A Fortune in Consumer Parcel Shipping

by Eric A. Brill*

* The author is an attorney in San Francisco (Harvard Law School, 1974).

(October 23, 2017)

Suggestion: First read http://brill-law.com/perfect-solution-online (including its Executive Summary, which applies also to this web page). That web page includes a link at the end that will take you back here. The two web pages describe a perfect solution to a serious problem: the pressing need for fast, low-cost shipping of consumer parcels

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Much more on these two graphics below:


A Fortune in Consumer Parcel Shipping

Quick: What technical breakthrough is Amazon known for? Answer: None. Yet Amazon is worth much more than tech giants Intel, IBM, and Hewlett-Packard – combined.

Why?

1.         Booming market.

2.         Good execution.

3.         Many tweaks.

Examples: OneClick, Kindle, next-day delivery, Amazon Prime, AWS, Alexa, same-day delivery. Some tweaks work out, and are kept. Others don't, and are discarded. Whether kept or discarded, though, small but frequent tweaks have been made along the way, and more are likely.

But even Amazon lacks this:

 4.        A technical advantage.

We will have all four.

With valuable help from parcel-industry engineers and many others, including an extended family of highly successful engineer-inventors (see "My Background" below), I've invented a fast, small-footprint, low-cost parcel sorter (see bird’s-eye view below). With this invention, backed by years of market research and $500,000 already spent, we will capture a small but valuable chunk of the booming consumer-parcel-delivery market with fast deliveries at low prices.

We will target two large markets:

Market One: Sorting and shipping parcels from a proprietary hub to Postal Service destination-area facilities (see map below). This market will count most. Though we will need substantial up-front financing, we will become profitable fairly soon after operations begin.

Market Two: Sorting and shipping from destination-area facilities to post offices, an existing market that we will sell into – profitable almost from the outset.

This summary lays out my plan for both (but first read http://brill-law.com/perfect-solution-online, which includes a link back to this web page at the end). A few gaps may beg questions, but I can fill those few gaps quickly with more detailed explanations. After you’ve read both web pages, please contact me if you would like to learn more (contact information at end).

No-Tax Exit – In View From the Start

My plan is to build the profitable parcel-shipping company described here – and then sell its stock at a large gain in 5-6 years, probably to a large on-line retailer or a private equity firm. No deadline, no rush, but I expect we will be out in that time frame – probably with founders and early investors paying 0% federal income tax under IRC §1202(a)(4).

Market One

Shipping from a proprietary hub (or hubs) to destination-area Postal Service facilities.

Note: We will need to strike a deal with one or more carriers that have destination-area delivery networks. Although there are alternatives, we expect the US Postal Service will be that carrier, and so most examples refer to it.

We will sort customer parcels at one or more proprietary hubs and advance them quickly to destination-area Postal Service facilities (see map below) for onward sorting and delivery to post offices (Market Two – see below) and then to consumers' homes. Our low rates will reflect our even lower costs. Deliveries typically will be as fast or faster than UPS/FedEx. Market One is what will yield most of our value. Though we will require substantial financing initially, we expect to become profitable fairly soon after operations begin – even without Market Two.

Our Advantages – and the Opportunity: High Rates and Suffering Shippers

Our advantages: fast and reliable delivery, world-wide coverage, very low prices.

Some potential competitors may (or may not) be able to sort and deliver parcels quickly. Or they may (or may not) be able to keep costs and prices low. None will be able to do both. This will be true for existing companies too. The US Postal Service, for example, is notoriously slow at the "origin end" and middle portion of the parcel-delivery process (our focus). Its recognized strength lies in the "destination end" (more on that below). Although UPS and FedEx dominate consumer-parcel delivery (see "Parcel Shipping Today," below), their nearly-identical rates have risen sharply for many years, squeezing on-line retailers and driving many of them out of business. Between 2000 and 2016, for example, US inflation was only 39% but UPS/FedEx residential ground rates (the so-called “floor rate” – the minimum paid by most shippers regardless of their discounts) rose 182% (more on this at http://brill-law.com/perfect-solution-online). Indeed, this huge  price umbrella is the most attractive feature of the consumer-parcel delivery business for potential entrants (though not for shippers, of course). Both UPS and FedEx grant large discounts to high-volume shippers, but discounts typically are percentage-keyed to list rates. Even Amazon has suffered: It lost a nearly-incredible $7.2 billion on shipping in 2016 alone (shipping charges paid to carriers plus internal shipping expenses, minus shipping charges collected from customers – see Amazon's 2016 annual report, at page 25), a shocking deficit that continues to grow steadily (Amazon’s net shipping costs had been “only” $5 billion the year before), even faster than Amazon's sales. 

