Express Operators Must Develop Flexible Service Portfolios to Survive Credit Crunch

Industry becoming increasingly reliant on the B2C segment and growing demand for online shopping deliveries as economic downturn hits B2B parcel volumes

London — January 23 2009 — The express industry is becoming increasingly reliant on the business-to-consumer segment and growing demand for online shopping deliveries as the economic downturn reduces business-to-business parcel volumes, according to industry researcher Erik Van Baaren of Datamonitor.

Van Baaren, logistics and express senior analyst at the research firm, says that as their budgets get squeezed, shippers are moving towards more "economy" products, prompting a shift from air to road and encouraging express players to implement creative solutions for surviving the current market climate.

Reductions Hit Premium Side

The economic downturn has damaged conditions in the express market considerably, leading to an unprecedented reduction in volumes of parcels, predominantly on the premium side. This decline in the express market is spreading from Western Europe and the U.S. to other parts of the world, and recently saw DHL withdraw from the U.S. domestic market, illustrating the drastic decisions that express operators have had to take.

The economic downturn has now caused all integrators to implement cost reductions, while pushing them to look for ways to keep existing customers and exploit new opportunities. Recent media reports suggest that DHL Express is planning to close five local service centers in the U.K., laying off about 60 staff in order to adjust to the worsening economic conditions.

All markets are suffering from lower consumer demand, which has caused shippers to rethink their use of express services. The consolidation of shipments and the use of economy services where possible are strategies increasingly adopted by customers that want to reduce costs in their supply chain.

Lower volumes, as well as the movement of customers from premium to economy services, have led integrators to come up with strategies to compensate for the declining revenues in their express businesses. This has been reflected in integrators' moves to broaden their economy-type service portfolio and raise their upper weight limits to compensate for the reduction in demand for documents and parcels, especially at the time-sensitive premium end of the market.

Adapting to the Market

While some integrators adopt strategies to broaden their economy product portfolio, a few others such as FedEx, have started to provide time-sensitive freight services to attract shipments from business customers looking to manage their inventories tightly. Most B2B customers are feeling the brunt of rising transportation costs and therefore are looking for options to incur the lowest costs possible, manage their inventory levels and capture customer demand. This and other initiatives are causing the merging of services within freight and express segments.

Although the express industry has clearly been affected by the falling demand from business customers, opportunities are being presented by the increasing demand for home deliveries as online shopping continues to flourish, especially in the U.K.. Home shopping has been a convenient option for consumers looking for an easy way to hunt for bargains, as long as their needs are met by reliable and flexible delivery services.

Despite the slump in retail sales, the online B2C segment has seen consumers making increasing numbers of purchases during the festive season, according to Van Baaren. "Although the number of online shoppers was lower, the volumes were high, resulting in overall growth in this market segment and offering opportunities to those operators that have suitable home delivery services."

The current market situation demands that express companies refocus their portfolio on those sectors, trade flows and geographies that offer the largest opportunities and make up for their falling volumes and profit margins, Van Baaren says. "DHL has already initiated efforts to tap the potential in the B2C segment by delivering packages at flexible times that suit different customer types," the analyst notes.

Van Baaren adds, "Further development of home delivery, freight express and geographic refocusing could be feasible alternatives for the other integrators such as TNT, FedEx and UPS, as long as they can develop the necessary road and air networks — both domestically and internationally — and serve the needs of a more discerning customer base."