The Perfect Solution for Online Retailers

by Eric A. Brill*

* The author is an attorney in San Francisco (Harvard Law School, 1974) – see “My Background."

(November 17, 2017)

Executive Summary

(see “Table of Contents” below for links to specific sections)

As any industry insider will confirm, booming online sales have created a problem that gets worse every day: Consumer-parcel shipping is expensive, or slow, or both. We’ll earn huge profits by solving that problem.

We’ll build and operate a highly profitable parcel-shipping hub in Louisville, Kentucky, with cookie-cutter copies likely to follow in other cities, to capture a small chunk (less than 1% will be enough – more will be better) of a booming market: consumer parcel delivery. Exploiting our proprietary low-cost parcel sorter as a “consolidator, one step removed,” we’ll offer fast world-wide deliveries at prices far below those of UPS and FedEx, whose price-fixing has created a huge price umbrella that will protect us too. At 50-60% discounts, operating just three days a week from a single hub, we’ll net $5-18 million a year. Most of our customers will be online retailers. They’ll find us attractive because we'll drastically reduce their shipping costs. Our very low costs will put us ahead of competitors and make us attractive to potential acquirorsWe plan to sell out after 5-6 years, federal-tax-free for founders and early investors (IRC §1202(a)(4)). 

Our business will be simple (click on “Where We’ve Been and What’s Next” in Table of Contents for details on how we’ll get there): 

1. Collect or receive unsorted parcels from customers near (or at) our Louisville hub.

2. Sort parcels to roughly 180-200 destinations.

3. Truck sorted parcels to a small number of drop-off points along just a few routes.

The consumer-parcel-delivery problem is serious and getting worse, and the reward will be huge for whoever solves it. We will – by providing a better “front end” and allying with the US Postal Service to provide the middle portion and “last mile."

End of Executive Summary

(see “Table of Contents” below for links to specific sections of body)

More on these two graphics below:


Table of Contents

Navigation: Click on a heading below to go to corresponding section of body. In body, click on heading again to return to top of document.


Old Shopping, New Shopping

Parcel Shipping Today

The UPS/FedEx Price Umbrella

     UPS/FedEx Price Umbrella

     Illusion of Negotiated Rates

UPS/FedEx Rate Hikes Far Exceed Inflation

     UPS/FedEx Rate Increases Have Turned Online Retailers Into Boiled Frogs

     Most Online Retailers Have No Practical Choice       

For Online Retailers, Hard Questions With Bad Answers

     UPS and FedEx Still Compete – But Not On Price

A Better Way –  A Delivery Network Focused on Delivery, Not Intake

     UPS/FedEx Networks Are Optimized For Intake, But Not For Delivery

     A Delivery-Focused Network Can Be Much Faster and Less Expensive

     GRAPHIC: Network

     GRAPHIC: Sorter

     More About the Network

     More About the Sorter

A Delivery Example

Earlier-Deposit Delivery Model Will Exploit Additional Postal Service Strength

     Market Segment Just Before Last Mile Is More Profitable

     Long-Distance Transport is Unnecessary

     Focus On Pre-Last Mile Segment Will Exploit Overlooked Postal Service Strength

Why Our Postage Rates Will Be Very Low

Can’t UPS and FedEx Do This Too?

Can't Others Besides UPS and FedEx Do This?

You May Be Wondering About Some Numbers

We Will Be Different From A Fulfillment Company

Why We Will Succeed Even If Others Do Not

Early-Period Hurdles

     Overcoming the Stickiness of Customer Relationships

     Gradual Transitions

     Possible Competition With Prospective Customers

My Background

Where We’ve Been and What’s Next

     Where We’ve Been

     What’s Next

The Perfect Solution

End of Table of Contents

  

Old Shopping, New Shopping

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Like it or not (many don’t), a major shift in retailing is 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 shoppers and stores. 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 on-site inventories.

     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 her purchases home in shopping bags. But some stores 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. Store employees answer questions and help shoppers to place orders. When a shopper heads home, she is carrying fewer shopping bags – possibly none. Indeed, she may never leave home at all, “shopping” instead from her own home computer. Either way, 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

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Two companies – UPS and FedEx (combined market cap: $150 billion) – control over 80% of the US parcel-delivery market, even more in some areas. The Postal Service is a distant third (especially successful with low-weight parcels sent by Priority Mail), followed by DHL and a few regional carriers. Some large on-line retailers (notably Amazon) have established in-house alternatives for some or all parcel-delivery steps. However those steps are divided up between a particular retailer and its carrier(s) or others, 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. 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 a nearly incredible $7.2 billion on shipping in 2016 alone (source: Amazon 2016 annual report, at page 25). Other on-line retailers, large and small, are losing money on shipping too – collectively, much more than Amazon.

The UPS/FedEx Price Umbrella

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Illegal price fixing? You decide.

