Industry Overview
With growing demand for food and product deliveries, many of us have interacted in recent days with the $108.9 billion dollar industry that is Couriers & Local Delivery Services (NAICS: 49222). The industry provides transportation services for goods, materials and documents that are delivered to businesses, consumers, institutions and government agencies.
The industry has three product segments: ground delivery services, air courier and other services including messengers and local deliveries. The ground delivery services segment accounts for 55.7% of industry revenue and will benefit from cost pressures on business customers to move away from air freight. The air courier segment accounts for 43.0% of industry revenue and is expected to benefit from decreasing fuel costs and growing demand from the increasing speed of e-commerce transactions. The other services segment, which includes messengers and local deliveries accounts for 1.3% of industry revenue.
The coronavirus pandemic poses a unique threat to two key areas of anticipated revenue growth: increases in consumer spending and growth in corporate profits. However, losses in household income could be offset by increased demand for institutional healthcare supplies, and by consumers seeking to avoid public places when buying everyday groceries, personal care products and restaurant meals.
The Key Players
While there are some 227,382 businesses in the Couriers & Local Delivery Services industry, the two largest players (FedEx and UPS) make up 77.1% of market share. The remaining 22.9% includes Deutsche Post AG at 3.7% and YRC Worldwide Inc. at 1.9%. USPS (NAICS: 491110), which is considered its own industry has become a valuable partner delivering the final leg of some shipments, and contracting with FedEx to provide domestic air freight for U.S. Mail, Priority Mail and Priority Mail Express.
Revenues
Prior to the coronavirus pandemic, the industry had a projected annualized growth rate of 4.0% to $132.4 billion over the next five years, and 3.4% for 2020 alone. Growth in consumer spending, an increase in the number of businesses, growing corporate profits and an overall improving economy presented key opportunities for industry revenue growth.
For courier providers, the continued growth of e-commerce translates to higher revenues from more frequent shipments. For local delivery providers, IBISWorld reports that takeout and delivery are one of the fastest growing segments of the restaurant industry as the Internet and apps like GrubHub and Postmates have made it easier to order takeout and delivery online.
Analysis: Porter’s Five Forces
Buyer Power: Low
Buyers for the Couriers & Local Delivery Services industry include: retailers, consumers, financial services and insurance, scientific and technical, and public administration. The current duopoly for couriers dominated by UPS and FedEx gives them greater power to set prices and reduce the need for negotiation with buyers, therefore keeping buyer power low.
If couriers are able to raise prices for specialized services, as they did for oversized shipping within the healthcare industry, buyers will have less options for negotiating or price shopping. Likewise, the growing demand for local delivery gives buyers less power. Even though options exist to shop on price, the small number of purchases per buyer gives them less opportunity to hold out and bargain at the transaction level.
Supplier Power: Low
Immediate suppliers for this industry include dealerships, maintenance and repair services and fuel suppliers. A second tier of suppliers supports boats, aircraft and bicycles. Overall, these suppliers represent commodities, which traditionally have low bargaining power with their customers. Additionally, fuel supply contracts and other options contracts can be leveraged to manage volatility in some supplier industries. An overall drop in crude oil prices can benefit contract workers as they supply a healthy number of on-the-ground partners for couriers like FedEx and local delivery partners.
Barriers to Entry: Medium
Barriers to entry in this industry range from high for couriers with international reach to low for delivery establishments that are focused on niche markets or single metro areas. To be competitive as a new courier service, firms need a substantial distribution network with advanced tracking systems and a fleet of different vehicles. They would be competing against established players with recognizable brands, which would drive startup costs into the millions or more for new entrants who would need a competitive aircraft fleet, storage capacity and highly skilled labor. Local delivery players who focus on specialized niche markets or specific metro areas could enjoy lower barriers to entry, especially if they partner with an established player like GrubHub or FedEx as part of their growing contractor base.
Threat of Substitution: Medium to High
The growth of e-commerce presents mostly opportunity for the industry in the form of more consumer and business deliveries. However, growing online use also means firms are investing more in cloud infrastructure to enable secure delivery of large files. This could drive down demand for shipment of documents in legal, architectural and other documents from both consumers and businesses.
