The E-Commerce Reset

Post-pandemic business-to-consumer (B2C) e-commerce and the last mile are potential opportunities for retailers. E-commerce sales are higher than in the pre-pandemic period, as are shipping costs. But, retailers are mitigating these costs in several ways, resulting in volume declines for FedEx and UPS.

E-commerce peaked at 16.4% of total retail sales in Q2 2020 but, as a percentage, has slowly fallen each quarter since to 14.8% in Q3 2022, according to the U.S. Census Bureau's quarterly e-commerce report.

The U.S. Census Bureau's monthly retail sales reports finds e-commerce has remained strong, up 11.4% year-over-year through November, while retail sales (minus non-store, food & beverage, auto and gas sales) increased 8.0% for the same period year-over-year.

Compared to the same period in 2019, e-commerce, as part of the non-store segment, is up 73.2%, while retail sales (minus non-store, food & beverage, auto, and gas sales) are up 23.4%. (Yes, inflation is also a contributing factor to the increases)

The U.S. Census Bureau tracks e-commerce within the 'non-store' segment, which includes mail-order houses, vending machine operators, home delivery sales, door-to-door sales, party plan sales, electronic shopping, and sales through portable stalls. Establishments engaged in the direct sale of products, such as home heating oil dealers and newspaper delivery service providers, are included in this subsector.

Retailers reported overall growth in e-commerce sales in recent earnings calls.

 For example:

• "E-commerce channels accounted for roughly 42% of our sales in the quarter at $22.7 million, representing a decrease of 17.5% from Q2 of last year, but a significant increase of over 171% over the pre-pandemic second quarter of fiscal '20," - Andy Fulmer, CFO of American Outdoor Brands

• "Year-to-date e-commerce sales growth has been strong at 12%, and it now represents 7% of our business, compared to 2% three years ago," - Bruce Thorn, President, and CEO of Big Lots

• "Digital is reverting back to kind of a mix between where we were pre-pandemic and where we were during the pandemic. So, when you looked at our digital penetration of the business in 2019, it was 25%. During the pandemic, it was 40%. We're now calling for 2022 at 33%, down from our initial estimation that it was going to be in the 37% range. When you see what our trend was in digital in the third quarter versus 2019, we were up 35%," - Jeff Gennette, CEO of Macy's

FedEx

But for the last-mile carrier, FedEx, e-commerce market growth has not met its expectations. In its recent quarter, ending Nov 30, average daily Ground volumes declined 10.8% year-over-year and, interestingly, down 10.4% for the same period in 2019.

"I think the main macro issue in the United States is really the e-commerce reset. Prior to the pandemic, e-commerce represented about 16% of retail. During the pandemic, it peaked at about 22%. And ever since, it's been kind of going down. We are probably, what, 18% or 19% right now. It's still higher than 16, but not quite as 22. So, that's the part of the reset that's going on in the U.S. domestic package business," FedEx CEO Raj Subramaniam told analysts during the company's earnings call in December.

Instead of pointing to e-commerce as the culprit for declines in FedEx Ground's average daily volumes, it may be because retailers spread out their volumes across more last-mile carriers as part of diversification strategies to mitigate costs.

"Of course, we have also taken certain revenue quality actions on some of the segments of the traffic, specifically FedEx Ground economy," Subramaniam further noted.

Retailers with physical storefronts are also encouraging curbside pickups and Buy Online, Pick Up in Stores (BOPIS) to help reduce their shipping costs.

In addition, some retailers are taking on parts of their last-mile deliveries themselves.

Target, which also utilizes FedEx and UPS, promotes its same-day services, noting that 75% of the U.S. population lives within 10 miles of a Target store. Its offerings include order pickup and drive-up and same-day delivery with its last-mile delivery provider, Shipt. According to Target, delivery orders rose 11% this year for Shipt, which also delivers on behalf of 200 other retailers. 

Meanwhile, Walmart, FedEx's most significant retail customer, continues to expand its last-mile service.

"The Spark Driver platform now serves customers in all 50 states for more than 10,000 pickup points with the ability to reach 84% of all U.S. households. This coverage includes a growing revenue stream from businesses utilizing Walmart GoLocal, our delivery as a service offering, has already made over 1 million deliveries since launching last year," Walmart CFO John David told analysts in November.

UPS

UPS Ground's annual daily volumes are also declining, while revenue management increased revenue per package.

"In U.S. domestic, our revenue quality efforts and the execution of our planned cost initiatives drove third-quarter results above our expectations. In the third quarter, average daily volume was down 1.5% versus the same time period last year, but the growth rate was an improvement over the first half of 2022 as new volume from the record number of wins we had in the second quarter came into the network," UPS CFO Brian Newman told analysts in October.

UPS also renegotiated its contract with Amazon resulting in fewer volumes as it focuses on profitability.

Resetting expectations

Ecommerce is more than just B2C. As noted in a previous post, B2B e-commerce is growing. Retailers are introducing B2B services while manufacturers and other B2B organizations embrace digitization to conduct business with suppliers and customers more efficiently.

In years past, volumes mattered for last-mile carriers, and the more, the better. But today, it's about profitable volumes.

Likewise, retailers and other shippers are focused on profitability. As part of their strategies, they will search for other last-mile options to mitigate costs, shifting volumes from FedEx and UPS and perhaps building their own last-mile solutions.  

- Cathy

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I wear a number of hats these days. Catch my weekly column on air cargo, freight forwarding, and the express markets, and the occasional podcast on Air Cargo World. I’m also helping out the Reverse Logistics Association as a research manager, and at JOC, I help out as a research analyst and write a weekly LinkedIn article, Freight Forward, summarizing JOC articles and providing an outlook for the week ahead.

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