June 30, 2006, 12:00 AM

Delivery Services

Internet Retailer

Executives at delivery companies might consider changing from the latest styles of business suits into some bell-bottom pants, wide-collar shirts and enormous ties. For them, it’s suddenly the ‘70s all over again.

The numerous delivery companies, big and small, are getting hit by steadily increasing oil prices, and the inflation these higher prices create. This is not good news for the delivery services market in Internet retailing.

Rising fuel costs have really hit all carriers hard, says Jeffrey Duening, managing director of sales at FedEx SmartPost, a branch of FedEx that focuses on delivering high volumes of lighter weight packages. “Unfortunately, we don’t see fuel costs coming down any time soon,” he adds.

At the moment, the biggest challenge for online retailing delivery is inflation and oil prices-they affect every transport-intensive business, agrees Sucharita Mulpuru, senior retail analyst at Forrester Research Inc. “However, this gives a huge leg-up to any retailer that is able to create significant in-store pickup business,” she says. “Building out in-store pickup provides a hedge for retailers against shocks like oil price spikes that adversely affect the distribution chain.”

More changes ahead

While carriers are trying to manage their growing fuel costs and understand how that will affect the prices they charge their customers, retailers are facing another delivery challenge: The United States Postal Service in May filed Rate Case R2006-1, a rate increase. The rate increase is expected to go into effect next March.

“Web retailers need to understand the impact R2006-1 will have on their business and be prepared to make changes in their packaging and transportation options,” says David Marinkovich, senior vice president of marketing and customer service at DHL Global Mail. “Web retailers who understand the importance of the delivery promise they make to their customers should begin to examine all available alternatives now. The Post Office rate case is complex; understanding the likely impact needs expert interpretation.”

R2006-1 can and probably will change to some degree before it goes into effect; but any way you cut it, there will be an increase in postal rates that will affect all players, Duening says. “And that will continue the trend of delivery companies having to offer customers larger suites of shipping options for their shoppers. Suites have to begin at early morning next day delivery and build from there.”

Another development is having an effect on delivery companies: In the past six months, several package consolidators-including APX Logistics, DDU Express and Parcel Corporation of America-have ceased operations. Shipment consolidators take packages from numerous shippers, consolidate them, then insert them into the postal service at the point that makes the most sense from a cost and delivery perspective. The absence from the market of the recently departed consolidators has begun pushing some Internet retailers to seek other resources for distribution to customers.

“A very noteworthy new development for e-retailers has been the exit of some consolidators from the market, most notably APX,” Duening says. APX Logistics filed for bankruptcy and closed suddenly in March. “That coupled with the USPS rate increase, from our point of view, is a challenge that offers a solid opportunity to grow business through being innovative with a fuller menu of delivery options.”

Patience, patience

What it all boils down to is the speed preferences of consumers-which are changing, according to some delivery services companies.

“There is a subset of consumers who want or need their delivery overnight, or at most two days guaranteed,” Duening says. “But there is a larger subset that prefers more cost-conscious delivery and is comfortable with waiting a few extra days or more. That’s why it’s critical for delivery companies to carefully work with clients to ensure they have all the options they feel their customers want.”

And according to FedEx, what customers want seems to be changing. “We’re seeing an increasing trend in online retailing toward very low-cost or free shipping,” Duening observes. “Free shipping is driving sales for our clients, the retailers, which in turn drives their customers to buy more, which leads to greater volume, which consequently leads to more paid shipping options being chosen. So ultimately, through the higher volume, delivery companies can realize increased business and increased revenue.”

DHL’s Marinkovich agrees. “E-commerce consumers have been gradually changing their behavior and seem very willing to wait to get their packages,” he says. “E-retailers still have call for many expedited shipments, but they can use cost-effective deferred delivery for a majority of their residential deliveries. This provides opportunities for improved cost management.”

While many consumers are more willing to wait longer periods to receive goods, they also have been placing a lot more orders. The 25% sales growth in online retailing in 2003, 2004 and 2005 has resulted in increased volume for delivery services companies. The services are enhancing internal processes and information systems to handle the growing workload, but they also are asking package recipients to lend a hand.

“The delivery companies have responded to the increase by enabling consumers to better manage more of the actual shipping process,” says Maris Daugherty, senior consultant at J.C. Williams Group. “As their business has grown in recent years, they have succeeded in putting great tools online to enable consumers to manage their shipping experience. And this helps everyone-the retailers, the delivery services and the retailer customers.”

Globetrotting

In addition to a general increase in package volume, some delivery companies are experiencing an increase in international shipping from online retailers. Some Internet retailers looking for growth are beginning to reach out to consumers around the globe, which translates into greater revenue for delivery companies.

“There is a robust demand for American products overseas, and Internet usage continues to grow. So while the web has opened the door to global trade, reliable delivery services are the ones having to make it a reality,” Marinkovich says.

In the end, given the ever-increasing competition in Internet retailing, e-retailers will be looking for any kind of ways to differentiate themselves from their competitors and keep their customers coming back.

“In surveys customers often rank shipping concerns as one of their top worries about their online purchases,” Marinkovich says. “So once a purchase decision has been made, keeping the delivery promise is a crucial component of maintaining and increasing customer satisfaction.”

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