But keep in mind an even more important question: If UPS and FedEx do collude to set high shipping rates (hint: they have for many years, and this appears unlikely to change any time soon), is that actually good for online retailers? Does the large UPS/FedEx price umbrella not only boost their profits but enable others to compete with them?

UPS/FedEx Price Umbrella. UPS and FedEx exploit their market power by “cooperatively” setting high ground rates (most consumer parcels are “ground” parcels). Misplaced your UPS rate table? In the good old days – 2016, for example – the solution was simple for online retailers: Just check your FedEx rate table instead. Except for the company name at the top of the page, US ground-rate tables were identical for UPS and FedEx – every weight, every zone. Over a thousand rates, identical to the penny. No exceptions.**

** For example, compare UPS Service Guide dated June 6, 2016 (pages 68-71) with FedEx Service Guide dated July 1, 2016 (pages 106-108) – 0-150 pounds, Zone 2 (0-150 miles from origin) through Zone 8 (1,800+ miles).

UPS/FedEx price-fixing has become slightly harder to detect, though it remains clear to anyone who looks closely. Sometimes UPS will be cheaper; sometimes FedEx will be. One carrier, for example, may have slightly lower base rates but slightly higher surcharges. Or it may depend on where the parcel is going (or coming from), or how much it weighs. For example, if a small ground parcel were shipped from Louisville to a San Francisco home on October 27, 2017, FedEx would be cheaper than UPS if the parcel weighed 5 pounds, but UPS would be cheaper – i.e. vice-versa – if the parcel weighed 2 pounds. If the parcel weight was somewhere in between – 3 pounds, for example – UPS and FedEx would charge about the same. And so on. (Sources: FedEx and UPS websites, on date mentioned.) Though UPS and FedEx “residential” ground rates will vary from shipment to shipment – sometimes one higher, sometimes the other – they are roughly the same overall for most online retailers, and both are very high.

Coincidence?

Illusion of Negotiated RatesIn days gone by, this might have raised eyebrows at the Justice Department. Not today. Lawyers for UPS and FedEx are prepared if anyone accuses them of price-fixing. Large online retailers don’t pay list rates, they will point out. They negotiate complicated contracts, and their rates vary considerably.

Do they? 

UPS and FedEx demand that customer contracts be kept confidential, but outsiders sometimes learn their terms. Their answer to this question:

Sometimes UPS and FedEx offer significantly different rates to a particular online retailer, but this is unusual. 

Most often, once one carrier learns what rates the other is offering an online retailer (sometimes from the retailer itself, who may hope for a bidding war), it usually will just match the offer or undercut it only slightly. Both carriers will press the retailer to base its choice on non-price factors – service and reliability, for example. At times, a significant rate difference may appear to exist, but surcharges or rate negotiations will erase it. Some retailers seek to exploit apparent rate differences by choosing between carriers on a delivery-by-delivery basis, but UPS and FedEx have various ways to prevent that. For example, a  retailer's volume-discount thresholds may induce the retailer to choose a carrier for a particular delivery even if its rate is higher.

UPS/FedEx Rate Hikes Far Exceed Inflation

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Many online retailers – even those who receive large discounts – grumble loudly and often about UPS/FedEx pricing. With good reason: UPS/FedEx rate hikes far exceed inflation. Between May 2000 and May 2016, for example, the US Consumer Price Index rose 39%. The UPS/FedEx "floor rate" for residential ground parcels – the 1-pound, Zone 2 list rate (there is no Zone 1 – long story), the minimum paid by most UPS/FedEx shippers regardless of their discounts – jumped far more: 182%.*** This large gap between inflation and UPS/FedEx rates has grown even larger since then, as annual UPS/FedEx rate hikes typically exceed inflation by about 3%. Although most online retailers pay less than list rates to UPS/FedEx (some of them much less), contractual discounts typically are percentage-keyed to list rates (usually with a minimum set at the undiscounted floor rate). As a result, the steep rise in list rates has hurt all UPS/FedEx shippers, large and small.

*** This alarming rate increase owes partly to surcharges, which have increased even more than base rates. The 182% price jump reported here is actually understated for many parcels. It reflects only the “big three” surcharges: fuel (a percentage add-on), residential-address ($4.15 in 2018 (FedEx)), and delivery-area ($4.00-4.40 in 2018 (FedEx)). The first two apply to every ground parcel delivered to a residential address (even a “residential" address used exclusively for a business). The last one applies to most US zip codes but only to a fourth of US addresses; it is “population-weighted” in our calculations. In 2000, none of these surcharges even existed; they were simply “built in” to UPS/FedEx base rates. Yet another UPS/FedEx pricing practice has boosted many retailers’ shipping costs: "DIM weight pricing” – a higher rate based on a parcel’s dimensions rather than its weight. Once UPS/FedEx made this calculation only for very large packages. Now they make it for all packages, regardless of destination, and stricter package-size formulas sweep in many more parcels. For example, a 2-pound parcel (or even a 2-ounce parcel) is priced as if it weighed 5.2 pounds if the parcel is a “large” box measuring 12" x 10" x 6”. A parcel's “DIM weight” is calculated by multiplying length x width x height (in inches) and dividing the result by 139 (for both UPS and FedEx). If a parcel’s actual weight is less than its “DIM weight” (i.e. if the parcel weighs less than 12.4 pounds per cubic foot, which works out to 5.2 pounds for the “large” small box in the example above), the higher “DIM weight” rate applies. 

