The Perfect Solution

by Eric A. Brill

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

(September 21, 2018)

Executive Summary

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The e-commerce boom has created a problem that gets worse every day: Parcel shipping is expensive or slow, or both. We’ll earn huge profits by solving the problem.

We’ve invented a better mousetrap – a better parcel sorter, actually: smaller, faster, cheaper. We’ll exploit it with a shipping hub – probably located in Louisville, Kentucky, with cookie-cutter copies to follow in other cities. We'll capture a small slice of a booming market: consumer parcel delivery – especially the 2-3 day delivery segment. We’ll outperform competitors by quickly sorting and trucking consumer parcels to a small number of Postal Service facilities. We’ll offer fast world-wide deliveries at ground rates less than half those of UPS and FedEx, the market leaders, whose steep rate hikes have far exceeded inflation (since 2000: rate hikes of nearly 200%versus 45% inflation).  

Most customers will be online retailers. We plan to sell out after 5-6 years at a huge gain, federal-tax-free for founders and early investors. 

Our business will be inexpensive to launch and operate, and simple. Each operating day, we will: 

1. Collect thousands of unsorted parcels near our hub.

2. Sort parcels to roughly 200 destinations.

3. Truck sorted parcels to roughly 40 drop-off points.

The consumer-parcel delivery problem is serious and getting worse. The reward will be huge when we solve it.

Second Market? This web page focuses on our principal business: low-cost, world-wide, 2-3 business-day delivery of consumer parcels from a single hub. But a section near the end explains a second market segment that may be even bigger: “A Second Market – Bigger Than The First? Local Same-Day Delivery."

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More on these graphics in body:


Table of Contents


Shopping, Old and New

Parcel Shipping Today

The UPS/FedEx Price Umbrella

     The Price Umbrella

     The Illusion of Negotiated Rates

Rate Hikes Far Exceed Inflation

     Boiled Frogs

     Most Online Retailers Have No Choice       

Hard Questions, Bad Answers

     UPS and FedEx Still Compete – But Not On Price

A Better Way

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

     A Delivery-Focused Network Can Be Fast Too – and Much Less Expensive

     GRAPHIC: Network

     GRAPHIC: Sorter

     More About the Network

     More About the Sorter

A Delivery Example

New Model Will Exploit Postal Service Strength

     Market Segment Just Before Last Mile More Profitable

     Long-Distance Transport Unnecessary

     Pre-Last Mile Segment Will Exploit Postal Service Strength

Why Our Postage Rates Will Be Very Low

Can’t UPS and FedEx Do This?

Can't Others Do This?

Wonder About Some Numbers?

Different From A Fulfillment Company

Our Leg Up

Early Hurdles

     Stickiness of Customer Relationships

     Gradual Transitions

     Possible Competition With Prospective Customers

My Background

A Second Market – Bigger Than The First? Local Same-Day Delivery

Where We’ve Been and What’s Next

     Where We’ve Been

     What’s Next

The Perfect Solution

  

Shopping, Old and New

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A major shift in retailing is under way. On-line sellers are squeezing out bricks-and-mortar stores, which have high costs for real estate, employees and inventory. Once-crowded shopping malls are losing shoppers and stores. 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 tell 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. According to the U.S. Census Bureau (Feb. 16, 2018), e-commerce sales increased 16% in 2017 (to $453 billion), continuing an upward trend that has lasted for several decades.

There will always be a need for immediate delivery, and many shelf-inventory stores will remain for that reason. But most stores will be small and have few employees. 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. Like it or not, that is the future – even the present.

Parcel Shipping Today

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UPS and FedEx control over 80% of the US parcel-delivery market, even more in some areas. Roughly 40% of their 40 million parcel (combined) daily volume consists of consumer parcels, a percentage that is growing steadily. 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 (especially Amazon) have established in-house alternatives for many delivery steps. Regardless of how those steps are carved up between a particular retailer and its carrier(s) or others, collectively they handle them all: stock the retailer's products in warehouses, process and pack customer orders, sort packed orders to their destinations, and transport sorted parcels to destination-area carrier facilities. There 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 consumer-parcel fulfillment.

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, but Amazon lost an astonishing $7.2 billion on shipping in 2016 alone (source: Amazon 2016 annual report, page 25), and has stopped “breaking out” shipping costs since then. 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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Price fixing? You decide.

Even more important: Does it matter?

