I interviewed Rob Martinez who discussed Small Parcel Market and Some of the Challenges and other Trends.
Rob, can you first provide a brief background of yourself?
Yeah, I'm happy to. My name is Rob Martinez. I'm the president and CEO of a San Diego-based consulting and technology company called Shipware, and I have spent about 27 years in the parcel market. I spent about a decade on the carrier where I ran a large division of a company called Airborne Express that competed with the two parcel giants today, FedEx and UPS. And for the last 15 years of so, I have been representing volume parcel shippers in their best interest in things like contract negotiations and making sure they get the best terms, rates, and conditions in their contracts with FedEx and UPS,modal optimization, making sure that shippers are taking advantage of all of the players in the marketplace, not just the giant two, but companies like regional parcel carriers, companies like OnTrac and LSO and Eastern Connection and kinds of companies.Package consolidators, parcel market work-share partners and the United States Postal Service.
We also provide freight auditing services, so those FedEx and UPS invoices every week have a tendency to have errors, so my company's software finds those errors and then we work directly with those customers to credit those accounts when errors occur. And there are a handful of other things that our company does, but those are the main points. So, yeah, I've negotiated literally thousands of contracts on both sides of the negotiating table, Dustin.
Can you talk about some of the current players and major industry trends in the small parcel market?
Sure. I'll break those down into two separate questions. Let's start with some of the major players. So, when I started in the parcel business back in the '80s, we had dozens of competitors delivering packages in North America, believe in or not. Companies I mentioned, my company, Airborne Express, but certainly FedEx and UPS were big players back time.
But we also had company like Every and Bax Global, Flying Tigers, Purolator was even delivering packages in North America, south of the border back then. Burlington and other companies were competing in this space. What's happened over the years is that all of those competitors have left the North American marketplace with the exception of FedEx and UPS. So, that trend has not been a good one as it relates to shippers trying to get the most economic value that they can from these two very large players in the industry.
There are alternatives, however, to FedEx and UPS, and the United States Postal Service is making a very large play in parcel. And the fastest growing segment of their business has been their packaged services business that incorporates things like Parcel Select and Priority Mail. So, the declines that we've seen in the marketplace for the Postal Service and all of the negative things that we read about the Postal Service have a lot more to do with the decline of First Class mail volumes, although we did see a stabilization of that in 2015 and into 2016.
But really, the shining star in the United States Postal Service portfolio of products has been shipping. So, that certainly has been a trend.
Moving into trends, we'll talk a little bit about things like the growth of eCommerce and what that has done, Dustin, for the shipping industry. But, FedEx and UPS have done a very good job, I think, of keeping up with the growth of e-commerce and creating new services to cover that residential market. So, both FedEx and UPS are work-share partners with the Postal Service on a product that the Postal Service calls Parcel Select. And that's where a work-share partner like a FedEx or a UPS would pick up a package, handle the entire sortation and inter-lying part of the transportation and induct that package as deep within the postal delivery network as possible.
There are other parcel consolidators or aggregators that uses Parcel Select product. So, companies like Newgistics and OSM and other companies do this as well. But FedEx and UPS are two of the largest. The FedEx product is called SmartPost and the UPS product is called SurePost. And both of those products are the fastest growing within those companies' portfolio lines.
These offer a deferred delivery method to the residents for lightweight, low-cost, non-time-sensitive materials, which is perfect for e-commerce.
And on the other side of the e-commerce equation, the online shopper, they're expecting free delivery. That's what most important — not how quickly it gets delivered, but if it's a free or very, very low flat-rate shipping cost, they're more likely to complete a transaction and go ahead and purchase something online. So, you couple the Parcel Select low-cost product with the United States Postal Service making the final-mile delivery in most cases — I can talk about that more, if you like — with the fact that that's what online consumers are looking for. And you can understand what that has been the fastest growing product.
What are some of the critical changes that are happening in the market?
Well, certainly that trend to residential, packages moving from predominantly commercial routes into more residential routes is a very big one and an important cost driver for the carriers. So, UPS, for example, 10 years ago, for every 10 packages they moved about eight of those were going to commercial addresses.
By the end of 2019, UPS expects residential packages to actually outweigh the commercial packages. And it's very close, right around 50/50 right now. And within the next couple or three years, they expect the residential products, they'll have more deliveries to the residential markets. So, that's a very, very important one, because UPS bases their cost on density — pick up density and delivery density. Businesses tend to have multiple deliveries going to a single location every day, versus the e-commerce market, you have much fewer packages going to individual residences all across the country, in fact, across the globe.
It costs UPS a lot more to deliver packages to the residents than it does to a commercial address. So, they've had to really create what they call synthetic densities, trying to maximize how many packages are going to that same residential door so they can make as many deliveries alongside of that one package as possible. So, they've invested in a lot of technologies to either speed up a delivery if they know something is going to be delivered to that same residential address or slow it down if they have a non-guaranteed product like this UPS SurePost, this Parcel Select product that I'm talking about. It's non-guaranteed. So, if UPS knows that tomorrow they have a ground package or an air package that's being delivered to that same residence, the technology allows them now to hold that package and delivery it alongside of the other package that was destined for that same location, thus reducing the cost significantly with multiple package deliveries or greater density. That's certainly been one of the trends.
