News > Companies
E-profits tough to deliver
November 29, 1999: 11:38 a.m. ET

New UPS competitors fight to deliver Web buys despite tight margins
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - The last mile of online retailing is the oldest but still one of the most difficult parts of the process.
    Making money by delivering goods to home is difficult, despite the fact that catalog shippers produced a market for the service a century before the first Internet sale. That's because even if consumer growth in e-commerce continues to be explosive, there will never be the "density” -- or efficiency for residential deliveries -- that there is in business-to-business shipments. And density is king when it comes to profitability in the trucking industry.
    "The complexities of doing home deliveries are much greater than they are for commercial deliveries," said Paul Schlesinger, analyst at Donaldson, Lufkin & Jenrette Securities. "It is far more difficult to get low costs. You still have the basic reality that you have to find someone at home. It gets awfully expensive if you have to make five stops in order to make four deliveries."
New competitors despite problems

    Tough competition and the resulting low prices in the market add to the problem of profitability in the sector. Along with United Parcel Service -- the world's largest transportation company, which dominates the market -- there is the U.S. Postal Service, with its monopoly on first class mail taking it to every home in the country six days a week, allowing it to add incremental business at little additional cost.

Shipments to residences from e-commerce shippers are expected to rise from 600,000 a day this year to 4.2 million a day in 2003.

- Forrester Research


    But despite the challenging economics, the lure of growing Internet purchasing by consumers is bringing powerful new players into the already crowded field, with the RPS subsidiary of Federal Express owner FDX Corp. (FDX), the Airborne Express unit of Airborne Freight Corp. (ABF) and Paxis LLC, a joint venture between Lockheed Martin Corp. (LMT) and GATX Corp. (GMT), among the new deep-pocket players in the field. Quad/Graphics Inc., the privately held printer of catalogs for many of the nation's leading direct marketing companies, also is getting into the delivery business with a new subsidiary, Parcel/Direct.
    The Airborne, Paxis and Quad/Graphics entries are due to U.S. Postal Service going after the parcel delivery business far more than in the past. In January it changed the pricing of its parcel package service, letting other delivery companies cut postal costs 50 to 80 percent by handing off the package to the post office or regional hub nearest to the final destination, and letting the Post Office take care of the difficult task of making final delivery.
    In March it also started electronic delivery confirmation of priority and parcel select packages. Lack of that confirmation had kept many shippers from using the post office for deliveries. The USPS has handled 38 million packages with delivery confirmation since starting that program.

FDX Corp., owner of Federal Express, is preparing to launch a new effort at this market through RPS, its low-cost ground parcel service that in the past handled only business-to-business deliveries. It is doing a pilot program in the Pittsburgh area with residential deliveries and expects to go after that market next year.
Home delivery explosion

    All these new players in the home delivery market say that e-commerce alone did not bring them to the field, but it is a large motivation for them making the move when they did.
    "This is something we had always intended to do because the market is such a huge market," said Henry Maier, vice president for product marketing at RPS. "Certainly the growth in e-tailers made us believe the time is now right."
    Tom Nightingale, a UPS veteran who is now director of marketing and customer development at Paxis, cited a study by Forrester Research that showed residential package deliveries from traditional shippers staying flat at about 2.3 million a day through the year 2003, but the shipments to residences from e-commerce shippers rising from 600,000 a day this year to 4.2 million a day in 2003.
    "Without a doubt, it (e-commerce) is a huge component of this" joint venture, Nightingale said. "Our excitement about the industry is fueled not just by the USPS discounts, but that this industry is at such exciting time in its history."
    Airborne, which always has been one of the lower-cost delivery options for businesses, may see its basic focus transformed by the new residential option, said Tom Branigan, its public relations manager.
    "The demand had been unprecedented," he said. "All the planets are aligned right now. It's hard to tell when you have a defining change for a company, but it appears we're having it now."
UPS still tough to beat

    Even with the new players, it will take quite a bit of work to dislodge UPS from its lead in home delivery of packages. It already has the density to allow it to be the low-cost provider of the service, despite a high-priced union labor contract and its own set of assets.
    Its volumes allow it to use even lower-cost forms of transportation such as trains, making it one of the railroads’ largest customers. It is still the only service that offers everything from the top-dollar, overnight air service to the low-cost guaranteed ground service using the same network, the same tracking system and same delivery drivers, making it the preferred choice of most e-commerce shippers, according to experts and studies of the industry.
    Even with the new competitors, UPS will be the only one able to make that statement for the foreseeable future.