UPS/FedEx Rate Increases Have Turned Online Retailers Into Boiled FrogsA particular rate hike may be tolerable for an online retailer, but their cumulative effect has been severe – death by a thousand paper cuts. An even better metaphor: the gruesome “frog in hot water” experiment. If a frog is dropped into a pot of hot water, it will jump out immediately. But if the water starts at room temperature and is heated slowly, the frog will paddle around contentedly until it boils to death.

Many online retailers “boil to death” every year. Few understand the reason any better than a puzzled frog. Some survivors see the danger, though, and it grows worse each year. UPS/FedEx rate hikes matter little to a retailer selling only $500 items. But how many do? Rate hikes matter a great deal to retailers selling low-price items, especially since buyers increasingly demand “free shipping” and abandon online shopping carts when sellers do not offer it.

Shipping is never free, of course. Someone pays for it. If buyers won’t, sellers must. And so online retailers are squeezed – pressed by consumers from one direction, by UPS and FedEx from the other. 

What can they do?

Most Online Retailers Have No Practical Choice. Very few retailers have a real choice. They strike the best deals they can with UPS and FedEx, cut costs elsewhere if they can, boost prices (or not) to cover shipping costs, and try to persuade themselves that customers won’t balk if they do. Some customers won’t balk; others will – at some point, very many will. Some retailers switch to Priority Mail, especially for lighter-weight parcels (or even to first class mail, for very light parcels). Some use lower-priced regional carriers where they can. Many use a fast-growing hybrid service offered by FedEx (SmartPost), UPS (SurePost) and several other “consolidators:” Parcels are dropped off at the  DDU (“destination delivery unit” – usually a destination-end post office) for “last mile” delivery by mail carriers – typically slower than regular UPS/FedEx ground service, but cheaper. (This “last mile” trend is significant, incidentally: According to Stifel, Nicolaus, a brokerage firm that follows the parcel-shipping industry closely, the Postal Service delivers over 60% of all “residential” parcels from DDUs – more on this below at “You May Be Wondering About Some Numbers). Sometimes these “solutions” work; often they don’t, and the online retailer either absorbs high shipping costs or goes out of business.

A handful of very large retailers "go direct” – especially Amazon. It has such high volumes that it can afford to truck parcels directly to destination-end post offices. At times Amazon skips the post office entirely, hiring independent “gig economy” couriers to drop off parcels at consumers' homes, or delivering them itself (sometimes in “Amazon Fresh” trucks designed to deliver fruits and vegetables). Nonetheless, even Amazon relies heavily on UPS and FedEx, shipping many millions of packages through each carrier. 

For Online Retailers, Hard Questions With Bad Answers

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Though it usually pays much lower rates, Amazon must ask itself the same questions as other online retailers:

1. Are shipping costs too high?

2. If so, are inflation and fuel prices to blame?

The answers:

(1) Yes – shipping costs are too high. 

Amazon, for example – despite its valiant efforts to cut shipping costs – loses several billion dollars each year on shipping, and that already-huge loss grows larger every year. Amazon's net shipping costs (shipping charges paid (plus internal shipping expenses) minus shipping charges collected from customers) were over $5 billion in 2015, and grew to an astonishing $7.2 billion in 2016. Other online retailers have had similar experiences – or worse.

(2) No – inflation and rising fuel prices are not to blame.

UPS and FedEx raise ground rates far faster than inflation or rising fuel prices require, for one simple reason: They can. Each knows its main competitor will do exactly the same, yielding ground-rate tables that until recently were identical (and remain very close) except for the company name at the top of the page. 

UPS and FedEx Still Compete – But Not On PriceUPS and FedEx still compete for the business of online retailers – each insists, for example, that its deliveries are quicker and more reliable, or that its customer service is better – but rarely on the basis that matters most to shippers: price. Their nearly-identical ground rates should come as no surprise. Consumer-parcel shipping has been growing at double-digit rates for many years, and this appears likely to continue. Not to exploit market power in such heady times would be to waste it. UPS and FedEx are not wasteful. Exploiting their market power calls for cooperative pricing, not bidding wars. They understand this.

But this stark fact leaps out: The US consumer-parcel market is sufficiently uncompetitive that UPS and FedEx are able to dominate it despite their high “cooperative" ground rates. A huge profit opportunity exists underneath this UPS/FedEx pricing umbrella.