The USPS is another formidable substitute as they have a nationwide network of air and ground delivery services, and are known to offer competitive pricing that can undercut major courier players. Another threat could come from retailers like Amazon diversifying into the Couriers & Local Delivery Services industry as they continue to grow their fleet of contract workers and collection of physical stores to offer same-day delivery.
Competitive Rivalry: High
Overall competition in the industry is high with players mostly competing on price, marketing and differentiation of services. While they all have similar offerings and the industry is deemed mature, there are opportunities to differentiate by providing specialized services to customers such as healthcare or firms that need to ship oversized packages. Concentration is high with courier services where FedEx and UPS dominate.
However, the higher diversity of local delivery services and the use of contract workers provides relatively low concentration for local delivery with the exception of firms who are able to dominate their local markets. From 2014 to 2019, the number of such establishments has grown at an annualized rate of 5.6% to 238,001 and the rate of employment has grown 5.7% to 935,470 workers. The local courier space will remain competitive and has the cost benefit of being more contractor dominant.
Higher costs dominate due to the labor intensive nature of courier services and the technology needs to provide tracking and security. Reducing labor costs (32.6% of revenue) by increasing the use of contractors, and reducing fuel costs with pricing contracts are two options that could support keeping consumer costs low and enable firms to compete on quality of service. Given the growth of e-commerce and local delivery demands, excess capacity should remain low. Healthy demand coupled with substantial investments in durable assets like specialized vehicles and cargo planes provide sizable exit barriers for larger couriers and delivery firms.
Market Outlook for the Future
Growth for the Couriers & Local Delivery Services industry depends heavily on the success of their customers in other industries. With more businesses predicted to come online and continued growth in e-commerce expected, the outlook for an otherwise mature industry is positive with expected annualized growth of 4.0%, which exceeds past projections for GDP growth of 2.0%. Brands like Amazon and Uber represent threats major players should be mindful of as Amazon seeks to diversify and grow their same-day delivery offering using their own fleet, and Uber, which already offers UberEats, continues to expand their Uber Freight service. Uber Freight in particular could successfully compete in the future with major players for lucrative business contracts.
As local and state officials plan for the potential of rolling lockdowns and other social distancing measures in response to the coronavirus pandemic, consumers will continue to be driven online for alternatives to in-person shopping, in addition to the already healthy growth in e-commerce overall. While the high investment needed to compete with the top industry players (FedEx and UPS) is daunting, local delivery remains a high growth segment and firms who can successfully leverage technology to execute efficient operations could grow their offerings into the courier segment. Additionally, the attractive growth prospects from increased shipping volume make the Couriers & Local Delivery Services industry vulnerable to new entrants like Uber and Amazon in the future who have the capacity to amass large amounts of capital to diversify.
References
Grant, R. (2019). Contemporary Strategy Analysis. John Wiley & Sons, Inc.
Kalyani, D. (2019). IBISWorld Industry Report 49222: Couriers & Local Delivery Services in the US. IBISWorld. Retrieved on 24 Apr 2020 from https://my-ibisworld-com.libezproxy2.syr.edu/us/en/industry/49222/about.
Mullaney, T. (2019). FedEx’s double-edged sword: New rivals Amazon and Uber aim to slash its business. CNBC. Retrieved on 26 Apr 2020 from https://www.cnbc.com/2019/06/24/fedexs-threat-rivals-amazon-and-uber-aim-to-slash-its-business.html.
Shields, N. (2018). THE DELIVERY CHALLENGER REPORT: How the rise in e-commerce is presenting opportunities for new entrants to challenge UPS and FedEx in last-mile deliveries. Business Insider. Retrieved on 26 Apr 2020 from https://www.businessinsider.com/the-delivery-challenger-report-2018-12.
Singh, S. (2019). The Soon To Be $200B Online Food Delivery Is Rapidly Changing The Global Food Industry. Forbes. Retrieved on 26 Apr 2020 from https://www.forbes.com/sites/sarwantsingh/2019/09/09/the-soon-to-be-200b-online-food-delivery-is-rapidly-changing-the-global-food-industry/#359956f9b1bc.
USPS. Postal Service & FedEx renew contract. Retrieved on 26 Apr 2020 from https://about.usps.com/news/statements/022317.htm.
