Postal Consolidators - Here today, acquired tomorrow!

If you have any responsibility for parcel shipping and distribution in today’s environment, you have likely recognized the rash of consolidator acquisitions that has taken place over the last year. Frankly, the trend has been hard to miss. As a result, DMG, Inc. launched an investigation to better understand what is driving this trend, and more importantly, what it means for you, the shipper.

Consolidator 101
For those of you not privy to the world of Postal consolidation, postal consolidators offer parcel shipping services believed to be more cost effective than today’s traditional small parcel shippers. In short, a consolidator will pick up your parcels, line-haul them to its nearest hub, sort the parcels to the appropriate postal facilities, consolidate your parcels with those of other shippers destine for the same area, and finally line-haul the parcels to the Postal DDU for end delivery by the USPS.

Ultimately, consolidators build economies-of-scale by filling trucks with packages from multiple shippers, which allows them to bypass the Postal BMC’s and SCF’s and drop directly into the Postal system at the DDU level. By utilizing zone skipping logic, in addition to taking advantage of the USPS’s Parcel Select Program, a consolidator can typically facilitate the delivery of parcels far cheaper than a shipper could on its own. The USPS also benefits greatly from these consolidator networks by eliminating pick-up, front-end sortation, and long-haul delivery costs.

Though postal consolidation is believed to be the best thing since sliced bread to some shippers, it is not considered to be a one-size-fits-all solution. Ultimately, these parcels are delivered by the USPS; therefore, if your parcel and delivery profiles are not conducive to Postal delivery (e.g. high delivery densities, large dimensions, extremely time sensitive, primarily commercial delivery, etc.), then a consolidator may not fit your needs. However, today’s parcel giants have recognized the value in this transportation niche and have begun aggressively pursuing that market to supplement their arsenal of delivery services and effectively manage less profitable deliveries.

A Brief History
The following is a timeline identifying recent, significant developments in Postal Consolidation:

• November ’03 - UPS and FedEx begin limited testing of end deliveries by the USPS via UPS Basic and FedEx Last Mile
  
• February ’04 - Parcel Direct acquires PaqFast
  
• May ’04 – Deutsche Post Global Mail USA acquires SmartMail Services and QuikPak
  
• August ’04 – Heritage Partners, principle owner of American Package Express (APX), acquires RR Donnelly’s parcel logistics business
  
• August ’04 – FedEx acquires Parcel Direct from parent Quad Graphics (and subsequently scraps its Last Mile test)

The latest consolidator acquisition, Federal Express’ purchase of Parcel direct for $120 Million in cash, is believed to be the most significant and certainly the most intriguing development in the consolidator community. Rather than speculate as to the logic behind this acquisition and the latest trend of consolidator acquisitions, DMG, Inc. went directly to the source. Dan Sullivan, President and CEO, FedEx Ground was kind enough to share his insights directly with Distribution Management Group, Inc.

DMG: How much integration is expected to take place within the infrastructures, information technology, equipment and sales force of both FedEx and PD?

Mr. Sullivan: The successful FedEx strategy of “Operate Independently, Compete Collectively and Manage Collaboratively” will be applied in the case of Parcel Direct. Parcel Direct operates a low-cost, highly efficient network of 12 hubs specifically designed to take advantage of the United States Postal Service’s Parcel Select service. The network will remain largely independent as it is tailored to meet the needs of targeted high-volume shippers who desire such a service to supplement other value-added services already offered by FedEx.

Over the next 12 months we will work on transitioning support services such as information technology and line-haul operations to leverage the strengths of both companies and put in place the most effective solutions for our customers.

The Parcel Direct sales force will become part of FedEx Services, joining more than 3,000 FedEx sales representatives in selling this service. By combining Parcel Direct’s cost-effective and scalable network with FedEx sales, marketing and financial resources, not to mention the considerable power of the FedEx brand, we’re confident we can aggressively grow this business.

DMG: Are there concerns that bundling PD’s consolidating services with those of FedEx Home Delivery may cannibalize current HD volume and margins?