A Better Way –  A Delivery Network Focused on Delivery, Not Intake

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A savvy entrepreneur can help online retailers to cut shipping costs, with very large profits left over for the entrepreneur. Here’s how: 

Operate a high-speed, low-cost, small-footprint sorting hub in a central location, and link it by trucks to regional Postal Service facilities in destination areas. 

Most on-line retailers have simple shipping needs. A single distribution center often is enough, if it is near a sorting hub that has two attributes: 

1. Parcels can be sorted quickly and cheaply to many destinations. 

2. The hub is located where sorted parcels can be trucked quickly to their destination areas – not to their actual destinations (that is where the Postal Service comes in), just to their destination areas. 

UPS/FedEx Networks Are Optimized For Intake, But Not For DeliveryFast sorting to many destinations is almost never necessary in a “many-points-to-many-points” network. UPS and FedEx each have that type of network – a huge matrix with thousands of end points and intersections. At each facility in such a network, parcels are taken in and then sorted to fairly few places – a farther-forward hub, for example, or (if the parcel has reached the destination area) a nearby delivery station. Delivery dates are projected, and rates are set, on the assumption that several or many sorts and transfers will occur along the way.

A Delivery-Focused Network Can Be Much Faster and Less Expensive. But a single sort – just one – is enough in a “one-point-to-many-points” network. Such a network is impractical for UPS and FedEx because they take in parcels at numerous locations. But a new entrant can establish this type of network, which will yield lower costs and faster deliveries. From a Louisville, Kentucky hub (for example), such a network might look like this (more details below, under “More About the Network):

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While this “one-point-to-many-points” network will give a new entrant a structural advantage over UPS and FedEx (each with its “many-points-to-many-points” network – necessary to permit intakes from thousands of sources, but slower and more expensive for deliveries), what probably will distinguish a successful new entrant from other entrants will be its sorter – up-front cost, operating expense, maintenance expense, speed, throughput and size. Though too many details might reveal the designer’s secrets, such a sorter might look like this from above (12,000 parcels per hour, 200 sort destinations, 25,000 square feet, very inexpensive to build and install, very inexpensive to operate and maintain – a few more details below, under “More About the Sorter): 

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Note: Some key numbers below – 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.

More About the NetworkThe map above (which shows the continental US only) marks 141 Postal Service regional facilities: the small white circles at Louisville and at 36 of the 37 drop-off points, plus 104 “satellite facilities” – the small white circles at places other than the Louisville hub or a drop-off point. The straight lines emanating from Denver are flight routes for the predictably few parcels to be Priority Mailed from Denver to the Billings, Albuquerque and El Paso satellite facilities. The remaining 138 regional facilities will be “fed” with our sorted/sacked parcels in one of two ways. Either we will deliver the sacks directly to the facility (at 36 of the 37 drop-off points, and in Louisville), or we will rely on the Postal Service to advance the sacks from a drop-off point (or Louisville) to a satellite facility in the same area during one of its frequent inter-facility trips – for example, from the Sacramento CA drop-off point to satellite facilities in Fresno, San Francisco, Oakland and San Jose. The faint outlines on the map reflect our educated guesses of the best “connections” between drop-off points (or Louisville) and satellite facilities. We may learn that other connections are better (for example, that parcels destined for the Des Moines IA area should be dropped off in Chicago rather than in Kansas City), or even that different drop-off points will be preferable. Once we settle on drop-off points and learn the optimal “connections,” however, we will know that the Postal Service transfers parcels from each drop-off point to satellite facilities at least once each day (and usually several times).

Altogether, we will sort and sack parcels to 171 sort destinations, not 141, because some Postal Service regional facilities conduct multiple sorts. This occurs both at some drop-off points (Los Angeles, for example, which sorts separately to DDUs located in the 902 and 907 3-digit zip code areas), and at some satellite facilities (Westchester NY, for example, which sorts separately to DDUs located in Westchester County NY and the Stamford CT area). In either case, we will expedite the Postal Service’s destination-facility sorting of our parcels by pre-sorting and sacking them to each sort destination. For example, at our Louisville hub, we will sort and sack parcels separately to both the 902 and the 907 3-digit zip codes fed by the Los Angeles facility, and to both the Westchester-County DDUs and Stamford-area DDUs fed by the Westchester NY facility. This will make it unnecessary for the Postal Service to open our pre-sorted sacks until they reach their final destination facility and mail is being sorted to their “label" DDUs.

