January 17, 2011

Express Mail Delivery

1. How and why has the express mail industry structure evolved in recent years?

Customers- Business and individuals became accustomed to express delivery services to ship their most
urgent documents, parcels and perishable goods. From a customer point of view, the urgency of
shipment and competitive prices were the major drivers in using express mail instead of normal delivery.
As the concept of inventory control became critical for businesses, they used express delivery to ship
their time-sensitive products, thereby reducing their on hand inventory. The reliability of express mail
carriers, access to tracking information and the convenience of drop-off, also affected how industry
evolved. Although not effective, volume discounts were offered to large customers to improve customer
loyalty.

Operations- Quality control became paramount to express mail industry, as the three largest carriers,
delivered more than five million packages each day, with an over 98% on-time arrival. Although each
carrier had different operational structure, their basic infrastructures were the same. They all utilized
large fleet of vehicles and drivers to collect packages from customers, and then transported by cargo
planes to hub airports, where the package were trucked to hangers to be sorted according to their final
destination and scheduled time of delivery. Even though carriers used different degree of automated
sorting processes, they all employed a vast number of employees to direct this process. Because of the
nature of hubs’ operations, it required large capital expenditures. A significant portion of carriers’
resources were also allocated to customer service and information management. In order to help
customers schedule pickups, track packages and provide rate information, complex information systems
were used to support the carriers’ distribution network.

Competition- 85% of the domestic market was captured by the three major firms, FedEx, UPS and
Airborne Express, with 1996 revenues of $10,274M, $22,368M, and $2,484M, respectively. The market
position of second-tier players, which included U.S. Postal Service, was minute compared to FedEx and
UPS combined. The Postal Services had remained popular among residential consumers, and had a legal
monopoly for mailing first-class letters; however it was prohibited by law to provide volume discounts
to business customers. In addition, it lacked efficient tracking capabilities and had poor on-time delivery
record. Other second-tier players were DHL and TNT, BAX Global, Emery and RPS. DHL and TNT
both targeted the international market. DHL’s purpose to operate domestically was merely to lower its
costs and increase reliability of its international shipments. And TNT was specifically targeting the
European market. BAX Global and Emery were not competitive in overnight express mail and only
focused on shipping heavy cargos. RPS was more focused in targeting price sensitive business
customers who were interested ground two-day shipping.

2. How have the changes affected small competitors?

Smaller competitors were forced to intensify their product differentiation and become more appealing to
niche markets within the express mail industry. They also utilized technology based customer service
information systems to improve their customer service.

3. Analyze the industry environment using the Five Forces model.

The risk of entry by potential competitors- Because of the large capital investment required for creating a
distribution network and its supporting infrastructure, the risk of new entry in express mail industry is
low. Major carriers have an advantage of economies of scale since they have already established their

1
January 17, 2011

position in the market, making it more difficult for new entry. Brand loyalty generally is low in the
industry. Potential new entrants can apply the same business models, therefore eliminating absolute cost
advantage of established carriers. There is a low switching cost since consumers can easily change
carriers. There are legal and regulatory constraint that create an entry barrier into the industry.

The intensity of rivalry among established companies within an industry- The industry is consolidated
and very competitive particularly between the two major players, FedEx and UPS, creating an oligopoly.
Other carriers generally follow the prices and trends established by these two major players. Increase
demand in express mail delivery has also influenced rivalry among carriers. In addition because express
mail industry generally has high fixed costs, and profitability is dependent of sales volume, it creates a
more intense competition among carriers. Because of the high initial capital investment needed to enter
into the industry, exit barriers are high, leading to a more intense competition.

The bargaining power of buyers- Individual consumers generally have no power in this industry, where
customer loyalty is minute and switching cost is low. However, commercial customers depending on
their volume of business, tend to have a degree of negotiation power on prices.

The bargaining power of suppliers- Major suppliers in this industry include labor unions, and vehicle
and jet fuel producers. Suppliers clearly could create a threat to the industry by providing poor service or
raising the costs of their products.

The closeness of substitutes to an industry’s products- Although customers can use facsimile and email
to transmit documents, there is always a need for sending original documents. In addition there is no
substitute for shipping urgent time-sensitive and perishable goods, except using an express mail delivery
service.

4. Identify any macroeconomic or global trends/factors that might be affecting this industry
significantly.
The four most important macroeconomic forces are growth rate of the economy, interest rate, currency
exchange rates and inflation (or deflation). Economic growth would expand consumer expenditures
resulting in a decline in competition among carriers. Cost of capital is dependent of interest rates, and in
general rising interest rates could cause a threat and falling rates creates opportunities. Volatility in
currency exchange rates could also impact competitiveness of those carriers involve in international
shipping. Volatility in inflation and deflation could destabilize the economy and create an adverse
business environment for express mail industry.
Global trends affecting the industry include: technological, demographic, social, and political and legal
trends. The technological trends impacting this industry most likely would be creative type which would
bring more value to the end user consumer. Positive demographic trends could result because of the
customer expectations of younger segment of population or generation Y, who would prefer same-day
or next-day delivery service. As society’s social values lean towards a green environment, there could
be deliberate tendency to use secured encrypted emails to transmit documents instead of mailing them
overnight. Unless the industry becomes regulated, there is will not be any political and legal trend
impacting the industry.