Thanks to Consolidation

This plan would have worked earlier, but not quite as well. Just 15 years ago, the US Postal Service had over 450 destination-area “plants.” Two thirds of them have been closed or “repurposed." A mere 141 destination-area facilities now "feed” 100% of the post offices in the continental US (see map below), with a few additional facilities feeding post offices in Alaska, Hawaii and US territories.

Old Shopping, New Shopping

A major shift in retailing is already under way. On-line sellers are squeezing out bricks-and-mortar stores, which have high real estate and inventory costs. Once-crowded shopping malls are losing stores and shoppers. Though a few on-line retailers have taken small steps in the opposite direction (for example, Amazon’s new bricks-and-mortar bookstores), the trend is clear:

1. Fewer bricks-and-mortar stores with full inventory.

2. More display-only stores and on-line retailers, with products shipped directly from warehouses to customers’ homes.

In a typical shopping-mall trip today, the shopper carries purchased items home in shopping bags. But maintaining large in-store inventories is expensive. Some retailers already stock only top-selling items, or even just samples. Store employees explain to shoppers that other sizes, styles and products are available on-line. In-store computers enable shoppers to view products (and reviews), and store employees answer questions and help shoppers to place orders. When a shopper heads home, she is carrying fewer shopping bags – possibly none. Purchased items are delivered directly from a warehouse to her home.

There will always be a need for immediate delivery, and many shelf-inventory stores will remain for that reason. But more and more consumers will order products for in-home delivery, after viewing the product at a display-only store or on the shopper’s own computer. Consumers' natural desires to see and touch products before they buy, and retailers' equally natural desires for name recognition and independence, will induce many retailers to maintain physical stores. But most stores will be smaller and require fewer employees.

Parcel Shipping Today

Two companies dominate this booming market now. UPS and FedEx (combined market cap: $150 billion) control over 80% of the US parcel-delivery market, even more in some areas (more on this at http://brill-law.com/perfect-solution-online). The Postal Service is a distant third (especially successful with low-weight parcels sent by Priority Mail), followed by DHL nationally and a few regional carriers. A few large on-line retailers (notably Amazon) have established in-house alternatives for some or all of the parcel-delivery steps. Though the several steps are split in varying ways between each retailer and its carrier(s), collectively they stock the retailer's products in warehouses, process and sort and pack customer orders, sort packed orders to their destinations, and transport sorted parcels to destination-area carrier facilities, where the parcels are handed off to delivery-truck drivers, Postal Service mail carriers or gig-economy couriers for final delivery. In a nutshell, that is the consumer-parcel fulfillment and shipping business.

A few parcel carriers are slow (for example, FedEx SmartPost) but do well because they charge less. In general, though, parcel delivery is a bit quicker than it used to be – more expensive, but at least a bit quicker. Nonetheless, although most consumers appreciate quicker delivery, very few will pay extra for it. Numerous studies show this. Indeed, many would-be purchasers abandon on-line "shopping carts" if the seller does not provide free shipping. Since shipping is never really "free," the on-line retailer often must pay for it or lose the sale. Fewer and fewer retailers are able and willing to pay constantly-rising shipping rates. Amazon is both, but Amazon lost an astonishing $7.2 billion on shipping in 2016 alone. Other on-line retailers, large and small, are losing money on shipping too – collectively, much more than Amazon.

Our Plan

We will offer retailers fast, reliable, world-wide consumer-parcel delivery at low prices from a single proprietary hub (or two hubs).

Example: This map shows our likely truck routes to 37 drop-off points from a single hub in Louisville, Kentucky, though a different hub location (or locations) could be chosen:


Our sorter probably will look like this from above (12,000 parcels per hour, 25,000 square feet; 200 sort destinations):

 

Note: Several numbers below – in particular: 37, 141 and 171 – reflect Postal Service information that may have changed slightly or hereafter may change. Such  a change almost certainly would not affect the analysis. Indeed, lower numbers (more likely) would make the analysis even more compelling.

