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Sep 21, 2023

Why shippers will add more FedEx and UPS competitors to their carrier mix in 2023

Interest in last mile alternatives is up. Experts say Amazon could take

Interest in last mile alternatives is up. Experts say Amazon could take advantage by launching a competing service.

Editor's note: This story is part of an ongoing series diving into the opportunities and challenges supply chains face in 2023. Read the rest of the series here.

Even as space frees up within FedEx and UPS' networks, shippers are poised to continue diversifying their parcel carrier mix in 2023, industry experts say.

Adding new last mile carriers emerged as a popular strategy during the pandemic after volume surges limited capacity at the two delivery giants. In recent months, FedEx and UPS have seen service levels rebound and demand normalize, but many shippers continue to keep other delivery options on tap.

If anything, shippers are adding alternative carriers at an even faster rate. The average number of last mile carriers per company account in December was 5.73, up from 4.86 the year before, according to project44 data.

A mix of factors is buoying this ongoing trend, including higher rates and concerns over UPS and the Teamsters' contract negotiations — their current agreement expires July 31. Increased capacity and more robust services from smaller competitors are also driving interest in alternatives.

The result is that last mile carrier mixes are starting to look more like shippers' varied LTL portfolios, said Caleb Nelson, chief growth officer and co-founder at logistics software provider Sifted. Looking forward, diversification isn't expected to slow down, leaving some industry experts wondering if Amazon will capitalize by launching a competing service.

"I think it's going to pick up pace this year, and it's mostly because shippers are a little bit behind and the regional carriers that have stepped in to offer competitive solutions to FedEx and UPS are far more advanced this year than they've ever been before," he said.

While a slowing economy is driving down ocean and trucking rates, last mile rates have remained persistently elevated, putting a strain on shippers' finances. The fact that rates in the sector have remained so high for so long is unusual, said Alan Amling, distinguished fellow at the University of Tennessee's Global Supply Chain Institute and former VP of corporate strategy for UPS.

"In my entire career with UPS, there were only a few years over the 27 years I was there where it was a seller's market — that's not the typical state of things," Amling said. "The typical state of things is a buyer's market and you're creating [market] share and the carriers are really aggressive in how they're courting business."

Despite volumes declining in recent quarters, 2023 is set to be another expensive year for FedEx and UPS shippers due to higher annual rate increases and surcharges. The Cowen/AFS ground parcel index, which measures shipping costs, is expected to reach a record high in Q1.

Both companies have defended their rate increases and surcharges, saying they are needed to keep service levels high and combat inflationary pressures.

"Honestly, we have had very productive customer conversations," FedEx Chief Customer Officer Brie Carere told Supply Chain Dive in October in regards to rising shipping costs. "I think our customers really are very well-informed and they understand the seriousness from an inflation perspective."

While smaller competitors have also raised prices, some have undercut FedEx and UPS's recent 6.9% general rate increase with lower hikes.

"With this added capacity and new competitors, we are going to go back to a buyer's market where there are more alternatives and better opportunities to get lower prices in the market and still maintain service levels," Amling said.

Since the onset of the COVID-19 pandemic, FedEx and UPS have pursued volume growth in more profitable segments like healthcare and small business while demonstrating a willingness to let go of lower-yielding e-commerce packages from large shippers. UPS, for example, reached an agreement with top customer Amazon that will result in fewer packages from the e-commerce giant inundating its network.

Meanwhile, many alternative carriers have stepped up to fill the gap by gearing their services around delivering online orders. LaserShip/OnTrac, The Frontdoor Collective and Better Trucks are among the last-mile delivery companies set to expand into new markets in 2023 while siphoning volumes from the top carriers.

"Customers are usually coming to us because they are frustrated with service from some of the big players," Better Trucks co-founder and CEO Andy Whiting told Supply Chain Dive in November. "There's been challenges with either service or price or a combination of the two, or they’re looking for alternatives."

Experts say another company could soon enter the parcel carrier fray, placing increased pressure on FedEx and UPS: Amazon. The e-commerce giant aggressively expanded its logistics network to fulfill and deliver in-house orders when the pandemic supercharged demand, and it has since grappled with excess capacity as sales have slowed.

At the same time, Amazon has rolled out new services that make use of its sizable logistics assets. Last year, the company launched long-term inventory storage services at its distribution services for third-party sellers. By the end of January, Amazon plans to expand its "Buy with Prime" service to all U.S. merchants, connecting their outside websites to Amazon's fulfillment network and delivery capabilities.

"They were all set to launch a third-party service before the pandemic hit, and then they had to pull it back," the University of Tennessee's Amling said of Amazon. "I would not be surprised if they dust off all those plans and execute those in 2023."