TABLE OF CONTENTS Dec 2012 - 0 comments

Outlook 2013: Courier

Fierce competition, growth pave way for bullish year for couriers' Big Three

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By: Ian Putzger
2012-12-01

Barring a veto from Brussels, 2013 should bring about a tectonic shift on the global express landscape, as the number of multinational behemoths on the stage shrinks from four to three, with UPS taking over TNT Express for 5.2 billion Euros ($6.63 billion). The marriage, which was announced in the spring, will produce a global powerhouse with combined revenues north of $50 billion a year. TNT gives UPS a much stronger network in Europe and a sizeable presence in China and Southeast Asia built on TNT's surface network in the region.

The impact of the takeover will not be felt in the coming year, though. TNT and UPS have signalled that the integration process should take about four years, as UPS management intends to take a phased approach concentrating on customer alignment first before the operational integration.

In Canada, the marriage of the giants will barely ripple the market. "It is not going to have as much of an impact for us here as in Europe and other parts of the world," says Mike Tierney, president of UPS Canada. "TNT has a small presence in Canada."

For him, his company's push into the Maritimes has been a more momentous development in the past year. UPS opened six stations in Atlantic Canada and laid on two nightly flights that connect Halifax and St. John’s to its Canadian hub in Hamilton, drastically reducing transit times to and from the region.

"It was an overdue expansion," Tierney says.

The Canadian market has not experienced any dramatic shift comparable to the UPS-TNT hook-up or last year's rebirth of Loomis in the wake of DHL's retrenchment and withdrawal from the domestic market. The new Loomis has not made waves in the market this year. "They said after the takeover that their focus initially would be on managing the transition. I think they should be getting near the end of that. I expect to see them make a move before long," says Gary Breininger, president of BGR Coaching and Strategic Solutions.

Market leader Purolator Courier saw the departure of president Tom Schmitt after barely two years at the helm. The company's market share has slipped, but at most by one percentage point a year, estimates Breininger. "They continue to be the market leader. It would take a lot for them to be unseated."

It remains to be seen who will take over the reins at Purolator and what course will be charted for the coming years. The fact that its interim president hails from Canada Post has fuelled some speculation that the parent company may abandon its traditional stance of keeping its hands off Purolator and seek to control its activities, but it is too early to draw conclusions on its future strategy and involvement with its parent.

According to Tierney, UPS has seen growth in Canada, not least of all because of its expansion into the Maritimes. Overall, however, the large express operators are feeling the headwinds from the macroeconomic situation. UPS and FedEx both lowered their earnings outlook in September, citing weakness in the global economy, and reduced their freighter aircraft capacity, notably in Asia, previously the chief engine for their growth. Over in Europe, TNT posted a 12% decline in earnings in the third quarter.

Competition has been fierce and is showing little sign of letting up. "There has been a lot of market share stealing going on, and price has been a key component in this," notes Breininger. He adds that using multiple courier firms is common among shippers, which is often sub-optimal. Courier companies have responded with efforts to look at competitive solutions for a shipper's entire portfolio.

In the short run, this very competitive climate benefits shippers, but over the longer term, the question is how sustainable this is, he continues. While cost cutting remains a key element of most operators' strategy going forward, opportunities for significant savings are limited. "Most cost cutting opportunities were done in 2008/9. Now it's more fine tuning," remarks Breininger.

Price increases announced for the coming year average 4-5%, which is above the rate of inflation, but reflects the high cost of maintaining the networks. "Margins are not as lean as in trucking, but they are not as high as in some other areas like retail," comments Breininger. He adds that it is doubtful that companies will be able to get their large corporate clients to agree to 4-5% higher rates, given their own cost pressures.

Moreover, the trend to substitute premium services with cheaper, slower alternatives is expected to continue through 2013.

Despite the challenging market conditions, both large US integrators have sent out bullish signals for the Christmas rush in their home market, predicting record package volumes during the period driven by strong growth in online shopping. According to Breininger, the trend is well entrenched south of the border, but less pronounced in the Canadian market.

"B2C e-commerce is seen as a huge growth factor, and this continues," Tierney comments. UPS has underscored its focus on this business in the past year with a couple of initiatives, most recently in the US with the option for consumers to choose between different delivery or pick-up locations. According to Tierney, the response to this has exceeded expectations. In Canada, the company has introduced a similar service which notifies consumers upon an unsuccessful delivery attempt that their parcel will be ready for pick-up at the nearest UPS Store, or they can call and specify a location for delivery.

"We have seen a tremendous reaction in Canada to this," Tierney says.

For all its potential – and the integrators are facing stiff integration in this space from the postal services, notwithstanding agreements for last-mile delivery – B2C commerce is not going to galvanize the courier business in Canada in the coming year. Many online shoppers are unlikely to pay premium rates for delivery of their products, given that cost savings often prompted them to buy online in the first place, notes Breininger.

In the battle to gain and retain customers, one of the prevalent strategies in 2012 and beyond has been what Breininger calls “mass customization,” the development of solutions tailored to customer needs rather than set products. This often goes hand in hand with another ongoing trend: the diversification beyond the core courier business to other segments of the logistics business, like warehousing and distribution.

At the top end of the market, the multinational giants have been trying to carve out a larger niche in the healthcare and pharmaceutical industry vertical, a segment that has proven largely resistant to the economic downturn, and offers long-term growth and juicy margins due to the need for special services. DHL, TNT, FedEx and UPS have been marketing offerings based on containers with active temperature control capabilities.

"Healthcare continues to be a significant emerging part of our logistics portfolio. It is going to be a big part going forward for UPS," Tierney confirms.

The courier market itself could do with a booster injection. "There will not be a lot of organic growth going on. We will see more of the same," predicts Breininger.

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