Evaluation Of Delivery Industry’s Profitability
Small package delivery company is kind oligopoly industry for a long time. The small package refers to a package that weighs up to 150 pounds and is up to 165 inches in combined length and girth, or palletized shipment weighing more than 150 pounds. The three major firms are United Parcel Service, Inc. (UPS), Federal Express Corporation (FedEx) and United States Postal Service (USPS). By analyzing five force of this industry, I want to discover the industry’s profitability. Moreover, I will primarily focused on the market in the United States so I will not put DHL express (DHL) in my analysis because it is a German logistics company and put competition within the international delivery market in to my consideration.
Force: Buyer Power
Factor: Concentration of Buyer
For the Buyer power of such industry, the buyers to UPS or FedEx are usually individuals and companies, which have a comparative low concertation and are very fragmented comparing to that of the US small package delivery industry, which is dominated by USPS, FedEx, and UPS. Therefore, the lower buyer concentration increase the buyer power.
Factor: Switching costs to Buyer
Small package delivery service performed by those companies are very similar. Both UPS and FedEx guarantee majority of delivery in two days, both companies have similar markups, and both companies provide express shipping service and have their shipping outposts spread across the whole country, providing convenience for the shippers. Individuals are indifferent in switching from one service provider to another one. In other words, their switching costs are low. The same reasoning, however, does not apply to the buyers such as Amazon. Amazon prime decides to use UPS’s service, it may integrate its delivery system with UPS’s shipping system. First, such action creates benefits for Amazon’s sellers by reducing shipment processing cost, offering different payment options like PayPal, and offering shipping and ordering history and automatic tracking updates. Second, this action increases Amazon’s switching costs as investments in infrastructure are not easily liquidated. The result is buyer power is lowered by this fact.
Factor: Threat of Backward Integration
The last section related to the buyer power is backward integration. The probability that individual or most business to deliver small packages by themselves is extremely low, because such service requires either frequent one-time shipping expense or big investment in purchasing large vehicles and packing machines. The initial capital requirements for doing such delivery are too high to achieve. Therefore, the difficulty for most buyers to backward integrate is increase significantly. However, as I mentioned before, this reason does not apply to Amazon, which is capable of developing a nation-wide network. There will be more specific and detailed analysis for this point in the analysis for the threat of new entrants. Overall, buyer power is low and slightly enables industry to make profits. The most significant factor is the low concentration of buyer to the deliver industry and the low possibility for buyer to perform the delivery services by themselves. The buyer groups of businesses and individuals processes quite low power since they are very fragmented, but this weak force is almost offset by their low switching cost among delivery companies, and by major buyer such as Amazon, which has extremely market power as ecommerce booms.
Force: Rivalry
Factor: The Number of competitors
In United States, there are only three dominated companies, which are USPS, UPS and FedEx. The US government operates the first one and the others are just public companies. They all provide the worldwide service without competing with any other existing company. Moreover, it is the oligopoly market that helps explain the low rivalry.
Factor: Industry growth rate
Right now, the UPS takes the most market share that is 31. 66%, USPS accounts for 24. 65% and FedEx has 13. 81% market shares. That means USPS and FedEx still have chance to grow both overseas and domestic. Apex Insight’s latest report: Global Parcel Delivery Market Insight 2018 reveals that the global parcels market was almost US$350bn in 2017, up from just over US$310bn in 2016.
Asia Pacific is the largest regional parcels market by value, accounting for around 40% of the global market. North America and Europe together represent a little over 50% of the market. Also based on the UPS’s predication, transcontinental and cross-border trade in Europe will grow faster than U. S. and global gross domestic production in the next 10 years3. In addition, FedEx has already started its market expansion in the Asia and contracted with Amazon. With the Amazon’s expansion, the market shares for FedEx and UPS will continue grow simultaneously. Within North America, the industry growth rate is also high, because the rapid development in the E-commerce. That’s the main character boost the quantity of package volume. For example, UPS admitted to the Wall Street Journal that the deluge of packages has put some deliveries behind by one to two days, despite the company staffing up for the holiday season and pushing drivers to work longer hours to meet delivery windows. In a word, the high growth rate of market decrease the rivalry.
