Consumers are hooked on the convenience of e-commerce that lets them click, pay and get their package the next day. In fact, customers are so enamored with the near-instantaneous gratification of online retailing that they may not complete their purchase if delivery takes too long.
This behavior is reshaping the package delivery business, putting pressure on large parcel companies and creating opportunity for retailers, regional distributors and low-cost air freight carriers as well as for the U.S. Postal Service.
“This transition could drag on margins at major parcel companies that have spent years building complex long-haul infrastructure,” says Morgan Stanley freight transportation analyst Ravi Shanker. “But it also presents an opening for competitors to edge in on the ‘last mile’ of deliveries, since short-haul operations are less complicated to start up and run.”
Fighting for the Last Mile
Under the old supply chain model, parcel carriers made most of their profits from the long-haul middle portions of the delivery route, shipping goods—often by air or rail—from central distribution centers to various regional locations. Now, however, more retailers are stocking inventory closer to their locations to offer more of the “buy online, pick up in store,” “ship from store,” and curbside pickup services that gained popularity during the pandemic. One of the biggest U.S. brick-and-mortar retail chains reported that these options increased to 86% of online sales in 2023, up from 75% in 2020.
This shift to shorter delivery routes means that more goods are being shipped regionally, via ground transportation, rather than long-distance via air. Air shipments accounted for just 17% of annual revenue last year at some of the country’s biggest shipping companies, down from 25% a decade ago.
“Carriers must pivot to less-profitable ‘last mile’ routes but given their entrenched networks, they may have difficulty making the switch,” says Shanker. “This is where regional delivery services and even the retailers themselves can edge in to gain market share and boost their own profitability.”
One of the biggest online retailers, with its own extensive logistics network, has shifted from centralized warehouses to eight regions for order fulfilment. As a result, half of the company’s flights in 2023 were 1,000 miles or less, up from 23% a year earlier. Such changes should yield cost benefits in the near term, with longer-term gains resulting from tighter control of a shorter supply chain.
“Large retailers that are able to re-engineer their fulfillment networks toward a regional model to reduce shipping costs and capitalize on last-mile demand could be rewarded with margin expansion,” Shanker says.
Changes at the Post Office
The U.S. Postal Service also is adjusting to the change. In 2020, it embarked on a 10-year, $40 billion program to regionalize and modernize its operations. The plan is designed to stem billions of dollars in losses and make the USPS more competitive with traditional parcel companies. In its last fiscal year, it opened 29 updated sorting and delivery centers and has plans to add 40 more in the current year. In addition, the USPS has cut air freight expenses by $1 billion, and plans to reduce processing, distribution and delivery costs by another $2.5 billion.
“The program not only will make it more efficient and reduce costs, but as the USPS improves its processes, it may attract more retailers interested in long-term contracts for next-day deliveries,” says Shanker.
Investing for the Short Haul
While the major parcel companies are responding to the change, their networks have been dependent on long-haul air routes for years, and they face significant challenges in adapting to the new shorter-haul markets. Several have significant investments in aircraft and unionized pilot contracts, which result in high fixed costs. Adapting to the short-haul market may take five to 10 years, although several major players are already investing hundreds of millions of dollars to improve their networks, reduce long-haul flights and shift air freight to trucks. In addition, two major parcel services have acquired companies that specialize in last-mile deliveries, boosting their short-haul offerings.
“The larger shipping companies that have invested in wide-body aircraft fleets may be hardest hit by these changes, but the shift could benefit smaller airlines and charter services, whose narrow-body aircraft fleets could draw partnerships with major online retailers,” says Shanker.
For deeper analysis and insights, ask your Morgan Stanley Representative or Financial Advisor for the full note, “Short and Fleet: The Regionalization of Express Parcel” (Feb. 26, 2024).