"We did nothing to get that 32 percent. This year we're doing something."

- Gerry McKiernan, a USPS spokesman


    Though about 80 percent of UPS' shipments and an even greater percentage of its profits come from business-to-business deliveries, the Atlanta delivery giant says it has no intention of backing away from the home delivery field.
    "Certainly other delivery companies are beginning to realize the value of home delivery. But you couldn't get a whole lot more fierce than you already were," said Steve Holmes, spokesman for UPS. "Even if you look at it and say it's not as profitable as b-to-b deliveries, it's still contributing to our fixed costs. The more volume you can win, you can create density to make it more and more profitable."
Tortoises winning delivery race

    A survey a year ago of more than 1,000 frequent Internet shoppers by Zona Research found that 55 percent said they usually got deliveries by UPS, 32 percent got them through the U.S. Postal Service and only 10 percent through Federal Express.
    That survey also showed that most consumers are looking for the most economical delivery option, not the quickest, on which the delivery companies can make the better return. More than half will take delivery in four to seven days, and only 2 percent will pay extra for overnight delivery.
    Officials of the U.S. Postal Service say they are convinced they will be handling a larger share of deliveries in the coming years, due to both their own efforts and the new ventures partnering with the service.
    "We did nothing to get that 32 percent, said Gerry McKiernan, a USPS spokesman. "This year we're doing something."
    Still even McKiernan and some of his new partners believe -- as do experts from the industry -- that UPS will continue to see its volume of online merchandise deliveries to homes grow as e-commerce purchases continue to rise.
Web shoppers demand service

    "UPS is much better suited from a pricing standpoint, but also from a consumer standpoint," said Elaine Rubin, chairman of, the trade group for online retailers.
    She said competition is forcing Internet retailers to eat a high portion of their delivery costs as part of customer acquisition, rather than turning delivery into a profit center like many traditional catalog retailers. That is driving online retailers to find the lowest cost option that meets their customers’ demands.
    But those demands are high and likely to get higher as consumers look to purchase more goods on the Web. RPS is planning to set up an entirely new delivery network for residential deliveries to meet those demands, looking at ways to make weekend and evening deliveries to find people home.
    "People think of home delivery as the stepchild of the supply chain,” said Maier of RPS. ”There’s a belief consumers are happy to get it and don't care when. Our research showed that couldn't be further from the truth. It’s important to have a choice of services. This is a far more demanding customer.”
Investor excitement, analyst concern

    The potential of delivering online purchases to consumers has driven investor interest in several of these companies, including UPS’ record initial public offering in November. The day the Airborne-USPS agreement was announced, Airborne’s stock climbed 16 percent. But Airborne shares since have fallen to lower levels than before that announcement in the face of difficult earnings numbers.
    Some analysts are unconvinced the efforts to deliver to homes will ever bring the profits that the companies’ core business-to-business deliveries have and worry that too many resources are being diverted to less profitable business.
    "It's certainly is an area that would seem to be conducive to lofty stock valuations. There's that incentive to do so,” Schlesinger said. "I would hope that the perspective of management isn't stock valuation.”
    But Schlesinger and officials of the companies say that in order to serve major shippers in the future, a carrier is going to have to find a way to make low-cost home deliveries of online purchases.
    "It's always going to be a challenging profit area,” said Maier. "It's more lucrative to deliver a lot of package to a single location. But I think the economics will change significantly and from a carrier perspective, I don’t think we’ve got a choice.” Back to top


Lots of green for Big Brown - Nov. 9, 1999

FedEx earnings fail to deliver on expectations - Sept. 16, 1999

Airborne goes postal - June 3, 1999


United Parcel Service

FDX Corp.

Airborne Express

U.S. Postal Service


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