If UPS and FedEx collude to set high shipping rates (hint: they have for many years, and the e-commerce boom gives them no incentive to stop – especially to squeeze out a competitor who will be content with less than 1% of their volume), is that actually good for online retailers? Does the large UPS/FedEx price umbrella enable others to compete?

The 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 – before 2017 – the solution was simple: Just check your FedEx rate table. 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.

* 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).

Beginning in 2017, UPS/FedEx price-fixing became slightly harder to detect, though it remains clear to anyone who looks closely. Sometimes UPS is cheaper; sometimes FedEx is. One carrier may have slightly lower base rates but slightly higher surcharges. Rates may vary slightly depending 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 March 29, 2018, FedEx would be cheaper (list) 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 ground rates 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?

The 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:

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

Most often, if 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. Indeed, that is why experienced consultants often urge clients not to disclose competitive bids. 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 try to exploit apparent rate differences 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.

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. The key words are worth repeating: many, grumble, loudly, often. With good reason: UPS/FedEx rate hikes far exceed inflation. Since 2000, the US Consumer Price Index has risen 45%. 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 – has jumped far more: 196%.** This large gap continues to grow: UPS/FedEx annual rate hikes typically exceed inflation by about 3%. Although most online retailers pay less than list rates to UPS/FedEx (some much less), contractual discounts typically are keyed to list rates. As a result, the steep rise in list rates has hurt all UPS/FedEx shippers, large and small.

** Surcharges. This alarming rate increase (196%) owes partly to surcharges, which have increased even more than base rates. The huge price jump reported here reflects only the “big three” surcharges: fuel (a percentage add-on, fluctuating, but always above 6% for UPS Ground in 2018), residential-address ($3.60 for UPS Ground in 2018), and delivery-area ($3.50-4.45 for UPS Ground in 2018). The first two surcharges apply to every ground parcel delivered to a residential address. The third 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 base rates – which were much lower than they are today. 

Dimensional Weight Pricing. Yet another UPS/FedEx pricing practice has boosted many retailers’ shipping costs, especially since 2018: "DIM weight pricing” – a higher rate based on a parcel’s dimensions rather than its weight. UPS and FedEx now make this calculation for all parcels, regardless of size or destination, and stricter tests 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 in a “large” box measuring 12" x 10" x 6”. UPS and FedEx calculate a parcel's “DIM weight” by multiplying the external box's three dimensions in inches – length x width x height – and dividing the result by 139. If the parcel's actual weight is less than its “DIM weight” (which will be true whenever a parcel weighs less than 12.4 pounds per cubic foot), the higher “DIM weight” rate applies. Any fraction of a pound is rounded up to the next whole pound; for example, if the LxWxD/139 calculation yields 3.2, the parcel's DIM weight is 4.

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” each 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? Steep rate hikes matter a great deal to retailers selling low-price items. 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 Choice. Very few retailers have a 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; 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 – usually 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 “Wonder 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 DDUs. 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. 

Hard Questions, 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 a nearly incredible $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 2017 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 sales (and associated shipping) have been growing at double-digit rates for many years, and all predictions are that this trend will 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 pricing umbrella, and UPS/FedEx are unlikely to give up their duopoly to prevent it from being exploited. Less than a 1% market share will be enough for us.

A Better Way

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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 will be enough, if it is near a sorting hub that has two attributes: 

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

2. Sorted parcels can be trucked quickly and cheaply 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, Not For Delivery. Fast 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, incoming parcels are sorted to fairly few places – a farther-forward hub, for example, or (once the parcel reaches its 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 Fast Too – and Much 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 thousands of locations and deliver them to millions of homes. But a new entrant can establish such a network, and should. It easily can be more than fast enough, and much less expensive. From a single hub in Louisville, such a network might look like this (more details below, under “More About the Network):

Such a “one-point-to-many-points” network will give a new entrant an advantage over UPS and FedEx. But what 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, our sorter will look substantially like this from above (12,000 parcels per hour, 534 sort destinations, 30,000 square feet (building size)), very inexpensive to build, install, operate and maintain – more details below, under “More About the Sorter): 

More About the NetworkPostal Service regional facilities will be fed with our pre-sorted parcels in two ways: either we will deliver pre-sorted sacks directly to the facility, or our sacks will be advanced from a main drop-off point to a satellite facility in the same area. (A third way for a few low-volume facilities: Parcels destined for the area will be sorted and sacked in Louisville and Priority-Mailed to the facility, where the pre-sorted sacks will be opened and the parcels inside will be sorted to the DDU level. See “First Important Note” below.)

