After broad expansion drives in Atlantic Canada and in the west, UPS has shifted gears and is consolidating. “We are letting the expansions we recently undertook settle,” says Mike Tierney, president of UPS Canada.
He dismisses the idea that the drop in oil prices has stalled growth in Alberta. The momentum has slowed, but it is still good growth, he states.
Financial results of the integrated express giants suggest that the same is true on a global level. Parts of their portfolios have shown strain from the shaky macroeconomic environment, but the express parcel segments show growth. DHL led the pack with a 12.2% rise in express revenues for the first half of 2015.
E-commerce has been a major driver. Observers and operators agree that the B2C sector has shown a momentum that clearly outstrips the B2B side. According to projections from Forrester Research, between 2014 and 2019 e-commerce sales are going to show compound annual growth of 12.3%, whereas the overall retail sector stands to see a comparatively paltry growth rate of 2.6%.
Cargojet, which provides linehaul on Canadian trunk routes for the large express companies, reports that signals from its clients point to a strong peak season this year. The express parcel carriers face this with a mixture of delight and apprehension, mindful of the tidal wave of traffic that overwhelmed systems two years ago.
“UPS say they are well prepared for the next peak. Two years ago they were under-prepared, last year they were over-prepared,” notes Tim Sailor, principal of Navigo Consulting Group. “You always had fourth quarter surges; they are just more pronounced now.”
Tierney acknowledges the challenge. “B2B is fine, but B2C can fluctuate up quickly. You’ve got to have an infrastructure that can deal with that but also makes sense for the remaining 10 months of the year. You can’t operate an infrastructure that is equipped for six weeks and under-utilized the rest of the year,” he comments.
A recent report from Transport Intelligence on the express parcel industry draws a picture of an industry facing strong growth but also unprecedented pressures. “E-retail, new business models, disruptive technologies and the volatile global economic environment are transforming the express parcels industry. The future is overwhelmingly positive-but only for those companies which work out how to take advantage of this systemic change,” is how Transport Intelligence CEO John Manners-Bell summarised the findings of the report.
Horst Manner-Romberg, managing director of German parcel research and consulting firm M-R-U, notes that these pressures are chiefly on the distribution side of the B2C business, as opposed to the procurement element. Even some of the deliveries are not to consumers but to businesses, he adds.
The economics of the delivery side of the B2C business remain challenging, notwithstanding myriad efforts to combine flexibility to meet consumers’ preferences with more cost-effective solutions than driving parcels to residential addresses in the hope that the recipient will be there.
Consumers’ expectations pose considerable problems, especially the notion of free shipping, which has forced e-tailers to look for more cost-effective solutions, remarks Sailor. He reckons that this expectation will remain prevalent.
Manner-Romberg points to Amazon’s Prime program, which offers free two-day shipping for a membership priced at $79 per year. “Amazon is driving the market,” he says.
Even more worrying for parcel companies are Amazon’s ambitions to take over the distribution itself. It has set up 58 regional distribution centres, a structure that suggests its management anticipates growing demand on the consumer side for expedited delivery, remarks Sailor.
Purolator Courier has put much energy this year into the integration of its shipping software into e-commerce platforms. Manner-Romberg views this as a key plank in parcel firms’ strategy for this sector, as the touch points are critical for a seamless flow of data.
This is not just about operational efficiencies to avoid errors and mismatches; it also faces questions about future capabilities of handling data. For one thing, the data that accompany a product are getting more extensive. The description of a simple chocolate spread easily exceeds 400 attributes, Manner-Romberg notes. “What if they have to provide these in the on-line store?” he asks.
Questions about the ownership of this deluge of information are yet to be settled. “If Amazon performs the delivery itself, the answer is clear, but if company X hands DHL 5,000 parcels, who owns what?” Manner-Romberg says.
As the number of commodities sold and shipped online expands, parcel firms have to determine which products they do not want to carry. “The amount of products that are available today is nowhere near close to where it will be,” warns Tierney. “You have to make sure you are well positioned for that.”
Sailor has misgivings about food shipments. “It is very tough if you have a dry ice shipment and perishables,” he says. He reckons that operators will raise ancillary handling charges to levels that make shipping such traffic with them prohibitively expensive.
On the other hand, the large integrators have been happy to embrace temperature-sensitive shipments that require sophisticated temperature control solutions, notably healthcare and pharmaceuticals traffic. Both the yields and the growth prospects are juicy.
“The healthcare segment overall is doing very well. We continue to expand it globally,” says Tierney.
FedEx illustrated the global appeal of pharmaceuticals transportation in August, when it unveiled two cold chain products that target the market for temperature-sensitive shipments in China.
Manner-Romberg points out that the growth rates in the international arena overall are significantly more promising for express parcel carriers, thanks to the rise in international e-commerce flows. He points to the increase in parcels that moved between China and Russia from 2013 to the next year, surging by over 130%. “We see that in other segments and countries,” he adds.
UPS has intensified its dialogue with smaller and mid-sized Canadian clients about expanding into international markets.
“For us growing export is key. Export was a big part of our business plan this year,” Tierney says, adding that this momentum should continue in 2016. “We are looking for double digit export growth,” he says.
Sailor remarks that international growth will dwarf domestic growth in the US parcel market, but cautions that this is no slam dunk for parcel firms.
“You have to have the technology where somebody in Mexico thinks it’s a local experience. You have to make elements like language and currency conversion as seamless as possible,” he says.
Another question to tackle is going to be return logistics. Most likely products will be either destroyed or returned to their country of origin in consolidations, depending on their value, he reckons.
Manner-Romberg sees a long road ahead, but one that will be hard to avoid.
“There are a number of stumbling blocks, such as different national regulations about how many days a consumer has to return an item, and lots more, but it is the business of the future,” he says, adding that “It’s still a long way with international B2C business”.