The express parcel delivery market has experienced a drastic change since the exponential growth of e-commerce. In addition to being a saviour, e-commerce has been a key for the boom in the express courier market. Every year, sellers need an increasing number of parcels for delivery and this trend is expected to continue in the foreseeable future.
The total global express and small parcels market grew at 7.7% in 2015 compared with 8.2% in 2014. The growth in real terms is forecasted at a CAGR of 8.4% for 2015-19. APAC is projected to have the highest growth in the upcoming years. In 2016, the global retail sales comprising in-store and internet sales touched $22.05 trillion, this was an increase of 6% from 2015. The retail e-commerce sales accounted for around $ 1.92 trillion or 8.7% of the global retail sales. This is expected to jump $4 trillion with retail e-commerce accounting for 14.6% of total retail spending by 2020.
Express couriers have gained more importance with e-commerce assuming a greater significance in the last couple of years. The industry comprises innovative leaders such as UPS (USA), FedEx (USA), DHL (Europe), TNT was acquired by FedEx (Europe) and smaller regional players, who created a niche for themselves like SF Express (China), Toll Express (Australia), Aramex (Middle East), DTDC (India), etc. Courier companies may have a similar customer base but can differ in the conduct of their business operations. For instance, the two bigwigs FedEx and UPS differ significantly in their structure of operations. UPS manage all its segments such as domestic, international, ground, commercial and industrial through a single pick-up and delivery network, however, FedEx has a unique delivery system for each of its segments (ground, express, freight). The single network system allows UPS to maximise asset utilisation and network efficiency as it mostly deals with small package sharing. On the other hand, FedEx cannot operate on a single network system as it has distinct operations for its segments.
All the main industry players like FedEx, UPS and DHL are heavily investing in their networks to provide better serves in this fast-growing segment. The express courier industry has adopted new technology to track vehicles and parcels through digitisation. Additionally, parcel processing systems that are capable of sorting 20,000 packages per hour have made the industry more efficient than before by reducing the turnaround time.
The express segment of FedEx underwent changes under the ‘profit improvement initiatives’ which included streamlining processes and staff functions, modernisation of air fleet, yield management and international profit improvement. In 2015, FedEx express decided to permanently retire 15 aircraft and 21 related engines leading to impairment and related charges of $276 million. The newly added aircraft are expected to be more reliable, fuel-efficient and technological advanced. Although the acquisition of new planes will negatively impact EBIT margins initially, the inclusion of newer planes is likely to lower the maintenance and repair costs in the future and will further boost the operating performance. In contrast, UPS took a bold step by ordering 14 Boeing 747-8F aircraft (capable of carrying 16% more cargo) due to be delivered between 2017-20. Thus, with an influx of new aircraft, UPS will be able to repurpose its older fleet for domestic operations. Moreover, UPS rolled out an algorithm-based driver delivery route optimisation program for more efficient parcel pickup-delivery and to realise cost savings.
DHL also invested heavily to maintain and renew their aircraft fleet as well as expand global and regional hubs to increase international footprints. The capital expenditure (CAPEX) for DHL amounted to €856 million, €2.98 per courier delivered (or $943.9) in 2015, up from €571 million or €2.15 per courier delivered (or $752.5) in the previous year. The CAPEX incurred for FedEx Express segment was at $2.4 million in 2015 and was higher by 19.4% over the preceding year. This was primarily due to increased spending for aircraft and related equipment purchases. This included the delivery of 13 Boeing 757 aircraft, 14 Boeing 767-300 freighter and the modification of certain aircraft prior to placing into service. The CAPEX was further expected to increase in 2016 to drive aircraft fleet refreshment programs.
The CAPEX for UPS undertaken in 2015 trended around $1.9 million each representing an investment undertaken on technological upgradations, vehicle replacements as well as new vehicle orders, capacity expansion, hub automation among others. The CAPEX for 2016 was set to be slightly higher at around $2.8 million.
Moreover, FedEx in a strategic move acquired TNT Express at €4.4 billion in May 2016 to expand its international footprint (specifically Europe) and challenge its long-time competitor UPS. Prior to this, the 4 major players DHL, FedEx, TNT Express and UPS held nearly 80% of the European market. TNT with its operations in 61 countries has a niche in high tech, healthcare, industrial and automotive industries. According to TNT, the international market (European market) and domestic market are worth €15 billion and €6 billion respectively. FedEx-TNT is expected to have the largest market share in the US and Canada air export revenue with this acquisition.
