Stanley Lim is an assistant professor of Supply Chain Management at the University of San Diego School of Business.
Juan Sotolongo is the chief executive officer of Lockars Ltd.
Shippers are very upset at the pricing and capacity strategies of both UPS & FedEx. Will this create an opportunity for new competition (and it’s not Amazon)? The last year has seen unprecedented growth in the parcel sector, as well as unprecedented market behavior by UPS and FedEx. Price increases, multiple surcharges, capacity restrictions and a “take it or leave it” attitude, have created a huge resentment within the shipping community. We say that these trends are unprecedented, but there is history behind this story.
In the 1970’s, UPS had pretty much a monopoly outside of the United States Postal Service, and like today, not strong competition from them. Before e-commerce, there was mail order, and the big players in those days were Sears and JC Penney, and they shipped millions of parcels with UPS. Incredibly, UPS had one rate chart, irrespective of how many parcels you shipped, meaning that if a company shipped one parcel per year or one million parcels per year, it paid the same price. No discount.
Sears and JC Penney approached UPS and demanded discounts based on the huge volume they shipped. They threatened to leave UPS if they didn’t get the discounts. UPS mulled it over for six months, and concluded they were bluffing. From the UPS’ viewpoint, it believed there was not a viable competitor for the mail order companies to turn to. They were wrong. Immediately upon hearing of the UPS decision, JC Penney and Sears canceled their contracts and started working with a little-known regional carrier called Roadway, which years later was acquired by FedEx and is now FedEx ground. This was the birth of a real competitor.
At the time, UPS scoffed at this decision, saying they will come back as there is no way that Roadway will provide the delivery service and the service level required, and being regional is deemed not a real threat. The layoffs at UPS ensued as a result and Roadway quickly became a national carrier. One year later, UPS was forced to change its pricing policies to offer volume discounts, and some of the business did eventually come back.
It was the UPS market arrogance that laid the foundation for a new competitor, and we see many of the same conditions today. We know that Amazon has already taken most of their volume in house, and they may cherry pick some of the UPS and FedEx volume and provide some third-party services. The e-commerce sellers are very leery of Amazon, as a direct (or indirect) competitor, and the latter has proven to abuse its market position as much as UPS and FedEx do.
But, no, the new competition will not be Amazon. It will be much more disruptive. Imagine if Google created a so-called “smart logistics platform”, such as the one that Alibaba has built (Cainiao Smart Logistics Network), which enabled the various regional carriers in the United States to collaborate seamlessly together. Add on top of that, a new urban logistics infrastructure of multi-tier fulfillment network comprising micro fulfillment centers, micro city hubs, shared parcel locker network, crowdsourced logistics and local delivery players, and let’s call this, for the sake of argument, Google Logistics Services. This could potentially create some serious disruption. Many reading this may scoff at it saying, it’s too hard, it’s too ambitious, it’s herding cats, et cetera. Precisely for this very reason that it would be hard that makes it incredibly valuable.
The seeds have been planted and the shippers are looking for an alternative. No better timing than now to provide them what they want. Best Service and Lowest Rates, the old UPS motto!
 (2024))
