The Delivery Economy: Delivery isn’t Free

Last week, Federal Express reported earnings that handily beat Wall Street expectations.  Revenue was also significantly above analysts’ forecasts.  Admittedly, expectations had come down because of shutdowns but it was still a solid quarter and a sign of things to come.

Traditionally in package delivery, business to business deliveries were more profitable than business to consumer deliveries.  Route density lowered costs and the importance of being on time for business deliveries allowed Fed Ex and UPS to earn higher margins on business deliveries versus consumer deliveries.  As e-commerce exploded and Amazon started its own delivery fleet, analysts were concerned about Fed Ex and UPS’ future profitability.  Then came the covid shutdowns.

Fed Ex and UPS both implemented “temporary” surcharges on deliveries.  Being part of what is essentially a duopoly has its privileges.  Below is a quotation from Brie Carere, Fed Ex’s EVP, Chief Marketing and Chief Communications Officer, from last week’s earnings’ call:

We see a very rational market and we really see a great partnership with our largest customers. So, we are working with them absolutely to find a win-win solution, but part of that is that we will, as I mentioned, implement peak surcharges. This is part of the new normal. It will not be just for this fiscal year, but I anticipate customers to pay more for pricing in November and December moving forward. And I do think that, that will be a structural shift in the market.  (emphasis added)

We all got spoiled by subsidized home delivery of merchandise.  In addition to b to b shipments essentially subsidizing home deliveries, many retailers subsidized home delivery by using their physical locations and their employees there for fulfillment.  With retail stores closing, that subsidy goes away.  It was a good ride while it lasted but it is over.  When the government tells us there is no inflation, I encourage you to look at the prices you pay to have items delivered to your house.  Do not forget how much your Amazon Prime subscription increases every year in your calculation. 

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