Quiver Quantitative - After enjoying the benefits of an e-commerce boom in the early stages of the pandemic, delivery giants United Parcel Service (NYSE:UPS) and FedEx (NYSE:FDX) are now finding themselves in a competitive pricing arena. For over four years, these companies resisted discounts and prioritized profitable customers, but the tables have turned. With a decline in demand, they are now more inclined to negotiate prices, allowing customers and retailers to gain discounts more easily than in the recent past. Data reveals that rates for ground delivery services, especially favored by online retailers, slipped below 2022 levels during the second quarter of this year and are predicted to decline throughout the third quarter. Such a fall would be a first since the initiation of year-over-year data collection in January 2019.
This shift is welcome news for many retailers and shippers. Macy's (NYSE:M) and Rent the Runway (RENT), both UPS clients, reported that they've experienced significant savings due to their newly negotiated delivery deals. A sharp contrast is observed in the negotiation dynamics from earlier this year when discounts were a rarity. Currently, on average, shippers are experiencing savings ranging from 8% to 12% off list prices, a reminiscent situation of the pre-pandemic era.
One of the significant factors causing this shift is the supply-demand imbalance, which has been the most significant in at least three decades. Leading delivery companies, including UPS, FedEx, USPS, and Amazon (NASDAQ:AMZN), collectively have the capacity to deliver over 110 million parcels daily. However, only about 70 million packages are sent for delivery daily. The consequent rate reductions, although might seem minuscule on paper, lead to substantial savings for large-scale customers. Furthermore, air-based express package delivery rates are also experiencing a downward trajectory.
However, the competition isn't just about price; it's also about market share and strategy. The recent contractual tussle between UPS and the International Brotherhood of Teamsters, where customers shifted around 1.2 million packages per day to rivals like FedEx and USPS, added to the delivery giants' rivalry. FedEx claims it can retain the extra 400,000 packages it gained during UPS's negotiations without dropping its prices. Still, with UPS offering to pay early termination fees for those who switched to FedEx, industry experts remain skeptical.
This article was originally published on Quiver Quantitative