More About the Sorter. Any sorter must be able to route each parcel to any sort destination. There are only two ways to accomplish this: (1) send each parcel along a single line past every possible sort destination, which inevitably requires either high speed or a small number of destinations (or both); or (2) sort each parcel twice – i.e. a primary sort and a secondary sort. Most high-end parcel sorters (though by no means all) use some form of the second method (sometimes in combination with a modified version of the first). For example, the “small parcel sortation system” at FedEx’s Memphis hub separates incoming parcels into four batches in a primary sort, and then sorts each batch to 430 “secondary” destinations, yielding 1,720 sort destinations (4 x 430 = 1,720). UPS’ Chicago ground hub is closer to “square” in this respect: Each of 40 conveyors sorts to each of 25 secondary conveyors, yielding 1,000 destinations (40 x 25 = 1,000 – actually 1,050, because of some complexities ignored here). In theory, the most “efficient” primary/secondary sorter will have an exactly equal number of primary and secondary modules. For example, the sorter pictured above has 14 primary-sort destinations, each of which has (on average) 14 secondary-sort destinations, yielding 196 total destinations (14 x 14 = 196). Some primary/secondary sorters vary from the theoretically optimal configuration so considerably that a great deal of speed is required notwithstanding the primary/secondary “batching” approach (for example, each of the four secondary sorters in FedEx's “small parcel sortation system” necessarily operates at high speeds to distribute each batch of primary-sorted parcels among 430 secondary destinations). In practice, certain constraints may dictate a “non-square” configuration (for example, a long, narrow building), and so our sorter’s actual configuration may differ from the drawing above (though we do not expect this).

A Delivery Example

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In our early days, a single truck may deliver sorted/sacked parcels from our Louisville hub to both the Newark NJ and the Springfield MA drop-off points. When volumes peak, however, a separate truck will deliver to each drop-off point. At the Postal Service’s Newark NJ facility, our truck will drop off parcels we have sorted and sacked in Louisville to each of the New York City area’s seven regional facilities. Sacked parcels destined for Newark-area DDUs will stay at that facility. Sacked parcels destined for the other six NYC-area regional facilities will be kept in their sacks and advanced by the Postal Service from its Newark facility to the labeled satellite facilities. (The Postal Service already does this at least once each day, and usually several times.) Once a sack reaches its final regional facility, the sack will be opened and the parcels inside will be sorted (along with other mail) to the DDU level and then placed on Postal Service trucks for night-time delivery to those DDUs – in preparation for early-morning sorting to carrier routes and delivery to homes by mail carriers

At “single-sort" satellite facilities (Brooklyn NY, for example), all parcels will be sorted in one pass to the DDU level. It will be slightly different at “multiple-sort” satellite facilities: Our presorted sacks will be opened when the DDU-level sort for the label-area is occurring. For example, parcels destined for Stamford CT-area DDUs or Westchester County NY DDUs will be sorted at our Louisville hub to sacks labeled either to “Westchester/Stamford” or “Westchester/Westchester,” and all of those sacks will be dropped off by our truck at the Newark NJ facility. There, the Postal Service will transfer our unopened sacks to a Postal Service truck heading to its Westchester NY facility. At the Westchester NY facility, our “Westchester/Stamford” sacks will be opened when parcels (and other mail) are being sorted to Stamford-area DDUs, and our “Westchester/Westchester”sacks will be opened when mail is being sorted to Westchester-County DDUs. In any case – single-sort or multiple-sort, drop-off point or satellite facility – our job will be finished once our Louisville-to-Newark truck has dropped off our sorted/sacked NYC-area parcels at the Postal Service's Newark NJ facility.

Earlier-Deposit Delivery Model Will Exploit Additional Postal Service Strength

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This earlier-deposit delivery model will enable the Postal Service to exploit more of its strengths – by partnering with carriers (us, for example) who can advance sorted parcels to destination-area Postal Service facilities but need help getting those parcels the rest of the way. 

For several decades, the Postal Service has encouraged shippers to deposit parcels at DDUs and pay rock-bottom postage rates for “last-mile” delivery to homes by mail carriers. Predictably, this focus has begat three very large “DDU-drop” customers: FedEx SmartPost, UPS SurePost, and Amazon, plus about a dozen smaller consolidators."

But this last-mile focus has mired the Postal Service in a low-margin segment. UPS, FedEx and Amazon (and others) relentlessly press the Postal Service to keep DDU rates low, upsetting both Postal Service officials (who naturally prefer higher rates) and UPS/FedEx drivers and their unions (who usually resist efforts to reduce company-driver deliveries). In addition, numerous local delivery companies – some using bicycle couriers or even on-foot couriers when the territory is appropriate (for example, Parcel in NYC, or Deliv in many cities) – have sprung up to drive down last-mile margins still further. This trend seems likely to continue.

Market Segment Just Before Last Mile Is More Profitable. Market segments before the "last mile” are less crowded and more profitable. UPS and FedEx dominate these segments now with their end-to-end ground offerings, largely because participation appears to (but actually does not) require a considerable infrastrucure that few would-be competitors possess or can afford. Wherever it can, Amazon skips the pre-last mile segment by trucking parcels from one Amazon distribution center to another, and then to local-area DDUs, but most retailers simply hand off parcels to UPS or FedEx at the origin end. One obvious potential entrant is the Postal Service, though it effectively bowed out of this segment long ago to focus on last-mile delivery, leaving its end-to-end offering (other than Priority Mail, for lightweight parcels) still in existence but slow and overpriced (Parcel Post). With a new focus and the right partner(s), however, the Postal Service will be poised to snatch back a large share of the pre-last-mile segment (and more of the last-mile segment in the process).