Mr. Sullivan: Parcel Direct’s service fills a previous gap in the FedEx portfolio and is complementary to FedEx Home Delivery. The service is targeted to high-volume shippers who are increasingly seeking a cost-effective solution for shipments of low-weight, less time-sensitive goods to residential recipients. Many of our customers are already using Parcel Direct or other competitive services in this segment, so we believe there is little overlap with FedEx Home Delivery.

FedEx Home Delivery has a strong value proposition and will continue to attract customers who prefer a money-back guarantee, complete custodial control through final delivery, end-to-end online tracking capabilities, and unique features such as evening and appointment delivery unavailable elsewhere in the industry.

DMG: Were other consolidators considered for acquisition, or are there plans to acquire additional consolidators in the future?

Mr. Sullivan: We investigated a number of options for entering this market and decided that Parcel Direct was the best fit for our customers and FedEx. This acquisition is consistent with our longstanding business strategy to constantly pursue opportunities to strengthen and expand the FedEx portfolio of services while meeting emerging market needs. In that respect, we will continue to do what’s necessary to serve the long-term interests of our customers, our shareowners and our business.

DMG: Did Deutsche Post’s acquisition of SmartMail and QuikPak prompt your consideration for consolidator acquisition and/or do you expect your competition to follow your lead in consolidator acquisition?

Mr. Sullivan: We have been interested in entering this segment for some time now based on evolving customer demand. Parcel Direct’s service contributes yet another dimension to the unmatched FedEx portfolio and provides customers another option for shipping to residences. How competitors approach the market is their decision.

We at DMG, Inc. believe the trend of consolidator acquisition and full service provider development of Federal Express, Deutsche Post, etc. will have an overall positive impact on the small parcel shipping community for several reasons:

• Acquired consolidators and their customers will benefit by the ownership of these industry leaders. Namely, infrastructural improvements and expansions, technological prowess and existing Postal alliances will improve consolidator service levels and enhance the value added services available to the customers of consolidators
  
• Though many will argue that these acquisitions will lead to an upward trend in consolidator pricing, we believe the operational efficiencies gained at parcel pick up and induction into the Postal system can actually help suppress consolidator and Postal costs. In addition, the FedEx’s of the world will gain a more cost effective outlet for less profitable, higher cost deliveries…specifically, lightweight residential deliveries
  
• Parcel shippers have been increasing the demand for true ‘full service providers”. The complete delivery portfolios now offered will allow shippers, and carriers alike, to “cherry pick” specific parcels and route them with the most effective and efficient service available from a single source

The $64,000 question is whether UPS will follow suit. Everyone is familiar with the tit-for-tat mentality that has developed between UPS and Federal Express. Frankly, we would be shocked if UPS does not follow the lead of FedEx on this one and at least investigate the opportunity of a consolidator acquisition. The benefits are obvious; however, UPS’ history with the USPS and their unionized work force may pose as hurdles too great to overcome. We are all aware of UPS’ constant lobbying against the USPS to force package delivery rates higher and the accusations of monopolization on first class mail to keep its shipping rates artificially low. In addition, the USPS did not take kindly to what it believed to be a manipulation of its Parcel Select program. The USPS has said on numerous occasions that UPS’ use of the Parcel Select program is simply an attempt to force “anything they can’t make money on” into the Postal pipeline. In addition, the introduction of UPS’ Basic Service created a serious stir in the Teamsters union. The 200,000 Teamsters employed by Big Brown claim that the new service undermines provisions made in the last contract that restrict the use of outside labor.

Though the inherent risks in a consolidator acquisition by UPS may be great, the exceedingly cost-conscious parcel giant simply may not be able to ignore the financial upside of a consolidator acquisition. Only time will tell!

DMG, Inc. would like to thank Dan Sullivan of FedEx Ground for his valuable insight and willingness to help shed light on FedEx’s recent acquisition of Parcel Direct.

To determine if a Postal Consolidator is right for you, and for more information about DMG’s small parcel consulting services, please click here.

Archived Articles

• Tackle the 2006 General Rate Increase; February, 2006
• Avoid the Nickel and Dime Treatment; March, 2005
• Postal Consolidators - Here today, acquired tomorrow!; October, 2004

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