UPS and FedEx: Unpacking a Formidable Duopoly

Rewind to 1971. Nearly 200,000 troops remain in Vietnam, “Watergate” refers solely to a D.C. hotel, and Fred Smith is launching one of the largest innovations of the 20th century — next-day parcel delivery to nearly every address in the United States. Uniquely prescient and enterprising, Fred’s vision of a consumer market dominated by small, valuable items sourced from remote locations has come to fruition.

Joining FedEx in small-parcel domination is UPS, which became a competitor to FedEx in 1975. Through organic growth, acquisitions, and the rise of the internet, the pair would go on to build one of the most significant duopolies in American history.

Early Days

A common question among UPS/FedEx customers surrounds lack of choice. Unfortunately, challenges to the duopoly are difficult to mount. Carrier networks are incredibly expensive to build, evidenced by the perilous financial state of the carriers in their infancy. Infrastructure investment including vehicles, distribution centers, and internal networks is joined by extensive variable costs in the form of fuel and labor, manifesting in strong barriers to market for competition.

Adding to these barriers is a healthy appetite among both carriers for acquisition. From freight-forwarders, to LTL carriers, to direct competitors like TNT, the carriers have gobbled market share and technological innovations to improve their position.

The Rise of Ecommerce

The internet and small-parcel logistics are the two sides of the ecommerce coin. The internet provides the communication and payment service, while the carriers deliver the physical product. In the eyes of the carriers, the rise of ecommerce is like the discovery of an oil field adjacent to an existing pipeline — and similarly rewarding.

The carriers’ extensive networks, time-definite service guarantees, and investment in tracking has fit particularly well with a relatively new frontier in retail — the fulfillment experience. Underfunded regional carriers (and the USPS, until recently) have been routinely spurned by retailers who fear backlash over late or damaged packages. This has provided further protection for FedEx/UPS market share amidst exorbitant rate and accessorial increases.

Catch-22

The increase in package volume related to ecommerce has been a blessing and a curse for the duopoly. Not all volume is good volume, particularly with regard to the meteoric increase in residential deliveries. The expense of the “final mile” weighs on profits, especially for deliveries outside of dense areas.

Revenue managers had a solution. Instead of simply increasing base rates for all packages, the carriers would add or substantially increase over 50 accessorial fees. The negative for their customers isn’t the mere existence of these fees (profitability for any business is important and expected), but rather the addition of so many levers to manipulate revenues. It has become increasingly difficult to navigate murky agreements, forecast future transportation budgets, and distill the carriers’ true cost to serve an account from a negotiations perspective.

An Advocate Emerges

In the latter half of the 2000s, it became eminently clear to those in the small-parcel space that a level playing field was essential. In an industry ripe for disruption, the partners of iDrive Logistics developed an innovation that has remained highly effective — the Carrier Cost Model Approach. Far superior to benchmarking due to the myriad variables present in small-parcel, cost modeling allows clients of iDrive to understand the carriers’ cost to serve an account. This innovation allows for precision in carrier negotiations, driving significant cost reduction while respecting the role of the carrier.

Further augmenting this approach is iQ, iDrive’s Business Intelligence Platform. Using post-audit reporting, this platform allows unparalleled insight into package, pricing, and operational trends, affording clients the ability to make informed decisions surrounding their small-parcel and LTL.

The small-parcel industry promises to become increasingly complex. We invite you to explore how our perspective could assist you in navigating the labyrinth.

Matthew White manages Client Relations for iDrive Logistics, assisting businesses nationwide in efficiently managing their small-parcel transportation expenditures. He can be reached at m.white@idrivelogistics.com, or 385.455.4113.