As is widely acknowledged, the Postal Service – Priority Mail, at least – performs very well in end-to-end deliveries. Two personal examples: A large package Priority-Mailed from San Francisco in late 2014 reached its destination mailbox in a small New England college town the next day. A home-baked loaf of bread – possibly still warm from the oven – Priority-Mailed from San Francisco a week later also reached its destination mailbox the next day, this time in central Ohio. Both deliveries were ahead of schedule (the Postal Service projects 2-3 business days for Priority Mail). In both cases, however, the Postal Service’s impressive end-to-end performance depended on its air-lift contract with FedEx, which almost certainly transported both packages cross-country. While the Postal Service can count on air-lift assistance going forward, whether from FedEx or another air carrier, its “end to end” performance inevitably will depend on that carrier – which also may be a competitor.

Equally or more important, Priority Mail rates rise steeply above very low weights and close-in zones, soon leaving Priority Mail uncompetitive with UPS/FedEx. For example, if a small parcel were shipped from Louisville to a home in San Francisco on October 27, 2017, Priority Mail would cost over $2 less than UPS if the parcel weighed 1 pound, but would cost nearly $6 more than UPS if the parcel weighed 5 pounds. In sharp contrast, Postal Service DDU rates (discussed below), available for parcels deposited at destination-end post offices, start far below UPS/FedEx rates (and Priority Mail rates) and stay low even at higher parcel weights (for example, roughly $3 for a 5-pound parcel).

Long-Distance Transport Is UnnecessaryCross-country transport is irrelevant for someone who taps into the Postal Service network in destination areas. Profitable destination-area deposits are feasible because the Postal Service has consolidated its parcel delivery network over the past two decades, closing or “re-purposing” over two-thirds of its regional parcel hubs. Today it “feeds” every post office in the continental US from just 141 destination-area facilities, with a few additional hubs in Alaska, Hawaii and US territories. 

Focus On Pre-Last Mile Segment Will Exploit Overlooked Postal Service StrengthThis new one-point-to-many-points” model will highlight a strength that the Postal Service has not exploited so far. It is strong not only in the “last mile” segment, but also in the segment just before that – in which parcels are advanced from destination-area regional facilitities to final-delivery dispatch-stations (post offices, in the case of the Postal Service). The Postal Service can exploit its pre-last-mile strength by making arrangements to feed its destination-area regional facilities – not just arrangements to feed destination-end post offices (DDUs), a limited-upside emphasis that inevitably will reduce the Postal Service’s significant customers to the very few who are capable of getting parcels that far without Postal Service help (i.e. UPS, FedEx, Amazon, and perhaps two or three others). 

Almost as inevitably, that ever-smaller group of powerful "last-mile" customers will pressure the Postal Service to maintain or reduce the (negotiated) low postage rates those customers pay, possibly to the point where those rates barely cover the Postal Service’s variable costs. Such a customer is not concerned with Postal Service costs, after all – except to predict when a Postal Service negotiator may become unwilling to discount the customer’s rates still further. The customer will simply compare the (discounted) DDU rates offered by the Postal Service with the customer's cost of a last-mile alternative – for example, delivery to the home by a UPS/FedEx driver, or by a gig-economy courier hired by Amazon. If that alternative cost is lower (taking into account non-quantifiable but important factors such as driver and union cooperation), the customer often will choose the alternative.

The Postal Service can reduce its exposure to these foreseeable consequences of a last-mile focus by devoting more attention to the step just before the "last mile:” the advancement of parcels from destination-end regional facilities to the post offices fed by those facilities. That would leave the Postal Service more inclined and able to strike deals with carriers (us, for example) that can cost-effectively advance parcels to destination-area regional facilities but need help to get them the rest of the way.

Why Our Postage Rates Will Be Very Low

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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. 

In the continental US, we will deposit parcels at only 37 Postal Service regional facilities (at 36 of the 37 drop-off points, and in Louisville), not at all 141 regional facilities. As explained above, we will ask the Postal Service to forward pre-sorted sacks to the remaining 104 regional facilities (continental US) on one of its frequent, regular trips between regional facilities. 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-end 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-off point (or the Louisville facility) to satellite facilities in the same area. We intend to minimize the Postal Service's Component 3 costs by pre-sorting and sacking parcels at our hub, and we will demand lower postage rates in return.

Our low 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 while leaving an ample profit for the Postal Service and a large profit for ourselves.

Can't UPS and FedEx Do This Too?