The Postal Service will advance roughly 70% of our parcels (sorted and pre-sacked by us) from these 37 drop-points to an additional 104 Postal Service regional facilities (37+104=141) marked on the map above (the straight lines emanating from Denver are flight routes for the predictably few parcels to be Priority Mailed from Denver to Billings, Albuquerque and El Paso), and from all 141 destination-area facilities to every local post office "fed" by those facilities. 100% of continental-US post offices are fed by those 141 facilities. (Though the map above shows only the continental US, we will offer world-wide delivery.) Some of these 141 facilities also sort parcels transported to DDUs in another (nearby) area, and so we will sort our parcels to a total of 171 Postal Service facilities (continental US – more on this below).

We will drop off almost all sorted parcels on the day before final delivery, one day after they are sorted at our origin hub (or two days after they are sorted, for West Coast parcels). We will pre-sack parcels destined for other regional facilities in the area of the drop-point, so that no further sorting will be necessary until the sack reaches its final regional facility (more on this below). 

According to reported statistics, roughly 95% of continental-US parcels will be finally delivered the day after we drop them off. About 5% will require an extra day. (Deliveries outside the continental US will take longer, but they too will be quicker and cheaper than alternatives.) We believe these statistics are reliable, even conservative. In two personal tests, each involving a parcel Priority Mailed from San Francisco (i.e. without first advancing the parcel to its destination area, as we will do), final delivery was next-day to a small town in southern Maine and next-day to a small city in central Ohio (i.e. both ahead of schedule – see below).

Why Our Postage Rates Will Be Very Low

All major parcel carriers offer overnight service – but at a high premium that on-line retailers (and consumers) rarely choose to pay. Almost all consumer parcels are lower-priced "ground" parcels.

Most carriers project delivery dates for "ground" parcels. UPS, for example, projects delivery in 1-5 business days throughout the continental US. The Postal Service projects delivery dates too. For example, it projects that Priority Mail parcels will be delivered anywhere in the continental US in 2-3 business days. The Postal Service represents even more to some large shippers – for example, that a parcel will be delivered the next day if the shipper deposits it at any one of 141 Postal Service destination-area facilities (continental US).

That is what we intend to do.

Not exactly, though. We intend to deposit parcels at only 37 Postal Service regional facilities (continental US), not 141 – see map above. We will ask the Postal Service to forward pre-sorted sacks to the remaining 104 destination-end facilities (37+104=141). For this reason, our rate negotiations with the Postal Service will take into account three components:

(1) DDU list rates, the very low “last mile” postage charged to deliver parcels deposited at “destination delivery units" (mostly post offices) – for example, the “list” DDU rate for a 5-pound parcel is about $3;

(2) the Postal Service's cost of sorting and advancing parcels from a regional facility to the DDUs it feeds; and

(3) for roughly 70% of our parcels, an intermediate step: the Postal Service's cost to advance pre-sorted sacks from a drop-point to another regional Postal Service facility in the same area.

Our negotiated postage rates, reflecting these three components (and a volume-based discount) – plus our very low sorting and delivery costs – will enable us to charge low rates to customers.

We intend to minimize the Postal Service's Step 3 cost, and to demand lower postage rates in return. Parcels deposited at a Postal Service drop-point but destined for another regional facility in the same area will be sorted and sacked to that other facility at our hub. Those pre-sorted sacks will not need to be opened at the drop-point. The Postal Service will be able to transfer those sacks, unopened, to a Postal Service truck heading to the other regional facility (more detail on this below).

Can Others Do This?

Yes, but only at much higher costs. For example, UPS' gargantuan Chicago ground hub (which eventually sorts many UPS parcels received from all over the United States) can sort more than 15 times faster than ours will. But we will not need such sort speed – 12,000 parcels per hour will be more than fast enough – and that UPS hub cost 150 times as much as ours will cost and occupies over 100 times as much space. FedEx is the same. For example, the "small parcel sorter" at FedEx's flagship Memphis hub cost 100 times as much as ours will. Each of those much-larger and much-more-expensive hubs is well-suited to its much-different purpose, but it is far too expensive and large for our purposes.

Our operating costs will be much lower too. Roughly 8,000 workers, split into four shifts, work around the clock, 7 days a week, at UPS’ Chicago hub. Over 7,000 workers show up every night at FedEx’s Memphis hub. In stark contrast, our hub will require well under 100 workers, including supervisors, maintenance and all other personnel. UPS' labor costs at its Chicago hub alone are roughly 100 times as much as ours will be.

Our maintenance costs will be lower as well. Sorter components will be few and inexpensive, and will run at slow speeds. Access will be convenient, and most maintenance can occur even while our sorter is operating.

Our delivery costs will be lower too. We will be advancing sorted parcels to only 37 drop-points in the continental US, along fast freeway routes that include several drop-points each (see map above).

