After DHL … Can the post office fill the void?

As one player whiffs in the United States, another waits to bat.

When DHL pushed into the U.S. parcel market in 2003, its splashy ad campaign sent a clear message to the marketplace: The days of the duopoly enjoyed by FedEx Corp. and UPS Inc. were over.

More than five years and billions of dollars in losses later, the only thing that’s over is DHL. Last month, the company shut down its U.S. express delivery operations, leaving parcel shippers to two behemoths whose virtual stranglehold on the business has earned them the not-so-endearing moniker of “FedUPS.”

But as DHL fades from view, a familiar face is emerging: the U.S. Postal Service.

Estimates vary as to the USPS’s share of the U.S. parcel market. During the third quarter of 2008, the USPS controlled 11.7 percent of domestic parcel volumes, according to SJ Consulting, a Pittsburgh-based consultancy. Hempstead Consulting, an Orlando, Fla.-based firm that develops pricing solutions for parcel users, estimates the Postal Service had 21 percent of the parcel market in calendar year 2007. Whatever the case, its portion is dwarfed by rival UPS, whose share of U.S. parcel traffic is estimated to be somewhere between 58 and 65 percent.

What accounts for the lag? USPS executives privately acknowledge they have not been as aggressive as possible in promoting their shipping products. They also admit some shippers perceive the post office as lacking the operational capabilities and the IT tools to consistently service the demands of corporate supply chains. But the real barrier to growth, they claim, was federal regulations preventing the Postal Service from offering volume discounts and other contractual perks to high-volume shippers.

That changed with a December 2006 law that gave the Postal Service authority to negotiate market-based pricing with any business that came its way. Starting in May 2008, a slew of USPS initiatives hit the street, among them discounts for online purchases of shipping services, customer rebates, a zone-based rate matrix for Express Mail overnight deliveries, and volume-driven price incentives for shippers using “competitive products” like Express Mail, Priority Mail, and parcel services.

Says Jim Cochrane, vice president, ground shipping and the executive in charge of the USPS’s parcel products, “I am now able to sit down and negotiate different multi-year contracts with all types of businesses for as much as they want to give us.”

Businesses generally use the Postal Service’s “Parcel Select” product, where bulk shipments are aggregated—either by a consolidator or by the shipper—and transported to a USPS facility near the parcel’s destination for final delivery. The closer the shipment gets to its final destination before entering the USPS system, the greater the savings. Shippers with the volume and infrastructure to manage the process themselves can pay as little as $1.71 per unit for a five-pound parcel moved from the post office nearest to the shipment’s destination, according to Cochrane.

The latest chapter in the postal flexibility saga was written in mid-January, when USPS launched “Commercial Plus” pricing to give sizable discounts to big customers of Express and Priority Mail. Express Mail users tendering at least 6,000 pieces a year will receive the equivalent of a 14.5-percent per-piece discount off retail rates. Priority Mail users who tender at least 100,000 pieces a year will get an 8.0-percent discount.

Rates on the rise
If the Postal Service is getting aggressive, it can’t come soon enough for large parcel shippers. DHL vowed to be the lowpriced player, and, for the most part, it made good on its pledge. On average, its rates were 15 percent below comparable prices from FedEx and UPS, according to Hempstead Consulting.

Perhaps mindful of DHL’s impending demise, UPS and FedEx rolled out 2009 pricing schedules that contained the largest year-over-year tariff increases in their long histories, says Hempstead Consulting. The Postal Service, for its part, also raised its rates for 2009.

Jerry Hempstead, head of the firm bearing his name and a former top sales executive for DHL and its predecessor, Airborne Express, says UPS and FedEx plotted their rate strategies knowing DHL customers would have few places to turn once the company announced last spring it would reduce its U.S. exposure.

UPS and FedEx were “privy in advance that DHL was going to exit and that the market would become a duopoly with the low-price leader eliminated,” Hempstead says. “Therefore, they could announce higher general rate increases and make them stick.” (DHL officials told the market in May they would restructure their U.S. operations, but denied that the company would pull out of the domestic U.S. parcel market altogether. Five months later, on Nov. 10, however, DHL announced that it would, in fact, discontinue its domestic operations.)

Mike Regan, CEO of TranzAct Technologies Inc., an Elmhurst, Ill.-based firm that also consults with parcel shippers, wrote soon after DHL announced in November that it would pull the plug in the United States that the parcel sector “has gone from being highly competitive to a duopoly. And you’re kidding yourself if you don’t think that FedEx and UPS understand how to take advantage of this condition.”

UPS spokesman Ken Sternad dismisses as “misguided” any connection between his company’s rate actions and DHL’s U.S. plans. “Our rates were determined well before DHL announced its intentions to exit the market,” he says. A FedEx spokesman did not reply to a request for comment.

Ted Scherck, president of The Colography Group Inc., an Atlanta-based consultancy that has worked with all four companies, says although FedEx and UPS knew of DHL’s plans to scale back its U.S. service, they were unaware of DHL’s intent to exit the market entirely. Scherck says he had believed DHL would stay in the United States but would stick to business-to-business deliveries serving about 14,000 ZIP codes instead of the current 50,000.

An unfair advantage?
One challenge facing USPS as it attempts to capitalize on DHL’s retreat is that erstwhile DHL customers may have already left the station. Following DHL’s Nov. 10 announcement, New York investment firm Wolfe Research polled more than 60 large and medium-sized companies that were significant DHL customers in 2008. The respondents said they had diverted 42 percent of their domestic volumes away from DHL by Sept. 30, nearly six weeks before DHL made its plans public.

Another issue for the Postal Service is that business that has migrated to UPS or FedEx may not be up for grabs for years. Hempstead says it is becoming commonplace for large parcel shippers to demand contracts three to five years in duration in order to ensure rate and service stability.

Still, there is little doubt that USPS brings unique advantages to the shipping table. As a quasi-governmental entity, it is exempted from tolls, parking fees and fines, and customs duties, rivals say. It is required to report income tax on earnings from competitive products, but according to Hempstead Consulting, it pays the tax back to itself. USPS does not pay fuel surcharges other than those levied by its consolidator partners. And unlike its competitors, the Postal Service (which is required by law to serve every address in America six days a week) does not levy surcharges on Saturday deliveries or on deliveries to remote or rural service areas.

The absence of USPS surcharges is no small matter. In what has become an annual ritual, its competitors either roll out new “accessorial” charges or expand existing ones. The carriers say the charges are needed to perform valueadded services and to cover the costs of serving outlying areas that offer little or no package density. But the charges can and do add up.

At UPS, carrier-imposed accessorial charges can account for 35 percent of a company’s parcel shipping budget, according to Hempstead. Scherck of Colography Group says those estimates are conservative on an industrywide basis.

USPS’s rivals, who have long complained the Postal Service uses its government-blessed monopoly on firstclass mail to subsidize its competitive portfolio, chafe at the privileges it receives. “That’s the big reason why we have always had problems with their cries to be given freedom to compete in the marketplace,” says Sternad, the UPS spokesman. “When you have those built-in pricing advantages, you are a formidable competitor, period.”

Major player?
As time passes, what additional traction that USPS gains in the express parcel arena may be determined as much by its own mastery of the new universe as by the marketplace’s perceptions of its capabilities.

“They are not too far away from becoming a major player on the commercial side,” says Douglas Kahl, vice president, strategic initiatives for TranzAct Technologies, who has closely followed USPS. “Their biggest challenge will be to learn and understand the increased flexibility they now have at their disposal.”

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