Other trends in the marketplace we've seen over the years, shippers have moved from air to ground to take advantage of the lower cost ground products. And ground, by the way, has done its job of really keeping up from a time perspective. Both FedEx and UPS guarantee their ground products. And for the most part, they're one-to-five-day deliveries. The majority of ground products with the UPS and FedEx network are delivered within three days, because most shippers have shorter haul packages. They're not going from coast to coast necessarily all the time. But the majority of their packages are traveling within the first few zones, as FedEx and UPS calls it, which has a faster delivery transit time.
Certainly that is a trend. We're seeing now ground to this deferred ground product, which means the growth of Parcel Select that we've talked about as a major trend. And as e-commerce and global trade continues to grow, we are seeing and the carriers are seeing significant growth in their international divisions, especially to emerging markets.
UPS has called the opportunity to deliver international packages, these emerging markets, as their number one growth objective. There is that significant promise in those particular geographies based on populations. So, we can certainly get more into trends, or if you want to move on to another question, just let me know.
Are there alternatives to the big two — FedEx and UPS?
Yeah. The Postal Service is now a major player. They are delivering roughly 10% of small packages, and that's based on considerable growth. And it's also based, in part, on the packages that FedEx and UPS tender back to the Postal Service for final-mile delivery through the work-share product we talked about. But still, the majority of these small parcel packages are being delivered by those two competitors, FedEx and UPS, to the degree that some have called it a duopoly. There are a whole other group of smaller parcel carriers — private, independent companies for the most part — that handle packages on a regional basis.
For example, a company, OnTrac, delivers packages to every zip code in California and to major metropolitan areas in the eight western United States. That's their geographic niche and their footprint. And they do a very good job of it. They offer some services very similar to FedEx and UPS, door to door delivery, trackability, some automation solutions, and they offer multiple services too, from an overnight service to a ground product.
Companies like OnTrac or LSO or Eastern Connection or LaserShip or other regional carriers allow large volume shippers to contract with multiple carriers for this best in breed approach, where they are utilizing multiple carriers based upon their unique delivery footprints and their specialization into certain markets to not only reduce costs, as these regional carriers tend to provide lower pricing than FedEx and UPS, and certainly easier to negotiate some of the major terms with them.But also, they can offer some superior service.
For example, I'm in San Diego, and let's say that I'm shipping a package from San Diego up into the Pacific Northwest, say, to Seattle. That's approximately a zone six delivery with UPS and FedEx. So, if I ship that package ground via FedEx or UPS, that is a three-to-four-day transit. If I ship it with OnTrac, it is a one-to-two-day transit. So, I can reduce my transit time, delight my client, and reduce my cost, very likely, if I've negotiated a good contract with these regional players.
I would also tell you that the 10% that United States Postal Service has of the marketplace is growing. And they offer a lot of packaged solutions that I think a lot of shippers just don't know about or miss, or maybe there's a lack of trust with the Postal Service. But it's a very viable alternative. So, for example, Priority Mail is a product that offer several different price points, and that's a one-to-three day product. Now, it's not a guaranteed product, but the transit times are very, very consistently into the 90s, and they do offer insurance, and you can track the package very similar to the kind of tracking to FedEx and UPS provide.
For certain shippers, especially those that ship lighter weight packages to the inner zones. In other words, they don't ship too far from point of origin to point of destination, can really take advantage of some of the pricing differences that the Postal Service offers on this product versus a FedEx or UPS. Especially if you compare it to a UPS Ground or a FedEx Ground, a one-to-five-day transit. You have a one-to-three-day Priority Mail transit at a significantly lower cost.
One of the biggest cost drivers for shippers these days is what FedEx and UPS would call surcharges or accessorial charges. So, Dustin, these are things like residential surcharges, fuel surcharges, deliver area, or out-of-area surcharges, those kinds of things that can contribute somewhere between [inaudible 00:15:15] and 10 and as much as 30% of shipper's overall cost.
Well, the Postal Service does not levy any of those accessorial charges. The only time you get ancillary charges with the Postal Service is when you ask for something different than a normal delivery — if you want a special signature or something and you ask them to do that, then they'll levy these additional charges. They are not automatic, like you see with FedEx and UPS.
Some other benefits to the Postal Service over FedEx and UPS also include the way that they price dimensionally is different than the way FedEx and UPS price. So, the way the big two do it is they take a package, they take its length, they multiply it by its width and its height, and then they divide that total cubic-inch factor by a dimensional divisor, which in 2016 is 166. So, length times width times height divided by 166. They round up that number, and whatever is greater, the actual weight or the dimensional weight, is what they charge you.
The Postal Service only applies dimensional pricing to the outer zones, zones five through eight — not the inner zones — and when they do apply the dimensional factors, it's a better factor for its shippers. It's a more improved factor of 194. So, the dimensions don't play as great a role in pricing with the Postal Service as it does with FedEx and UPS. And there are some other benefits of using the Postal Service as well. So that is certainly an alternative in addition to those regional carriers that I mentioned before.
Thanks, Rob, for sharing today.
Sure. My pleasure.
About Rob Martinez
Co-Founder, President & CEO at Shipware LLC.