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Only if they abandon their “intake-focused” networks, which is highly unlikely. Unless they do that, their costs will be much higher than ours. For example, UPS' gargantuan Chicago ground hub (which sorts parcels taken in at thousands of UPS facilities around the country) can sort more than 15 times faster than our sorter 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 (which sorts parcels taken in at thousands of FedEx facilities around the country) cost 100 times as much as ours will and is several dozen times as large. 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. (Incidentally, I have personally toured these UPS and FedEx facilities, during operations (along with many other parcel-sorting facilities), and have written descriptions of them prepared by myself and others.)

Our operating costs will be much lower too. Roughly 8,000 workers, split into four shifts, work around the clock, seven 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 much lower too. Sorter components will be few, low-precision and inexpensive, and will run at slow speeds (barely 1/10 as fast as some parcel sorters). Access will be convenient, and most maintenance can occur even while our sorter is operating.

Our delivery costs will be lower too. In the continental US, we will be advancing sorted/sacked parcels to only 37 drop-off points (plus Louisville, our hub city), along fast freeway routes that include several drop-off points each.

Finally, the postage we pay will be very low (see “Why Our Postage Rates Will Be Very Low” above)

These cost differences will 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 (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.

Can't Others Besides UPS and FedEx Do This?

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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 would-be entrants who intend to use conventional sorting equipment.

You May Be Wondering About Some Numbers

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How can it be said that UPS/FedEx control 80%+ of the consumer-parcel-delivery market if the Postal Service delivers over 60% of “residential” parcels? The answer: Many parcels that the Postal Service delivers to homes are UPS/FedEx parcels before they reach the DDU. Only the “last mile” is handled by the Postal Service – which also handles “last mile” deliveries for Amazon and several “consolidators” other than FedEx and UPS, as well as for the Postal Service itself (Priority Mail and Parcel Post). Each day, FedEx (SmartPost) and UPS (SurePost, and UPS Mail Innovations for very lightweight parcels) hand off millions of parcels to the Postal Service at DDUs. Each of those parcels is counted as a FedEx or UPS parcel because FedEx or UPS will have handled all delivery steps before the DDU. In other words, we will be asking the Postal Service only to perform services at which it is highly experienced – dominant, in fact: last-mile delivery, and the step just before that – advancing parcels (and other mail) from destination-area regional facilities to DDUs. For most of our parcels, we also will ask the Postal Service to handle an additional step: to advance pre-sorted sacks from one destination-area regional facility to another in the same area – yet another delivery step at which the Postal Service is highly experienced

We Will Be Different From A Fulfillment Company

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Several companies offer fulfillment services to online retailers, handling some or all of the critical but unglamorous steps that follow (or precede) the actual selling of products to consumers. This enables online retailers to focus on what they do best: sell. Some fulfillment companies are large and well-established (for example, UPS and FedEx themselves, or Amazon – both for itself and for many “Amazon Sellers"), while others are small and fairly new (ShipBob, for example). Some fulfillment companies emphasize certain services (Shyp, for example, which offers detailed advice on packaging – or ShipWire, which emphasizes its warehousing of inventory), but nearly all stress the “soup to nuts” comprehensiveness of their services – i.e. their general ability to “free up” online retailers to sell.

Typically a fulfillment company will compare shipping prices among carriers – UPS, FedEx, the Postal Service, often DHL or regional carriers as well – sometimes periodically, sometimes for each order. Most establish a volume-based discount-shipping arrangement with one or more carriers and pass most or all of the discount on to their customers.

While fulfillment companies enable online retailers to off-load important but mundane elements of the business, very few fulfillment companies actually deliver parcels. UPS and FedEx are obvious exceptions, since they offer both regular “end to end” ground delivery (UPS Ground, FedEx Ground or FedEx Home Delivery) and lower-priced-but-slower “origin to DDU” ground delivery (UPS SurePost or Mail Innovations, FedEx SmartPost)). But many online retailers prefer not to use UPS or FedEx for fulfillment (not to mention Amazon, which typically demands access to considerable information from a retailer). They are reluctant to permit UPS or FedEx to extend its reach backward in the fulfillment process, especially if (as often happens) the carrier-affiliate’s fulfillment efforts result in the customer's “choice" of that carrier to handle deliveries.

Fulfillment is a very important part of the online retailing business, a part in which we may engage too. But it will not be our focus. Our focus will be to participate in the “front end” of the final and most lucrative step in the fulfillment process: parcel delivery. 

Why We Will Succeed Even If Others Do Not

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The UPS/FedEx price umbrella presents an opportunity even for inefficient new entrants – but the opportunity is greater for low-cost, efficient entrants, as we will be. New entrants will be equal, at least theoretically, in their abilities to collect parcels and (after sorting) truck parcels to destination areas. In addition to the all-important difference between theory and practice, what inevitably will distinguish new entrants among themselves will be their comparative cost, speed and efficiency in the sorting and sacking of parcels. Those who can do so quickly and cost-effectively will succeed. Those who cannot will fail or limp along. Our sorter will be very inexpensive to build and install. It will occupy very little space. It will be very inexpensive to operate and maintain. Our overall very low cost structure is the single most important reason we expect to succeed, and to be acquired at a high price in 5-6 years. We intend to structure and operate our business so that gains are federal-tax-free under IRC §1202(a)(4).