More About the Sorter. Any parcel sorter must be able to route each parcel to any sort destination. There are only two ways to accomplish this: (1) send each parcel in 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 (or more) – i.e. a primary sort and a secondary sort. Though some sorter designs emphasize the first method (boosting speed to boost throughput), most high-end parcel sorters include some version of the second method. For example, the original “small parcel sortation system” at FedEx’s Memphis hub separated incoming parcels into four batches in a primary sort, and then sorted each batch to 430 secondary destinations, yielding 1,720 sort destinations (4 x 430 = 1,720). In theory, the most efficient primary/secondary sorter will have an exactly equal number of primary and secondary modules (ours will vary only slightly). UPS’ original Chicago ground hub was reasonably close to this ideal: Each of 42 primary conveyors sorted to each of 25 secondary conveyors, yielding 1,050 sort destinations (42 x 25 = 1,050). Some design constraints dictate a non-square configuration – for example, a long, narrow building (not an issue for us). 

Delivery Example

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In Newark NJ, our truck will drop off parcels we have sorted and sacked at our hub to each of the NYC area’s seven regional facilities (and which we will have sorted even more finely if a regional facility in the area conducts multiple DDU-level sorts – for example, “Westchester-Westchester” or “Westchester-Stamford” if the parcel is destined for the Westchester NY facility, which re-sorts parcels (and other mail) separately to Westchester County DDUs and Stamford CT-area DDUs). Sacked parcels destined for Newark-area DDUs will stay at the Newark facility. Parcels destined for the other six NYC-area regional facilities will be kept in their sacks and advanced from Newark to the labeled satellite facilities. (The Postal Service moves parcels between area regional facilities at least once each day, and usually several times.) Once a pre-sorted sack reaches its final regional facility, the sack will be opened by the Postal Service and the parcels inside will be sorted to the DDU level – when the applicable DDU-level sort occurs, if more than one DDU-level sort occurs at the facility (at the Westchester NY facility, for example) – and then placed on Postal Service trucks for delivery to those DDUs (usually very late at night) – in preparation for further sorting at the DDU (usually very early in the morning) to carrier routes and final delivery by mail carriers. 

At “single-sort" facilities (Brooklyn NY or Las Vegas NV, for example), all parcels will be sorted in one pass to the DDU level, and so our pre-sorted sacks may be opened whenever any DDU-level sort occurs. At “multiple-sort” facilities (Westchester NY or Los Angeles, for example), our presorted sacks will be opened only when a DDU-level sort for the sack’s parcels occurs. In any case – single-sort or multiple-sort, drop-off point or satellite facility – our job will be done once the truck from our hub has dropped off our pre-sorted sacks in Newark NJ.

First Important Note: Sacks Destined for Low-Volume Facilities Will Be Priority-Mailed from Nearby Facility. Pre-sorted parcel sacks destined for roughly 20 very-low-volume regional facilities (Shreveport, Louisiana, for example) will not be trucked to the facility at all – either directly from our Louisville hub or from a drop-off point. Instead, they will be Priority-Mailed to the facility from a nearby regional facility to which we will go, with such sacks to be “opened and distributed” by the Postal Service when they arrive.

Second Important Note: Multiple Sorts Will End Soon. Multiple sorts occur at several regional facilities (for example, Westchester NY and Los Angeles) because the facility “feeds" more DDUs (post offices) than its sorter can sort to in a single pass. That appears likely to end soon. The Postal Service signed a contract in November 2017 to buy up to 10 EPPS sorters from Lockheed Martin ($210 million if the Postal Service orders all 10 – $21 million each (our sorter will cost less than 10% of that)). Each EPPS sorter can sort to 450 destinations (versus 534 destinations for ours, though at Louisville we’ll probably sort to less than 200), which should enable each Postal Service facility to sort to all “fed" DDUs in a single pass.  

New Model Will Exploit 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 them 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 Mail Innovations), and Amazon, plus many 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 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 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 can afford. Amazon often skips the pre-last mile segment by trucking parcels from one Amazon distribution center to another, and then to destination-area DDUs, but most retailers simply hand off parcels to UPS or FedEx at the origin end. One 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, mostly for very light-weight parcels) still in existence but slow and overpriced (Parcel Post). With a new focus and the right partner(s), 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.

The Postal Service – Priority Mail, at least – performs extremely well in end-to-end deliveries. Two personal examples: A large package Priority-Mailed from San Francisco in late 2014 reached its destination in a small New England college town the next day. A home-baked loaf of bread Priority-Mailed from San Francisco a week later also reached its destination 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 each case, however, the Postal Service relied on an airlift from FedEx, a competitor, which had a contractual right to postpone the airlift – and probably would do so if it considered Priority Mail a significant threat.

