Spend Management Experts, describes the current landscape of competitors in that sector.
SCB: How is the trend of faster delivery impacting the e-commerce and small-parcel markets?
Haber: It's having a drastic impact on small-parcel markets, because everything has shifted from two-day to next-day to same-day delivery, and when you're doing that, it's very expensive. It’s hurting a lot of retailers who are trying to compete with the Amazons and the Walmarts and the Targets of the world. They can afford to subsidize one-day shipping, but the small mom-and-pop retailers can't. Neither can a lot of the brick-and-mortar retailers that are moving into e-commerce. But that's what customers expect these days.
SCB: We hear that even Amazon, as efficient as it is, loses money on every one of those deliveries. Is that the case?
Haber: Absolutely. They're buying up market share. There's really no such thing as free shipping. The customer expects it, but that's not a reality. And it's not sustainable in the long term.
SCB: Even when the customer thinks they’re paying for free shipping in the form of, say, an Amazon Prime membership, that's still doesn't cover the whole cost.
Haber: No, it doesn't. A lot of times it's embedded in the cost of goods sold. And like you said, it costs money to be a Prime member. So some of that goes to cover the shipping costs, but not all of it.
SCB: Do other big retailers have equivalent membership programs that help to defray at least some of the cost?
Haber: Most of them don't. If you purchase a certain amount of goods, then you qualify for free shipping, so they'll have thresholds.
SCB: It sounds like the economics just don't work. The only reason Amazon can do it is because it’s subsidized by Amazon Web Services — not because it’s so efficient that it can get to the point where it can eventually make a profit out of that.
Haber: Right. Amazon has the benefit of having the cloud, which makes billions of dollars in profit, and they're using those profits to subsidize their logistics arm.
SCB: FedEx no longer has Amazon as a ground and express customer. That relationship has been terminated. Do you think FedEx will be successful going forward with that strategy?
Haber: I do think it will. What we're seeing is that they're very aggressively going after other retail accounts to backfill that lost revenue, which is about $1 billion a year. They need the volume to cover their fixed costs, but we believe they’ll be able to replace that revenue and margin successfully.
SCB: You would think that if anyone was able to make this work, it would be FedEx. They have the experience, network, and the infrastructure. Yet they still face the challenge of it not being profitable.
Haber: Amazon only wants to pay a certain price and FedEx didn't want to deliver it for that price. Amazon is competing with FedEx. FedEx is finally admitting that, now that they're a competitor as well as a customer. What's interesting is the amount of business that Amazon has with UPS, which represents almost 12% of UPS's entire revenue, and which is a dangerous number in our opinion.
SCB: I assume we won’t see UPS breaking off from Amazon any time soon.
Haber: Definitely not. They're tied at the hip until Amazon in-sources everything.
SCB: Where does the U.S. Postal Service fit into this equation?
Haber: The Post Office is really struggling. FedEx is pulling last-mile delivery back in-house. That amounts to almost 2 million packages a day. Both UPS and Amazon are also bringing in-house a lot of the volume that’s been delivered by the Post Office. The pension obligations for the Post Office will continue to be the major issue in its financial viability over the long term. If is doesn’t enact meaningful reform, we just don't see how it can be sustainable on a go-forward basis.
SCB: Why are those big parcel carriers pulling their last-mile operations in-house?
Haber: They're seeing that they can do it more profitably by doing it on their own. As they build up more density in the last mile, they're delivering more packages internally, rather than paying the Post Office to do it.. What you see is the Post Office getting the rural deliveries, stuff that's very low-density, because it’s going there every day anyway. But in denser urban areas, the big three carriers are bringing that in-house, rather than giving it to the post office to deliver.
SCB: With the severe drop in the volume of first-class mail that the U.S. Postal Service has experienced over the last decade or so, parcel was supposed to be the salvation. Is it going to be that, or is it just another weight pulling them down?
Haber: We don't see it necessarily as being the salvation, because the Post Office network is really only situated to handle packages of up to around nine pounds. Really one- to five-pound packages is what the infrastructure can handle these days. Postal vehicles today are bogged down with these packages. They would need to have all new vehicles in order to move into that marketplace. It’s going to take a lot more than just parcel packages to save the Post Office. You’ve got to have some reform on the pension side of things.
SCB: So 100% network coverage is the Postal Service’s sole value proposition?
Haber: There's more value to the Post Office than the fact that it’s delivering packages to every address every single day. But UPS and FedEx are moving to seven-day delivery, so it's going to be hard for the Post Office to maintain the volume it has.
SCB: At the same time, we’re seeing the so-called uberization of delivery. What kind of a challenge does that present to the big three or four parcel carriers?
Haber: Crowd-sourced delivery is certainly here to stay, and it's a viable option for a lot of shippers. Cost is really the driving force, but service levels are also very important. The thing you get with the USPS, FedEx or UPS is familiarity with the truck and driver. I know my UPS driver; it's the same guy who’s been delivering packages to me for a long time. I feel comfortable leaving a key for him to put a package in my house. With crowd-sourced delivery options, you don't have that same feeling. A lot of times you don't even know who's showing up at your door. However, crowd-sourced delivery is a more cost-effective way to have packages delivered. You're going to pay less, and that’s what a lot of people care about — more than who’s showing up and delivering the package.
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