Finally, the postage we pay will be very low – see "Why Our Postage Rates Will Be Very Low" above.

These cost differences should prevent UPS or FedEx from hurting us. Nor, frankly, are they likely to bother trying: We will be content to take less than 1% of their volume (well over 30 million parcels each day, including “commercial” parcels), and they cannot prevent that unless they are willing (which is unlikely and unnecessary) to accept much smaller margins on the rest. Their mutually profitable duopoly, with its protective price umbrella, will remain intact after we arrive. More important, our low costs and rates will block other would-be entrants, who predictably would incur costs even higher than UPS and FedEx – especially entrants who use existing high-priced, large-footprint sorters (we will not).

Market Two

Shipping from destination-area regional facilities to local post offices.

The map above shows Market One ending when we drop off parcels at destination-area Postal Service facilities. That may be the end of it, but we doubt it.

How Do Parcels Get the Rest of the Way?

UPS and FedEx handle ground-parcel delivery "end to end" – from the origin-end UPS/FedEx facility (or even from the shipper's warehouse) to the consumer's home or business. But many other carriers (including FedEx SmartPost and UPS SurePost) hand off parcels at destination-end post offices for final delivery by uniformed mail carriers. They negotiate volume-based discounts from the Postal Service's already-low DDU rates – see "Why Our Postage Rates Will Be Very Low" above).

This begs an important question: 

How do parcels get from a carrier's destination-area regional facility to DDUs?

That intermediate step is handled by whichever parcel carrier operates the regional facility – for example, by FedEx SmartPost, UPS SurePost, or DHL if the regional facility is operated by that private carrier, or by the Postal Service if it operates the regional facility. Whether a private carrier or the Postal Service handles this step, however, it must sort parcels from the destination-end regional facility to the DDUs fed by the facility, and then truck the sorted parcels to those DDUs.

At least once each day (usually late at night), the Postal Service trucks parcels from each destination-end regional facility to all DDUs fed by the facility – which may be fewer than 100 DDUs or several hundred DDUs. Once a parcel reaches its DDU, it is sorted (along with other outgoing mail) to its carrier route early the next morning and is delivered to the consumer's home or business that day.

The Postal Service’s destination-end regional facilities do something else too. They truck parcels (or sacks with parcels inside) to other regional facilities in the same area, often several times each day. Although most of our 37 continental-US drop-points themselves serve very large populations, the Postal Service will advance roughly 70% of our continental-US parcels to 104 other regional facilities (37+104=141), rather than directly to DDUs.

The Postal Service’s Brooklyn NY facility is a good example. Although we will drop off Brooklyn-bound parcels at the Postal Service's Newark NJ regional facility, about an hour west of the Brooklyn facility, those parcels will have been sorted and sacked at our Louisville hub to the Brooklyn facility. At its Newark facility, the Postal Service will simply transfer our Brooklyn-bound sacks, unopened, to a Brooklyn-bound truck. When the truck reaches the Postal Service’s Brooklyn facility, our sacks will be opened for the first time and the parcels inside will be sorted to the DDUs fed by the Brooklyn facility.

Some destination-area Postal Service facilities “feed" more DDUs than the facility can sort to in a single pass. (That ultimately is the reason why, in the continental US, parcels must be sorted to 171 destinations even though the Postal Service has only 141 destination-area regional facilitiies. This has become true even more often in recent years: As a result of the Postal Service’s consolidation over the past decade or so, some remaining destination-area facilities handle deliveries to DDUs that formerly were handled by now-closed facilities.) A regional facility that feeds 250 DDUs, for example, may be able to sort to only 150 of those DDUs at a time. If so, parcels destined for the remaining 100 DDUs must initially be sorted to a residual "second pass" slide. Once the "first pass" parcels have been removed from their 150 sort bins (i.e. loaded onto trucks for delivery to those 150 DDUs), the "second pass" parcels will be sorted again, this time to the DDU level, and then loaded onto trucks for delivery to those 100 DDUs.

The Postal Service’s Westchester NY regional facility is a "two-pass" facility – a status that is evident whenever parcels deposited at a facility (more accurately: sacks containing those parcels) are required to be labeled more precisely than to just the facility. At the Postal Service’s Westchester facility, some parcels will have been sorted, labeled and sacked to “Westchester/Westchester” (i.e. largely Westchester-County DDUs) while others will have been sorted, labeled and sacked to “Westchester/Stamford” (actual Postal Service labeling rules are more specific). Stamford CT is a small city about an hour northeast of the Westchester facility, the site of a closed-or-repurposed Postal Service regional facility from which parcels formerly were advanced to Stamford-area DDUs. Those Stamford-area DDUs are now “fed” from the Westchester facility instead. As a result, the Westchester facility is required to sort to more DDUs than it can handle in a single pass (though this may have changed since consolidation, if the Westchester-facility parcel sorter has been upgraded). 

