The parcel market is a vital component of the global economy, responsible for delivering goods and products to consumers and businesses alike.

However, the industry is currently facing a challenging situation due to excess capacity and stagnant demand. The COVID-19 pandemic has further exacerbated these issues, with businesses reducing their orders and consumers shifting towards online shopping.

As a result, many parcel companies are struggling to maintain their profitability and competitiveness in the market.

In this blog post, we will explore how the parcel market is dealing with excess capacity and stagnant demand and the strategies that companies are adopting to overcome these challenges.

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The Current Supply-Demand Disparity

There is currently an unprecedented supply-demand disparity in the parcel market that has not been observed in the past three decades or possibly even longer. This is due to the absence of any new measures or incentives that may stimulate consumer spending on products, coupled with a lack of growth in demand. As a result, it is expected that there will be an oversupply of parcels for the next three years or more.

The COVID-19 pandemic brought about an unprecedented surge in demand for delivery services in 2020 and 2021, prompting the three national carriers in the US - UPS Inc., FedEx Corp., and the US Postal Service - to quickly expand their capacity. This rapid growth in the delivery sector also attracted significant investment from venture capital and private equity firms. As a result, many new players entered the market, eager to capitalize on the craze for investments in last-mile delivery businesses.

Moreover, the rapid expansion of Amazon.com's last-mile delivery network inspired other retailers such as Walmart, Target, and American Eagle Outfitters to develop their own private last-mile delivery capabilities.

As the pandemic brought about a surge in deliveries to homes, carriers found innovative ways to maximize their existing infrastructure. Leveraging their fixed sortation centers, they successfully introduced weekend deliveries, boosting their capacity by a remarkable 30% at a minimal cost. Interestingly, one effective way to trim excess capacity is by discontinuing weekend delivery services, which can lead to significant cost savings.

Update as of June 2023

The parcel market is currently experiencing a surplus of capacity, with the combined capabilities of the three national carriers and Amazon's private fleet exceeding 110 million parcels per day, while market demand as of June 2023 was only around 70 million parcels per day.

This discrepancy between supply and demand raises concerns for the future of the industry, as it is unclear how this surplus capacity will be utilized. While some may hope that such a situation would result in lower shipping prices for shippers, this is unlikely to occur due to various factors affecting carriers' costs, including labor expenses and shareholder demands for higher returns.

Therefore, despite the excess capacity in the parcel market, it remains to be seen how carriers will navigate this uncertainty and how it will ultimately impact the industry as a whole.

The Labor Contract Negotiation

A recent labor contract negotiation has provided UPS with the opportunity to expand its delivery services to include weekends. This move requires the company to create additional full-time positions and offer a higher wage and benefits package for senior package car drivers, which will reach $170,000 per year by 2028. However, the implementation of these changes requires careful management to ensure that UPS does not sacrifice its market share gains by overextending its capacity and lowering its cost per package.

In the aftermath of the pandemic, demand for delivery services has not kept pace with the expansion of capacity. This trend can be attributed to two main factors: firstly, consumers are returning to physical stores for their shopping needs, and secondly, online retailers are opening brick-and-mortar locations to offset their losses from online sales. As such, UPS must remain vigilant in its efforts to balance its capacity and cost structure to maintain its market position in this evolving landscape.

The free shipping offering by Amazon was a game-changer for the online retail industry, leading to a surge in sales for the sector. However, this once-novel feature has now become commonplace, with numerous other retailers adopting it as well. It has come to light that a growing number of merchants are opting to raise their minimum order thresholds in exchange for complimentary shipping services.

Though this may result in higher sales figures, it also leads to a decrease in the number of parcels, as multiple smaller orders are combined into a single, larger one. This shift towards larger orders has significant implications for logistics and transportation companies, who will need to adapt their business models accordingly.

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Disrupt Pricing in the Parcel Industry

The parcel industry is undergoing a major shift in pricing, with shippers turning to Amazon to disrupt the market just as it did with brick-and-mortar retail. Amazon's recent re-introduction of door-to-door parcel service is aimed at the most profitable small and medium-sized customers of FedEx and UPS, thanks to its huge backhaul capacity which enables it to handle millions of parcels per day.

In addition, the Postal Service has the capacity to handle up to 60 million parcels per day, but currently only handles 26 million. The company aims to boost its market share growth by offering enticing rates to consolidators such as DHL eCommerce, Pitney Bowes Inc., and OSM Worldwide. This strategic move can potentially expedite the company's market expansion and bolster its position in the industry.

This strategy would enable the business to expand its presence in the industry at a faster pace. The Postal Service has the exclusive ability to place lightweight parcels in mailboxes, which provides added protection from inclement weather and theft. This unique advantage presents an opportunity for the organization to broaden its customer base by attracting more business-to-consumer parcels.

As a result, the Postal Service can have slight increases its revenue streams while also enhancing its reputation as a reliable and secure delivery service.

According to data gathered by ShipMatrix Inc., a significant portion of parcels delivered to residences weigh less than 5 pounds and can easily fit inside a mailbox. This information is crucial as it presents an opportunity for the Postal Service to potentially reduce freight rates for these packages. As the cost of delivering an 8-ounce package to a mailbox is comparable to that of a large envelope of the same weight, such a move could lead to increased volume for the Postal Service. Additionally, this could prompt competitors to respond with their own competitive pricing or risk losing out on this particular market segment.

In Conclusion

The parcel market is facing significant challenges as it tries to deal with excess capacity and stagnant demand.  While the COVID-19 pandemic has led to a surge in e-commerce sales, it has also created logistical challenges, with companies struggling to keep up with demand. Moreover, rate increases happened and were implemented by supply chains.

However, many industry experts are optimistic about the future of the parcel market, with many companies investing in new technologies and business models to address these challenges. As the market continues to evolve, it will be interesting to see how these companies adapt and innovate to meet the changing needs of customers and stay ahead of the competition.

If you want to stay updated with the current trends in the trucking, freight, and logistics industry, stay connected to us.

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