Can parcel carriers get ahead of the B2C density curve?

FedEx Corp. (NYSE:FDX) Chairman and CEO Frederick W. Smith has said that “density is our destiny.” Beyond the clever turn of phrase, Smith’s words ring very true. For carriers of all modes, building effective shipment density is critical to sustained profitability. But it is especially critical in the world of parcel delivery, a labor-intensive business that involves multiple stops by each driver every day.

For decades, the parcel-delivery industry was dominated by what is known as business-to-business (B2B) traffic — businesses shipping to each other. B2B was beneficial to carriers in two ways: First, businesses were less price-sensitive than consumers who received residential traffic; this enabled the carriers to charge more for their services. Second, business shippers typically tendered multiple packages at one location that also were bound for one location. This enabled carriers to achieve superior “stop density,” meaning more packages would be delivered per stop. This reduced per-package costs per stop, wringing more productivity and yield out of each pickup and delivery stop and, by extension, each package.

About a decade ago, e-commerce began to slowly reshape the density landscape. Rather than picking up and delivering orders of multiple parcels moving from one location to another, carriers found themselves delivering individual packages to one residence after another. Yields on residential deliveries were inherently lower than commercial deliveries because the per-package margins failed to offset the costs of multiple delivery stops. As business-to-consumer (B2C) traffic played an ever-larger role in parcel delivery, it became clear to the ecosystem that it had to build the same type of shipment density for B2C deliveries as it had for B2B. This would become a herculean effort due to the very different and less favorable delivery logistics in B2C. 

FedEx and its chief rival, UPS Inc. (NYSE:UPS), have struggled for years to overcome the density disadvantage of B2C shipping. UPS’ ground delivery network didn’t post a profit on B2C deliveries for years. Still, the carriers have had no choice but to spend billions of dollars retooling their networks and technology to meet a density challenge that will only grow. 

All the while, B2C traffic becomes increasingly relevant to the carriers’ futures. For example, in the fourth quarter of 2020, an extraordinary period of B2C activity with the COVID-19 pandemic layered on top of the traditional peak holiday shipping season, B2C accounted for 70% of FedEx’s traffic.

That level is unlikely to be sustained. The B2B segment continues to recover from its pandemic-related flattening. Physical stores are expected to receive more business as vaccines make Americans comfortable with in-store shopping and compel them to pull away from their devices. Still, no one expects B2C to ever again represent less than half of the industry’s total traffic mix. OnTrac, a regional delivery carrier that serves eight states including all of California, has converted from handling almost all B2B traffic to almost all B2C traffic.

The 2020 peak season was a successful and profitable one for FedEx and UPS. No small part of that was attributable to hefty delivery surcharges imposed by the carriers. Volume curbs placed on big customers held down costs. UPS also leveraged the ubiquitous last-mile network of the U.S. Postal Service for more than half of UPS’ final-mile deliveries made under its SurePost service in conjunction with the Postal Service. 

However, what was also apparent was that the carriers reaped enormous benefits from their large-scale investments in infrastructure and technology to get ahead of the B2C density curve. FedEx said on Thursday that it reduced its cost per stop during its fiscal 2021 third quarter — which coincided with the holiday period — by 12% year-over-year. By expanding to a full-blown seven-day-a-week delivery service and integrating parcel traffic it once tendered to the Postal Service under a similar arrangement the agency has with UPS, FedEx cut its fixed costs per package by 4%. Smith told analysts that both figures were “stunning.”

FedEx and UPS have made significant strides in recent years to push a rising tide of parcels through their networks as quickly as possible, making density and the lower-unit costs that accompany it a more reachable goal than ever before. Given the continued surge in B2C traffic spawned by e-commerce, the work will continue with no finish line ahead.