UPS also acquired Marken, a privately-held supply chain company with a niche in the pharmaceutical and life science industry. Marken on average processes 50,000 shipments/month globally and thus, will allow UPS to tap the pharmaceutical logistics market. The cold chain logistics market is projected to grow to over $14 billion by 2021 and UPS is keen on positioning itself to capture this market. Furthermore, UPS has completed the acquisition of Coyote Logistics for $1.8 billion. Coyote provides supply chain management solutions to more than 12,000 customers, thereby allowing UPS to take advantage of the synergies created by way of cost efficiencies in shared maintenance, IT and administrative costs to control its operating expenses (OPEX).
Similarly, DHL acquired UK Mail in 2016, this will further enable expansion of its network and will have a strong grip in Europe’s three largest e-commerce markets, the UK, France and Germany. All these combined together accounted for more than 60% of online retail in the European continent. DHL also acquired a 27.5% stake in Relais Colis, a French delivery company in 2016, which will enhance its access in the French e-commerce market.
The couriers delivered for UPS Express* segment increased by 2.1% in 2015, however, revenues remained flat resulting in an average revenue per courier delivered at US$10.7. There was no growth in revenues registered as an increase in the base rates was offset by lower fuel surcharge rates. The OPEX for the segment decreased by 5.2% in 2015 over the preceding year translating into OPEX per courier delivered of US$9.05 respectively.
Likewise, FedEx’s couriers delivery increased by 4.7% in 2015 over 2014, although revenues and operating expenditures registered no growth over the previous year. This resulted in a drop in its revenues per courier delivered by 4% to US$25.81 respectively and a drop in its OPEX per courier delivered by 4.6% to US$24.3. FedEx Express’ revenues remained flat as growth in the US and international package business was offset by lower fuel surcharges and lower freight revenue. The OPEX included a US$276 million charge relating to permanent retirement of certain aircraft and associated engines.
Further, for DHL couriers delivery increased by c. 8.3% in 2015, revenues increased in its home currency by 9.4% in 2015 translating into a lower revenue per courier delivered of €35.8. In USD terms, however, revenues decreased by 8.5% to $15.06 million translating into 20.3% drop in revenue per courier delivered of US$39.5. DHL’s revenues increased in line with volume growth, but as with FedEx and UPS, these were partially offset by the lower fuel surcharge. The OPEX increased by 8.5% in its home currency but decreased in USD terms by 9.2%. This translated into a lower OPEX per courier delivered of US$33.8 (or €30.7). TDI shipment (Time Definite International) is DHL’s core product and accounts for the major chunk of the revenues generated by the express segment (accounting for 41% of total revenues). DHL pre-sends paperwork to the countries concerned, thus, enabling clearance prior to the arrival of the shipment. The TDI segment has largely benefitted from the growing importance of small and medium-sized businesses in international trade and expanding the scope of e-commerce.
On an average, the industry registered a decrease in net profit margin owing to fierce competition in the industry, this led to reducing pricing strategies. UPS’s ROE at 194.5% was the highest amongst the three players. The primary driver for this is the high equity multiplier. UPS’s net worth-TNW was negative and net equity was only 6% of total assets-net equity was lesser than its intangible assets (attributable to high accumulated deficit). Secondly, c. 39% of their total liabilities are short term and long term borrowings, gross debt to equity was 5.75x and tangible DHL’s N.P margin declined to 2.9% in 2015. Although its asset turnover improved to 156.4%, indicating adequate revenue with smaller asset base. The equity multiplier was lowest for FedEx indicating lower debt used to finance assets.
Challenges posed by Amazon
Amazon, after making its mark in e-tailing and warehousing segment has set its eyes on dominating the logistics market-owning and managing shipping and distribution services instead of relying on other firms. This move is going to give stiff competition to the big players as Amazon currently relies on FedEx and UPS for its packages to be delivered to its customers. The firm acquired a 25% stake in French based Colis Prive in 2014, Amazon went ahead and acquired the remaining 75% stake in 2016, thus enhancing its distribution capabilities while improving customer satisfaction. Amazon also entered into an agreement with Air Transport Service Group (ATSG) in 2016. This resulted in affiliates, Amazon Fulfilment Services, that will operate ATSG’s 20 Boeing 767 freight aircraft to deliver merchandise to Amazon customers in the US. In order to reduce its operating expenditures, Amazon expanded its delivery options, achieved better pricing and stricter control over its logistics segment. It also incurred significant cost in maintenance of inventory and with jets, at its disposal, it can reduce the delivery time and deliver merchandise from distantly located warehouses.
Businesses are becoming more reliant on the express courier industry with the integration of world economies and increasing dependence on international trade. Additionally, with the growing importance of small and medium-sized enterprises in global trade and e-commerce, the demand for the express industry is expected to grow. But with the fierce competition persisting in the industry, cost efficiencies will come into play as margins will be pressurised.
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*UPS express segment includes the US domestic package (next day, deferred and ground) and international package
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