The Real Impact of FedEx’s 7-Day Delivery Announcement

 In Industry News

Here’s everything you need to know about the REAL impact of FedEx’s big announcement, including what UPS has to say.

On May 30th, FedEx announced a new plan to begin offering 7-day-a-week Ground delivery.

From the company statement: “FedEx Ground delivers seven days per week during the holiday peak season, and beginning in January 2020, this service will continue year-round for the majority of the U.S. population. The company is also rapidly integrating FedEx SmartPost package volume into FedEx Ground standard operations and increasing large package capabilities.”

You can read the full announcement here.

There are some obvious reasons for the change. It is primarily an acknowledgment that the market for small parcel delivery has evolved significantly in recent years. This includes the general shift towards more B2C deliveries driven by the growth of ecommerce and the increased expectation of faster delivery by both shippers and their customers.

The sentiment is supported by the comment posted on LinkedIn by Ryan Kelly, VP of Global eCommerce Marketing at FedEx, shortly after the announcement.

screenshot of LinkedIn post from Ryan Kelly of FedEx

A Changing Small Parcel Marketplace

In addition to more demanding shipper and consumer expectations, the competition faced by FedEx is both growing and changing. For one, Amazon is already providing 7-day-a-week service in many markets. The ecommerce giant is also continuing to make well-documented investments in its own logistics infrastructure with the stated goal of providing reliable and low-cost 1-day delivery across the country.

At the same time, FedEx is facing increased competition in the form of new delivery models developed by tech start-ups like Uber. Regional small parcel carriers are also stepping up to meet the growth in demand.

What Does the Announcement Mean for the Competition?

This change will be complex for FedEx to implement. It is also something the carrier’s largest competitor, UPS, and competitor/partner the USPS will have to address.

UPS

Not surprisingly, the announcement immediately placed attention on FedEx’s largest competitor, UPS, and the question of if, or how quickly, UPS would follow suit.

In an interview with Bloomberg the afternoon the FedEx announcement was made, UPS CEO David Abney was asked if UPS would begin offering 7-day delivery to match FedEx. Abney said, “We are looking at it right now. And in our last [labor] contract . . . we have language that covers Saturday and Sunday, so we are pretty far down the path. We will talk about it when we are ready to review.”

Here is a link to the full video.

Regardless, it seems UPS will be in a difficult position to easily follow suit. But with FedEx gaining such a big competitive advantage there is obvious pressure to make it work as soon as possible. It should be noted again that the change is not taking full effect until 2020, so there is some time.

One important contrast between the two carriers also worth noting is that the labor model for how each company makes residential deliveries is different — UPS drivers are employees, while FedEx drivers are contractors.

The following is speculation, but with the details of how well Saturday and Sunday are “covered” (as described by Abney) in the latest labor contract still unclear, it’s hard to know what shape a final solution allowing UPS to deliver on Sunday would take. One option could be to hire part-timers (non-Teamsters) for that particular service, but there is undoubtedly a lot of work to be done to create a workable solution.

USPS

The announcement concerning SmartPost and how that volume will be “rapidly integrated” into the FedEx Ground network is also noteworthy.

“Eventually all of those SmartPost packages will be delivered directly by FedEx Ground. It’s not that the service is going away, it’s just that the final delivery will be handled by FedEx Ground as opposed to the U.S. Postal Service,” says Patrick Fitzgerald, Senior VP for Integrated Marketing and Communications at FedEx.

The impact on the USPS is obvious; this change means fewer packages and less volume in its network. The financial implications for the USPS, as well as how this change affects the relationship between FedEx and the USPS, will be seen in time.

For FedEx and its customers, the changes will be impactful as well. For example, in contrast to UPS, FedEx has long kept its networks segregated. This meant that when a shipper routed a package with SmartPost, the USPS would deliver it. In the past, UPS has been more flexible since its networks are more holistic. A SurePost (UPS’s competitor to SmartPost) package could easily be upgraded to a quicker transit service if UPS identified packages going to the same (or nearby) address(es). FedEx is adding perhaps greater flexibility that will similarly benefit the shipper in terms of time in transit.

As a final note, our 2019 GRI Analysis (click here to read) illustrated the premium that SurePost (UPS) shippers are paying over SmartPost (FedEx) in 2019. Since with the implementation of this change FedEx itself (and not the USPS) will be delivering more SmartPost volume, the carrier’s operating costs will presumably go up. This means SmartPost shippers need to be on the lookout for a potential mid-year rate increase. If FedEx doesn’t hike SmartPost rates before the 2019 peak season, we expect the 2020 increase to be hefty and potentially close the retail price gap against UPS.

What Should You Do Next?

We have commented many times over the past several years that the actions taken by FedEx and UPS in relation to cost factors, such as base rates or changes to how costs are calculated (think GRIs and DIM), reveal how the companies as market leaders are still trying to figure things out. The growth of ecommerce and entrance of Amazon into their marketplace are now recognized as clear and present dangers to the status quo.

The real cost impact for customers is also yet to be seen. In recent years, both FedEx and UPS have implemented more frequent, and less predictable, fees and surcharges squarely aimed at the B2C delivery market. It’s logical that as both carriers attempt to work through this 7-day-delivery challenge, this will continue. Whatever year-end GRIs are announced for 2020 will be very telling. For better or worse, our take is that this announcement by FedEx creates more questions than answers. FedEx is playing catch-up with this move, and UPS is being left even farther behind. It will be very interesting to see how UPS responds. Regardless, every shipper should stay on the lookout for more frequent announcements related to service changes and rates from both carriers. And, when those announcements happen, contact info@firstflightsolutions.com for a fast, free, no-obligation analysis of what the changes will mean to your company’s small parcel shipping costs and bottom line.

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