Over the past few years, the holiday shopping season has put increasing levels of stress on the U.S. Postal Service, UPS (NYSE:UPS), and FedEx (NYSE:FDX). Despite that, all three carriers have posted record levels of on-time deliveries and they appear to be handling the added volume well. They've clearly learned from past mistakes and are throwing resources at the situation to avoid problems. And, it's also worth noting that retailers including Amazon (NASDAQ:AMZN) have taken their own steps to stay ahead of holiday demand.
In this segment from Industry Focus: Energy, host Nick Sciple and Fool.com contributor Daniel Kline discuss how the USPS, UPS, and FedEx are handling holiday shipping this year.
A full transcript follows the video.
This video was recorded on Dec. 13, 2018.
Nick Sciple: Let's also talk about what's going on with these traditional logistics companies, FedEx and UPS. FedEx, UPS, and the Postal Service, actually, collectively have, in spite of this increased demand, logged near-best on-time delivery performance since 2013, according to Ship Matrix, which is a software provider that analyzes shipping data. UPS delivered 98.3% of its packages on time, while FedEx and USPS had on-time delivery rates of 98.9% and 97.9% respectively.
What we're looking at here, Dan, is that while there may be some struggles in these retailers from their omnichannel perspective, these traditional logistics folks have really done a good job absorbing this demand.
Dan Kline: They learned their lesson. Last year, weather was more of a contributing factor. And we could still have storms that screw everything up. There's absolutely no way FedEx can plan for the storm we had this week in the Midwest. That's not expected, people are going to get some packages late.
But last year, there were a number of problems. There were Amazon orders coming after Christmas. This year, they threw people at the problem. We were both talking about an article we saw in the Wall Street Journal earlier, that they're hiring tens of thousands of people even now. They weren't going to just take this and say, "Maybe we'll get it right." They threw a lot of money at it. That's probably expensive, it's probably going to hurt the margins for those companies. But from a reputation point of view, it is much better to get it right.
Sciple: I also saw some interesting data from FedEx. They've been working closely with retailers to plan out demand. They've also even put some limits on how much individual retailers can put into their shipping network, to prevent them from becoming overstrained. That's a trend we're seeing, where these logistics providers and the retailers are having to work together to make sure all the goods get where they need to be when they're supposed to get there.
Kline: I think it's also worth it to step back as consumers. If I send you a gift that you're really waiting for, and it's the only gift FedEx delivers incorrectly all year, you are going to have a negative perception of FedEx. This is not a zero-sum game. 98.3% is still going to come with a fair amount of negative feedback for these companies.
Sciple: In addition to these cooperations that we're seeing between FedEx, UPS, these traditional logistics providers, we mentioned spreading out promotions that some of these retailers have done. We've also seen some interesting maneuvers to open up new logistics capacity that maybe hadn't been used in the past. One of the examples that I've been reading about is, Amazon, on vacant patches of land that they have near their logistics centers, they have started running some of their operations out of large tents. I know we saw that with Tesla, with their factory. They had an additional assembly line out of a tent. Well, tents are hot in the streets right now. Amazon is doing them, as well. What can you tell us about what these kinds of operations are adding from a logistical perspective?
Kline: I think it's very important, because Amazon is changing how these companies think. We've talked about some of my Walmart issues. Walmart has always had the, "This is our process. Follow our process." Amazon takes a, "We're getting it to you in two days because that's what we promised." You talked about the tents. It's not just that they've set up added facilities. They're also bringing in temporary workforces. Basically, if they have to strap your package to a carrier pigeon to get it to you, they're open to that. And that's forcing Walmart and Target to take a little bit more of that attitude, of, "OK, this isn't about our system. It isn't about what we're going to do next year. It's about, how do we get this package delivered? If our manager has to put it in the backseat of his car," and we've all seen people in our neighborhoods delivering Amazon packages that are barely identified as working for Amazon. A sticker on the window of the car, sometimes. Which is a little creepy. But, but they've really taken the attitude that the result matters.
I think, much like with Tesla, it was important to get the 5,000 cars number. Here, if you want consumers to have faith that this is going to work -- and Christmas gifts arriving on time is very, very important to people -- you have to be willing to do whatever it takes, even if you lose money on that delivery.
Sciple: Right. It's not only something that's coming around for the holiday season alone. JLL, a real estate firm based out of Chicago, they're converting a parking garage, it's over 3.8 million square feet in the middle of Chicago, underneath Millennium Park, into a logistics facility for retailers to use. We're seeing some conversion of properties in the middle of downtown New York City, these old, unused structures, and turning them into logistics vehicles.
We're really seeing a move, both in the short-term, making things work over the holiday season, and then longer-term, putting these logistical facilities as close to the customers as they can. So, in the middle of Chicago, in the middle of New York. That's something we're going to continue to see developing. There's a little growing pain with the tents.
What do you see long-term, how these infrastructures are going to get built out to get everything as close to the customer as possible?
Kline: I think they need to know their data more. Obviously, if you're Amazon, you can use Whole Foods, you can use some of the Kohl's they have relationships with. As they start to build the holiday data year after year after year, they, in theory can have what you're going to buy closer to where you are. They can also build their flexible capacity relationships. Our Davenport house has a Walmart and an Amazon Fulfillment Center on the same road. Usually, when I drive down that road, I see 10, 12 Amazon Prime tractor trailers, all with the Amazon logo. Now, you see, like 40, 50 tractor trailers overnight, but most of them aren't Amazon anymore. So, they're clearly flexing out their workspace and building relationships.
Obviously, the price of trucking has gone up. They're paying dearly for that. That's going to hurt margins, it's going to raise prices. But, as that happens, next year, they might realize, "Yes, we can fully add 15 more Amazon-branded trucks at a cheaper price, which will logistically work, and we'll need them at the holidays."
Sciple: Right. It's definitely going to be an interesting phenomenon to pay attention to going forward.