About a month ago, Nate Skiver, founder of LPF Spend Management, a parcel-delivery consultancy, posed a rhetorical question on his LinkedIn page: What if shippers and retailers used regional delivery carriers and last-mile providers to meet their primary e-commerce delivery needs and used UPS Inc. (NYSE:UPS) and FedEx Corp. (NYSE:FDX) to fill in the blanks as backups?
Skiver’s musings received about 10,000 page views, striking a chord in an industry experiencing profound changes in how its business gets done. Skiver said he’s not suggesting or even recommending that retailers implement such a change. He also emphasized that it would make more sense for retailers below the mega-guys to consider moving in that direction. The largest retailers still need the one-stop national coverage that they trust only UPS and FedEx to provide.
Yet it’s the shippers that are pushing regional carriers to expand their coverage areas. In response, the needle is slowly moving toward what would be an industry-altering trend of regional carriers teaming with last-mile providers to forge what would resemble national delivery networks.
In theory, there’s plenty of logic behind this. E-commerce fulfillment is migrating ever closer to the consumer, Skiver noted in his post. UPS and FedEx have been hitting their big customers with rate increases and delivery surcharges; the brunt of UPS’ peak-season surcharges announced last week will fall on the shoulders of high-volume customers. Increasingly, big shippers are seeking out regional carriers to fill their delivery needs, especially over the approaching holidays, at what they hope are more reasonable price and surcharge levels.
There is no shortage of regional players to select from. In a presentation, Skiver listed 14 regional parcel delivery carriers serving various parts of the U.S. There is also the Canadian carrier T-Force which serves 50 locations in the U.S. and 10 in Canada. In addition, there is an untold, and growing, volume of last-mile carriers. As IT connectivity improves, suddenly the idea of a national network composed of a mix of regional and last-mile providers doesn’t seem like a flight of fancy.
Vienna, Virginia-based LaserShip, whose East Coast network stretches from New Hampshire to south Florida, recently expanded into Tennessee with service in Memphis, Knoxville and Nashville. LaserShip is also looking to enter Chicago, is considering an expansion into Texas, and will broaden its coverage within some of the states it already serves, said Josh Dinneen, its chief commercial officer.
Austin, Texas-based Lone Star Overnight, commonly known as LSO, said last week it would expand into Missouri, Kansas and Illinois by early September, the company’s first push outside the southwestern U.S. in its 30-year history. LSO said it will cover 90% of Missouri’s population with services to St. Louis and Kansas City. Its Kansas and Illinois service areas will initially encompass the western and eastern fringes of the Kansas City and St. Louis markets, respectively. The carrier will add New Orleans and Baton Rouge to its Louisiana service area and will deepen its penetration in Oklahoma and Arkansas, the latter with new service to Little Rock and to the state’s important northwest quadrant, home to various transport companies and, notably, Walmart Inc. (NYSE:WMT).
Richard M. Metzler, LSO’s CEO, said that burgeoning demand from big shippers has outpaced the company’s current geography, necessitating the expansion. Shippers, he said, have been encouraging LSO to branch out.
Two companies need not make a trend. Still, the geographic expansion is a milestone for a segment of the industry that isn’t known for biting off large chunks of unfamiliar territory. Regional carriers have stuck to their geographic knitting for decades. They understand the ins and outs of their service areas far better than do their national counterparts. Big shippers that are longtime FedEx and UPS customers also rely on regional carriers, and for good reason. Regional carriers are very reliable in hitting their one-day, at most two-day, delivery commitments. Because they operate low-cost ground delivery services and have low overhead in general, they can keep their rates competitive and surcharges on a low boil. As parcel delivery lengths of haul continue to shrink, the regional model becomes a more compelling proposition.
Whether the regionals can ever challenge FedEx and UPS for national supremacy is another matter. Brandon Burt, director of operations at consultancy Transportation Impact LLC, said regionals lack the resources to offer a viable long-term geographic alternative to the national carriers. It will be a tall order for any regional carrier to consistently and effectively accommodate the delivery demands of multiple big shippers requiring the support of a large-scale network. Burt said.
As a result, shippers and retailers will stick with the devils they know, and will pay UPS and FedEx whatever it takes to avoid network disruptions, Burt said. Those costs, he added, will likely be passed on to end consumers.
Skiver echoed those sentiments, saying that regional carriers will need to earn retailers’ trust before they will commit to a relationship on a scale similar to that with FedEx and UPS. In addition, the big boys can “customize pricing that is just attractive enough to retain large customers, if they choose to,” he said.
There is also the concern, albeit a slim one given that daily U.S. parcel volumes, according to FedEx estimates, will grow to 172 million by 2026 from about 107 million today, that regional carriers will become financially overextended if they pour money into network expansion only to find that volumes aren’t what they projected.
The overarching problem for all parcel-delivery carriers is retailers’ inability to accurately predict end demand, Skiver said. Retailers are “absolutely terrible” at giving their carrier partners timely and precise planning data, he said. Retailers are neither ready nor willing to support a complex delivery network, which makes an uphill battle for regional carriers even more arduous, he said.
Not every regional carrier has expansion plans on the table. OnTrac, for example, has no plans to broaden its eight-state network, which runs as far east from the Pacific Ocean as Colorado, said Mark Magill, OnTrac’s vice president of business development. Yet at some point, given the projected volumes headed their way as e-commerce continues to grow, it may not be an option. Regionals “will absolutely have to expand,” said John Haber, president of the parcel business unit at consultancy Transportation Insight LLC.