The Business of Independent Service Provider Contracting

It has been a long time since economic conditions were favorable for a package rate war between UPS & FedEx.

In fact, because of generally good economic conditions, until a couple of years ago, there was little need for our two favorite competitors to try to steal each other’s business. A rising tide had been raising all boats, even including regional package carriers. Most indicators were signaling that there would never be another true price “war” like there was in the early 90’s, the early 2000’s or the period from 2008 - 2010.

Everything was stable in “pricing-land”...

Until it wasn’t.

An Unusual Break From Pricing Tradition

FedEx and UPS have long mirrored each other’s pricing, with UPS always leading the way, dictating new, higher annual base prices.

Since there are only two real national competitors in the market (sorry USPS), UPS & FDX can, and do, exercise their pricing power over the market. Historically, FedEx has always followed UPS's lead.

There are several reasons why FedEx matches UPS's increases, but the main one is simply that “they can”. FedEx benefits from the increased revenue and margins gleaned from higher prices so they can manage their own operating cost increases, which, until recently,  were more or less in line with UPS’s.  

This year marks the first time that FedEx has broken with tradition and announced an increase to base rates ahead of UPS. UPS then swiftly announced increases that  matched FedEx’s rate increase.

So what’s the big deal? If they matched each other, then what's the big whoop?

The Difference

Other than FedEx surprisingly taking the pricing lead, the role reversal is a sign of the tide finally turning in the UPS vs. FedEx war. It’s an indication that FedEx, at long last, is acquiring the upper hand.

You see, UPS was likely going to announce a larger increase than the 5.9% that FedEx ended up revealing.

UPS needed significantly more to deal with the 3.3% labor cost increase that they are now burdened with thanks to their shiny new contract with the Teamsters union.   

FedEx announcing a smaller increase than what UPS was desperate for, and then matched, is not good for UPS’s overall financial situation.

Now, we don’t think FedEx would ever have done this, unless they have calculated that they can be the low-cost provider of transportation services, longer than UPS’s deep pockets can endure weaker margins.

This folks, is what Network 2.0 is all about. The new Teamster contract is likely crippling UPS, especially when it comes to being able to compete on an operating cost basis with FedEx.

FedEx used to not be in an advantageous position to compete on price. UPS had deep enough pockets to basically “buy” whatever account they wanted. They could absorb the loss, or reduced margins, long enough to make their aggressive pricing possible, where and when needed.

This way oversimplifies the pricing model situation, but the bottom line is that UPS used to be comfortable that they could ultimately win in any price war.

Until now.

What Does A Price War Mean For CSPs?

Let's acknowledge that a price struggle between UPS & FDX is no longer a fair fight, and it is because of what Contracted Service Providers do for FedEx.

The brilliance of the FXG model is that it utilizes the “low cost” provider of transportation services in the industry (CSPs). Long story short, it means that FDX can’t be priced out of the market. That’s good for FedEx.

But how brilliant is it for CSP’s?

Here is what many think the impacts are to CSPs in a “price-war”:

1. More Intense & Tougher Contract Negotiations - While increased volume is always a good thing, FedEx will need to hold the line on its costs, which is done through its negotiations with you. As they duke it out with UPS over price, they must maintain their per-unit margins. We think that choosing a MESO in this environment is probably not in your best interest.  This means it’s never been more important to make sure that you are optimizing your contract negotiation. Let us help you!
   
   
2. Steady Or Possibly Increasing Volume - Between the implementation of Network 2.0, and possible business won from UPS over price, CSPs stand to benefit from additional volume. More volume is good, unless we spend more than is necessary to service it. If we are truly in a bad economic environment, additional volume is more than spectacular as other transportation companies scrounge for every dollar of revenue. The business will get more complex, but it will be worth it in the long run.
   
   
3. Service & Productivity Pressure - Customers will get much more demanding in a difficult economic environment. We've seen this over the years with FXG. Recently, we’ve observed the importance of customer satisfaction erode as customers' ability to demand satisfaction is replaced by any number of excuses from companies.  Pandemics, labor markets, “supply-chain issues” and the excuse du-jour have given companies carte blanche to provide less than what used to be acceptable service levels. This will absolutely change in a recessionary situation. Customers will demand more for their hard earned dollar, especially if they leave a standard (like UPS) for the upstart FedEx. Market dominance by FedEx can happen if its CSPs can deliver superior service as perceived by customers.

The Bottom Line

So in the end, service, at a fair price, will likely again rule the day. 

CSPs can improve their situation, and their individual business value, if they appreciate and support FedEx’s attempt to seize the opportunities that they are being presented. 

This will mean a recommitment to sound business practices such as accountability, managing by the numbers (KPIs), continuous recruiting and margin management.

These things can be managed if you’re not solely focused only on the survival of the business. Fortunately, the survival of your business is not necessarily at stake. Executing on the key principles above is.

CSPs have enough to worry about - thankfully, a price rate war between FedEx & UPS isn't be one of them!

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