Factor: Production differentiation
For all carrier companies, the services delivered are similar to each other. All three companies offer international delivery and tracking system; all of them have general standard 2-day shipping and express shipping method; all of them have the offices that allows the consumer to pack and send their packages; all of them provides the storage space with almost equally price; all of them use both airlines and large truck for the delivery, and even the price-floor for free shipping are identical for the same website. Anybody who does not have an account in any of those three companies will have no preference in having any agency deliver his or her packages. All the facts above reduce the industry profits. Nevertheless, the current organizations are trying to differentiate themselves from one another. For instance, when quick delivery is your number one goal, FedEx shines above its competitors. On average, comparable FedEx services priced slightly highest among the competitors. In contrast, in most cases, UPS ground is the least expensive method for shipping within the continental United States, but may take up to five business days for the package to be delivered. For USPS, it has placed a renewed focus on customer experiences, making it more friendly to small business owners than ever before. The trade-offs helps the FedEx to image itself as the premier shipping method. The incremental revenue from higher price facilities FedEx to build more franchisees that offers extra services such as photocopy and photo print. The lowest cost brings more customers to the UPS result in building more simple offices for UPS around. For USPS, Fostering the intimacy with existing customers and startup businesses is going to keep the leadership since it had the most customer base because of mailing services that it provided before. As I summarized above, the rivalry is low and it helps the industry to gain profits. The most vital point is the current market structure — oligopoly. The interesting thing is that, before 2000, there were hundreds of delivery companies. Those three companies occasionally survives from the Price War and the financial crisis and become the oligarch with their effective operational system, tracking system and the reliability. Thanks to the high growth rate of the market, there will be a growth driven by the e-commerce instead of a fierce competition.
Force: Threat of new entrants
Factor: Economies of scale
The economies of scale in this industry is very obvious. It enables the incumbents to be more profitable. All of the delivery companies prioritize the investment in technology, because that is the core for them to keep the revenue growth and to address unexpected changes. For example, the ORION (On-Road Integrated Optimization and Navigation) technology analyzes a collection of data points including the day’s package deliveries, pickup times, and past route performance to create the most efficient daily route for drivers. When ORION is fully implemented throughout the U. S. in 2016, UPS expects to see annual reductions of 100 million miles driven and fuel savings of 10 million gallons per year. These add up to 100, 000 metric tons of greenhouse gas emissions avoided every year. The technology benefits the economies of scale by allowing lower cost with higher efficiency. In addition, the reduction of emission will lower the tax, which reinforce such effect. It is nearly impossible for the new entrants to apply such system. For those aged companies, they have opened more than ten thousands of the franchisees and owned millions of trucks across the North America. It can be said that wherever a request for shipment, there is going to be a carrier with various shipping methods. That’s called network effect.
Factor: Capital requirements
Starting a delivery company means high initial capital investment. If anyone want to be the new player in the existing market and capable of competing with the three oligarchs mentioned before, the estimate capital requirements will be at least a hundred million dollars. The first thing of new entrants is to buy shipping trucks and to lease planes. Second step is to purchase and implement information system and the delivery system with effective schedule and route. The third step will be creating an at least national wide network. The final step is to advertise yourself. Even though those steps are fulfilled, the gap between any of those oligarchs is still large. Specifically, in total, UPS operates over 119, 000 delivery vehicles worldwide, ranging from bicycles to tractor-trailer trucks. UPS Airlines is a fleet of 245 aircraft serving over 200 countries and territories worldwide. International Package operations include delivery to more than 220 countries and territories worldwide and logistics business provides services in more than 175 countries and territories worldwide. Those numbers are unachievable for the new entrants including the company like Amazon.
It is true that anybody can brought or even lease a truck and then start local delivery business. That done not need much investment. However, such a business is too small to affect the whole market structure and is going to disappear quickly, because most the package deliveries require long-distance traveling and the public recognition.