Early-Period Hurdles

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We anticipate early-period resistance from prospective customers. We intend to overcome it in several ways.

Overcoming the Stickiness of Customer Relationships. An old saying in the computer business – “Nobody ever got fired for buying IBM [the market leader back then]” – probably will apply here too. Just as corporate computer buyers did not get fired for buying from the market leader, even at much higher prices, so too will many decision-makers in the online retail business “default” to UPS and FedEx – at least initially.

But online-retail managers do get fired – quite often, in fact – for not earning a profit, a feat that becomes more difficult each year as shipping costs skyrocket. We will boost their odds by helping them to cut shipping costs. 

Gradual Transitions. We will encourage “toe in the water” behavior by new customers – shifting at first a small portion of outgoing parcels to us, with more to follow if we perform well. While we intend to please customers every day, we will work especially hard in the beginning to persuade hesitant customers to entrust more and more parcels to us. 

Possible Competition With Prospective Customers. The “80/20 rule” is alive and well in the online retailing business (more accurately, in this business: the “95/5 rule”), and we may take advantage of it. It is an easy matter to determine which online products sell best. We may encourage prospective customers to switch to us more quickly by establishing our own low-priced online retail outlet focusing on, say, the top 500 online products (probably warehoused at our hub) – including some top sellers offered by prospective customers – thus capitalizing on our own low delivery costs and (more important here) inducing hesitant retailers to use our shipping services in consideration of our commitment to stop competing with them. 

Just as IBM made room for competitors in the computer business (and still manages to earn large profits), UPS and FedEx will make room for us in the parcel-shipping business. We won’t require much. More would be better, of course, but less than 1% will be enough.

My Background

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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 current sorter design (for the record, I did receive a patent on a very early version (from Singapore, in 2001), but I have not bothered to maintain that patent and the sorter design has changed a great deal since then). One or more patents might be available for key components of  the sorter design, though efficient execution, occasional plan tweaks, and limited need-to-know disclosures of confidential information are likely to count for more.

Where We’ve Been and What’s Next

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Where We’ve Been. Though I’ve never before sought to commence operations, I've spent thousands of hours and roughly $500,000 on this business opportunity. 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 design reflects hundreds of changes over the years – a few major (long ago), most minor but useful. The planned route map 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've created to evaluate this 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 (though it appears even more promising now). From the outset, I have followed the advice of most successful inventors: First identify a problem, and then invent a solution. Don’t create a “solution” and then cast about for a problem that it might solve.

What’s NextThe next step is to create and test a prototype of the sorter. 

We also will use this time to (1) begin discussions with potential suppliers of sorter components; (2) obtain an option on Louisville hub site; (3) begin rate discussions with the Postal Service – see “Why Our Postage Rates Will Be Very Low” above  – which may (but probably won't) persuade us that we should deal instead with a different destination-area carrier (there are alternatives to the Postal Service); (4) begin discussions with trucking companies that can deliver our sorted/sacked parcels to drop-off points; and (5) begin discussions with potential liaisons at prospective drop-off points. 

Assuming (as we anticipate) that we decide to proceed further after this “prototype” time frame, we will (1) commit to buy the sorter components; (2) acquire the Louisville hub site; (3) sign a rate agreement with the Postal Service; and (4) identify potential Louisville hub managers. 

When the sorter components arrive at the Louisville hub, we will install the sorter. During installation, we will (1) hire Louisville managers and other hub personnel, and make appropriate arrangements with (2) one or more trucking companies; (3) liaisons at prospective drop-off points; and (4) our initial customers – who probably will be charged highly discounted rates and make limited and non-binding volume commitments. 

Once installation is complete, we will commence three-day-a-week operations – at first with our own “test” parcels to identify and solve any sorting or delivery problems, and then with early-customer parcels. Assuming that we perform well, we will expand our customer base as quickly as possible, and may establish one or more additional hubs in other cities (for example, in Salt Lake City – see map). 

Though we may elect to continue operations indefinitely, our present plan is to sell the business in 5-6 years in a transaction that yields 0% federal tax for founders and early investors under IRC §1202(a)(4).

The Perfect Solution

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By using the one-point-to-many-points” delivery model described above, consumer parcels can be delivered quickly and cheaply from a single private hub to homes throughout the US and the rest of the world – at a huge profit for the entrepreneur who brings this about. If the sorting facility also can handle pre-shipping steps (the sorter pictured above can), an online retailer’s total fulfillment costs – warehouse shelf to customer’s home – can be cut drastically, with an even larger profit left over for the entrepreneur. 

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

– Eric A. Brill

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© Eric A. Brill 2017