The Postal Service solves this “problem” in two ways. First, it pre-sorts parcels as described above, routing all second-pass parcels to a residual slide during the first pass and re-sorting them to DDUs after the first-pass parcels have been removed from their sort bins. Second, it requires major parcel-depositors to label parcel-sacks more precisely – essentially performing the pre-sort step that the Postal Service otherwise would need to perform. For example, a shipper might label a parcel sack destined for Stamford-area DDUs as “Westchester/Stamford,” while labeling another parcel sack, destined for Westchester County DDUs, as “Westchester/Westchester." Assuming (as we do) that the Postal Service arranges for all Stamford-area parcels to be sorted to the DDU level during the first pass so that those parcels can already be on their way to the more-distant Stamford area while the second-pass sort is occurring at the Westchester facility, some parcels in our Westchester/Westchester sacks nevertheless might be sorted to the DDU level during the first pass (i.e. if not all sort bins are assigned to Stamford-area DDUs during the first-pass sort) while other Westchester/Westchester parcels probably would be sorted to the DDU level only during the second pass.

If instead, in this example, the Westchester-facility sorter could sort to all Westchester and Stamford DDUs in a single pass (which, again, may be true already if the Westchester facility’s parcel sorter has been upgraded), a second pass would not be necessary. Parcels from other Postal Service facilities could arrive at the Westchester facility much later each night and still be delivered the next day to homes in Westchester County or the Stamford area. In Market Two, our low-cost, many-destinations sorter will make this possible – single-pass sorting at a much lower price than a carrier now pays for two-pass sorting. Even at a regional Postal Service facility that already has single-pass sorting (for example, because the facility feeds few DDUs, even after consolidation), our sorter will be much less expensive than competitors' sorters (for example, the Lockheed Martin SPSS, which has been installed in several regional Postal Service facilities).

My Background

Though I am a business lawyer by trade (Harvard Law School, 1974), I've received valuable help over the years from parcel-industry engineers, patent lawyers, parcel-industry business professionals, independent consultants and many others. Equally or more important, both branches of my family include highly successful engineer-inventors – Google "patents" and Eugene Brill (father), or Beatrice Brill (mother), or Daniel Prutton (maternal grandfather), or Howard Prutton (maternal uncle). Growing up, dinner-table conversation often dealt with inventions and patents. I have no patents on the sorter (for the record, I did receive a patent on a very early version (from Singapore, in 2001), but I have not maintained it and the sorter has changed a great deal since then). One or more patents might be available for key components of my sorter – though I expect that efficient execution, occasional plan tweaks, and limited need-to-know disclosures of confidential information will count for more.

A Few Final Points

I've already spent a great deal of time (thousands of hours, since 1999) and money (roughly $500,000) on this. In addition to considerable travel (mostly domestic but with a few Far East trips), my time has been devoted in roughly equal portions to three categories: the sorter, the map, and the spreadsheets. The sorter (see bird's-eye view above, presented intentionally without any explanation) reflects hundreds of changes over the years – a few major (long ago), most minor but useful. The route map (above) has been refined dozens of times and reflects, more than anything else, a careful analysis of the local and regional Postal Service facilities listed in the several spreadsheets (some including over a million cells) I have created to evaluate this business opportunity.

Some great ideas occur to entrepreneurs spontaneously and are complete once they occur. Other great ideas are developed methodically over a long time. This idea is in the second category – it did not occur to me suddenly or recently. From the outset, I have followed the advice of most successful inventors: "A successful inventor first identifies a problem, and then invents a solution. An unsuccessful inventor creates a solution, and then casts about for a problem that it might solve."

Low-cost, fast and reliable consumer-parcel shipping has been a serious need for several decades – a problem that already has yielded huge losses and threatens to get worse. We will offer a perfect solution. 

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Suggestion: As mentioned at the beginning, ideally you should read this web page after you have read http://brill-law.com/perfect-solution-onlinPlease let me know whether you would like to learn more.

Contact information: (415) 954-4474 (office) or (415) 713-4795 (cell); eabrill@mindspring.com

– Eric A. Brill

© Eric A. Brill 2017