COVID-19 shift to major surge in residential deliveries is impacting operations for parcel carriers

The ongoing impact of the COVID-19 pandemic is changing the playbook, in some ways, for how global transportation and logistics bellwether FedEx is approaching capacity and management for its SmartPost offering, its last mile delivery service partnership with the United States Postal Service (USPS).

That was the main takeaway from a recent report in The Loadstar, which observed that large shipper users of SmartPost are seeing reductions in equipment allocation from the Memphis-based carrier. This has been the narrative in industry circles, with parcel stakeholders observing that FedEx has been capping its weekly pickups and volumes, with volumes running as high as Peak Season levels.

John Haber, founder and CEO of Atlanta-based Spend Management Experts, a transportation, distribution and fulfillment spend management consultancy, noted that with FedEx having separate Ground networks between Home Delivery, Commercial, and SmartPost, things are being exacerbated by the huge shift from commercial to residential and the massive influx of e-commerce volumes all while integrating the SmartPost deliveries into their delivery network rather than the USPS.

And the subsequent impact on this is hindering operations, specifically for shippers with a heavy focus on B2C (business-to-consumer) ground operations, something that is being magnified during the COVID-19 pandemic, as more people are ordering goods and products online, due to ongoing sheltering-in-place and stay-at-home restrictions.

“We are seeing the volume caps apply to volumes across all service levels—it is Peak Season in May, and we anticipate it to remain throughout the remainder of the year,” said Haber. “It makes sense, but it is up to 80% residential deliveries in some areas…if businesses reopen, that will change, but FedEx and UPS will not come out of that in 2020. FedEx is doing everything it can and without them right now we would be in a world of pain. However, there is no doubt it is negatively impacting many shippers that are scrambling, trying to find alternate solutions without much notice.”

As for UPS, Chairman and CEO David Abney said on the company’s first quarter earnings call that throughout the quarter UPS adjusted its network and controlled costs but was not able to offset the unprecedented and swift changes in market demand and mix.

“Business closures and stay at home restrictions disproportionally affected SMBs, and we are seeing a dramatic shift in consumer shopping behavior,” he said. “By late March, residential deliveries approached nearly 70% of our volume and drove increased delivery costs, a trend we [saw] continue in April.”

A FedEx spokesman told LM that although the company cannot disclose details of its customer agreements, FedEx, as an essential business, is committed to working with its customers and communities to continue to safely and reliably meet their needs during this uncertain time.

“The COVID-19 situation is very fluid and is causing many businesses—ours, service providers’ and customers’—to make adjustments,” he said. “While the growth of e-commerce has risen during the pandemic, the demand for business-to-business has declined. We are adapting operations as needed to align with this shifting balance of commercial and residential package volumes, including continuing the ongoing integration of SmartPost volume into the FedEx Ground network. Keeping commerce moving in the face of varying stay-at-home and shelter-in-place restrictions, which are disrupting supply chains and increasing our cost to serve, is an unprecedented challenge.”

Addressing FedEx, Jerry Hempstead, president of Orlando-based Hempstead Consulting, noted that FedEx has an interesting problem right now in the form of too much business.

“It’s for the most part residential and bulky, and it’s having an impact on stations that have issues with undeliverable packages,” he said. “They are delivering seven days a week so they just don’t have a way to take a breath. Amazon is facing a similar surge, as is UPS. Everyone is beyond last December’s peak volumes. Both UPS and FedEx have suspended their service guarantee. Of course, without knowing when life will return to “normal,” FedEx, at this point, has made a decision to limit some shippers. The lowest yielding traffic is SmartPost, followed by Home Delivery and then Ground. FedEx has been trying to stay disciplined in its hiring as its balance sheet has been in need of improvement for some time. One might call it profitless prosperity. All this shall pass, and then the big concern will be all this capacity and too few B2B transactions. You just know that’s coming.” 

The same issues UPS and FedEx have faced have also been experienced by global e-commerce giant Amazon.

A Bloomberg report noted that Amazon recently said that the one- and two-day delivery times that shoppers have come to expect should gradually return in coming weeks as it catches up from a demand surge tied to the coronavirus outbreak. The report added that on May 10 Amazon removed restrictions on the amount of inventory its suppliers can send to Amazon warehouses and is shortening delivery times—which had stretched for weeks for some products since the outbreak began—back to days.

“Amazon spends months preparing for the surge in consumer demand that usually comes during the holiday season,” the report said. “The Covid-19 outbreak that closed many retail brick-and-mortar stores and sent millions of shoppers online created a month’s worth of Black Friday spending without warning. Once Amazon fell behind, it took several weeks and hiring 175,000 people to get back on track.”