Last week United Parcel Service (UPS) announced plans to add an additional 5 million square feet of parcel logistics and shipping capacity in 2018, nearly five times more than what the carrier invested this year in added capacity. The global carrier indicated that it will make such investments because of expected parcel shipping volume increases emanating from the online commerce area. However, with more capacity investments to support peaks, and with added financial incentives to train consumers to buy in more planned intervals, is there a risk of too much overall capacity? Will the added costs of utilizing such a network prompt other alternative models of fulfillment?

As Supply Chain Matters has opined in multiple prior commentaries, added capacity investments by parcel carriers are literally being financed by the continuing series of rate increases that have occurred every year, for the last three years. The latest is UPS’s intent to increase rates 4.9 percent, along with added surcharges for B2C retail shipments during select weeks leading-up to this year’s Christmas holiday, and into 2018 as-well.  Amazon, on the other hand, funds needs for added logistics and distribution capacity through revenues the online retailer receives from its Prime premium membership program and by charging Fulfilled by Amazon merchants’ customer and fulfillment costs. Amazon also has the benefit of some cash cow businesses including Amazon Web Services that have fairly hefty operating margins.UPS Natural Gas Van

UPS has been holding certain online retailer’s feet to the fire for the upcoming holiday period, literally charging shippers for excess surge capacity, even if such capacity is not utilized. The carrier has communicated that such added charges will motivate retailers to plan merchandise promotions earlier and thus lower the need for peak staffing and augmented capacity costs. However, the open question is whether holiday consumers will change their shopping habits, especially procrastinators or adroit bargain hunters who always wait for the right time to execute holiday buying decisions, and who shop online retailer which is best able to satisfy such needs.

In the coming holiday surge, UPS alone is planning to manage an expected surge of upwards of 30 million parcels on 17 of the 21 total delivery days that occur between the Thanksgiving and New Year’s holidays. This year’s planned surge represents an added 6 days of the 30 million parcel thresholds. That is continuing evidence of the permanent shifts in consumer buying, literally shunning the physical store or shopping mall experience.

Online retailers are fully aware at this point, that Amazon’s model of Free Shipping has become the expected norm for consumers to finally execute their online purchase. They further comprehend that the power of Amazon is in its flexibility to accommodate online consumer buying needs even on the day before Christmas, or any holiday or important event.

Retailers are thus placed in another difficult position. They must compete for consumer business by matching Amazon’s or Wal-Mart’s capabilities to accommodate consumer buying preferences and must find ways to absorb the added parcel transportation costs and surcharges from parcel carriers. Retailers with significant brick and mortar store presence can channel Free Shipping toward in-store pick-up. However, smaller specialty retailer and businesses lack such flexibilities as well as the leverage to negotiate rate negotiations with the likes of a UPS or FedEx..

In an opinion blog commentary published in June, Supply Chain Matters predicted that parcel carrier actions to fund added capacity requirements through ever increasing rate hikes could well lead to more structural changes in online fulfillment and last-mile delivery:

In other words, if the intent of parcel carriers was to somehow permanently change online buying trends, they will indeed get their wish.  However, as what occurred last year when Amazon demonstrated the prowess to implement its own parcel transportation and last-mile fulfillment capabilities, online retailers will have little choice but to explore other more cost-effective options to protect their margins. That will open the door to new industry disruptors.”

When the equity investment world addresses the future of online commerce retail strategies, it is often placed in the context of scale- scale in customer mindshare, online customer intelligence and in logistics, physical store and last-mile fulfillment. Last year, we declared how Amazon’s evolving strategy was to also become its own parcel logistics and last-mile fulfillment provider. This year with the acquisition of Whole Foods, Amazon adds last-mile food and grocery fulfillment capability. With every month, that capability grows in-scale, now spanning both B2C, B2B to B2C, and pure B2B product fulfillment needs.

Likewise, other online retailers are now offering broader lines of online merchandise including furniture and appliances, among others.  Third-party specialty logistics providers have now tailored “white-glove” services to support such needs.

The open question is whether more leveraged use of the physical store as an extension to Free Shipping and last mile fulfillment lead to a cumulative effect of too-much online logistics and customer fulfillment capacity with far more expensive costs for online retailers.  That literally opens the door to accelerate new disruptive models.

In other words, if parcel carriers really want to be a key fabric of the online world, they may need to become online merchandisers and retailers as-well, or risk the opposite effect- too much surge capacity with few retailers and shoppers needing such capability.

 

Bob Ferrari