The Covid-19 pandemic has paralyzed large swathes of industry, such as the automotive and the aerospace sectors, but it has given a massive boost to parcel deliveries. For the carriers, this has been too much of a good thing, as they struggle to cope with the vastly increased volumes.
John Haber, CEO of Spend Management, a consulting firm on logistics spend, noted that carriers are experiencing a “peak season in May.” Indeed, parcel volumes have been going through the roof, with some operators reporting increases of more than 200%.
The shuttering of retail, as national and state governments desperately tried to stem the spread of Covid-19, has been a powerful catalyst for the rise in online shopping and home deliveries. According to one pundit, the repercussions from the pandemic have accelerated the migration of shopping to online channels by 5-10 years.
For the parcel carriers the tidal wave of peak season volumes on an ongoing basis quickly turned from bonanza to challenge, as they have been stretched to handle this onslaught. One US pundit noted that parcels were piling up outside UPS and FedEx facilities that were overwhelmed by parcel traffic. Already in April, the Swiss Postal service announced that it could not cope with the volumes and had to impose daily limits on the volume allocations for its largest customers.
The carriers’ plight was exacerbated by the need to implement measures to protect their workers and avoid a shutdown in the event of an outbreak among staff in warehouses and sorting centers. Horst Manner-Romberg, principal of parcel logistics research and consulting firm M-R-U, reported that most operators split their staff at the hubs in two groups in order to have one functional if the other suffered an outbreak. This has meant reduced staffing levels coping with vastly augmented volumes.
Many facilities themselves have been operating beyond capacity, as have freighter operations, coping with increased traffic worsened by the loss of belly capacity to move overflows.
During the earnings call on the first quarter results of UPS, company chairman and CEO David Abney admitted that the integrator’s efforts to adjust its network and control costs could not compensate for the unprecedented changes in the market.
On top of the high volumes, the volatility of the market has been a huge challenge for operators, Manner-Romberg noted. They have been struggling to plan for capacity and manpower requirements, without reliable projections for demand developments. For the most part, it has been planning for two or three days ahead.
As shipments piled up, integrators’ service guarantees went overboard, and Amazon suspended its two-day delivery pledge.
In an effort to curb volumes to more manageable levels the e-commerce giant virtually shut down its third-party fulfilment arm, which left tens of thousands of small businesses scrambling for alternative fulfilment options. FedEx has imposed curbs on volume allocations from large shippers.
At the same time the big players had to beef up their headcount and capacity. Amazon announced in mid-March that it would recruit an additional 100,000 workers to cope with the elevated traffic volumes. For the next quarter management expects to spend about US$4 billion on Covid-related expenses, from investment in personal protection equipment to developing its own Covid-19 testing capabilities.
While it has boosted B2C parcel revenues, the pandemic has delivered severe blows to operators. The US Postal Service warned that the impact could be a US$13 billion revenue loss directly tied to Covid-19.
Amazon posted a 26% increase in net sales for the first quarter, but its operating income sank 10% and net income dropped from US$3.6 billion 12 months earlier to US$2.5 billion.
UPS saw its net income in the first quarter decline to US$965 million from US$1.11 billion a year earlier.
The increase in parcel volumes masks a sharp divergence. B2C traffic soared, but B2B volumes slumped. Essentially the integrators have suffered, as the rise in B2C traffic does not compensate for the losses in the B2B segment, where margins are significantly higher, Manner-Romberg noted.
FedEx confirmed as much in an 8k filing on April 3, where it reported downward pressure on margins due to the weakness of its B2B business. UPS reported a 3% decline in domestic margins in the first quarter as B2C business soared to 70% of its domestic volumes.
The integrators’ international volumes have been less robust. For UPS average daily international parcel volume slipped 1.8% in the period.
All large integrators have responded to these developments (and the sharp decline in international capacity), with surcharges. By and large, these have been most steep out of China, but they are also in the double-digit range on other international sectors.
Some surcharges have left shippers stranded. DHL’s ‘emergency situation surcharge’ on international shipments, which came into effect on April 1, is layered by weight brackets. While parcels between 2.5 and 30 kilos command a flat surcharge of €2.50 (US$2.73), the charge is €200 for a shipment north of 300 kilos.
The parcel tsunami of B2C traffic looks set to continue. Recent weeks have seen bankruptcy filings of two large US retail chains, J.Crew and JCPenney. More are likely to follow. The US National Retail Federation predicts double-digit declines in US retail sales from May through August.
The integrators are reinforcing their efforts in the B2C sector. On May 1, FedEx announced an alliance with BigCommerce, a venture-backed e-commerce platform that currently hosts over 60,000 stores and brands, serving predominantly SME merchants looking for an online shopfront with the requisite functionality. The collaboration of the pair gives new BigCommerce customers four months of free service on the platform as well as discounted FedEx rates.
Clearly FedEx management is continuing to focus on the SME e-commerce sector. It does not offer the margins of the B2B arena, but it is where the growth is.
By Ian Putzger
Correspondent | Toronto