Why Our Postage Rates Will Be Very Low

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All major parcel carriers offer overnight service (we will too), but at a premium that on-line retailers (and consumers) rarely choose to pay. Most consumer parcels are lower-priced "ground" parcels.

Carriers typically “estimate" 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 large shippers with whom it hopes to establish long-term “negotiated service agreements” – that a parcel will be delivered to the addressee’s home the next business day if the shipper deposits it at the 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 just 38 Postal Service regional facilities, not at all of them.  As explained above, some of our pre-sorted sacks will be advanced to additional regional facilities (42) – sometimes by the Postal Service itself on one of its daily (or more frequent) trips between regional facilities within the same area, at other times by private carriers we hire. For this reason, our rate negotiations with the Postal Service will take into account these components:

1. DDU list rates, the very low “last mile” postage charged to advance parcels from DDUs to homes. For example, the list DDU rate for a 5-pound parcel is about $3; 

2. The Postal Service's charge for sorting and advancing parcels from a regional facility to the DDUs “fed" by the facility (a cost reflected in the differential between DDU rates and (higher) DNDC rates, though the analysis is more complicated than this.

3. For many parcels, an intermediate step: the Postal Service's charge to advance our pre-sorted sacks from a main drop-off point to other regional 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 to their final destination-area facilities, and by hiring third parties to advance most sorted sacks to satellite Postal Service facilities; and

4. In a few low-volume areas, Priority Mail “open and distribute” rates applicable to pre-sorted sacks of parcels that we will deposit at a larger Postal Service facility along one of our trunk routes (see the first “Important Note” above).

Our low negotiated postage rates, reflecting these components and a small volume-based discount,  plus our low sorting and delivery costs, will enable us to charge low rates to customers while leaving an ample margin for the Postal Service and a large profit for ourselves.

Can't UPS and FedEx Do This?

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Only if they abandon their “intake-focused” networks, which is highly unlikely. Neither of them will be inclined to cede their highly profitable market control to thwart a competitor who aims for less than 1% of their volume. Unless they do that, UPS/FedEx costs will be much higher than ours. For example, UPS' gargantuan Chicago ground hub (which sorts parcels received 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 100 times as much as ours will cost and occupies over 70 times as much space. FedEx is the same. For example, the original small parcel sorter at FedEx's flagship Memphis hub (which also sorted 15 times faster than our sorter will) cost over 70 times as much as ours will and was 30 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. 

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 several hundred times as much as ours will be – and every parcel shipped by UPS is sorted at several facilities along the way. 

Our maintenance costs will be far lower too. Sorter components will be few, low-precision and inexpensive, and will run at slow speeds (barely 1/10 as fast as some high-end parcel sorters). Access will be convenient, and most maintenance can occur even while our sorter is operating.

Our delivery costs will be low too. In the continental US, we will be advancing sorted/sacked parcels to about 40 drop-off points, mostly 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 consumer-parcel volume, and they cannot prevent that unless they are willing to accept much smaller margins on the other 99%. Their profitable duopoly will remain intact after we arrive.

Can't Others 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.

Wonder About Some Numbers?

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Why do we say UPS/FedEx control 80%+ of the consumer-parcel-delivery market but the Postal Service delivers 60%+ of “residential” parcels? Answer: Many Postal Service parcels 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 many “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 destination-end post offices (DDUs). Each parcel counts as a FedEx or UPS parcel because FedEx or UPS will have handled all delivery steps before the DDU, and also counts as a Postal Service parcel because the Postal Service will handle “last mile” delivery. 

In other words, we will ask the Postal Service only to perform services at which it is highly experienced: last-mile delivery, and the step just before that – advancing parcels from destination-area regional facilities to DDUs, which the Postal Service also has been doing for many decades. (For some parcels, we also will ask the Postal Service to handle an additional delivery step: to advance pre-sorted sacks from a drop-off point to another regional facility in the same area – yet another step at which the Postal Service is highly experienced and typically performs several times each day. And in a few low-volume areas, we will Priority-Mail pre-sorted sacks to the regional facility, where the sacks will be opened and the parcels inside will be further sorted to the DDU level – yet another action that the Postal Service has performed routinely for decades.)

Different From A Fulfillment Company

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Several companies offer fulfillment services to online retailers, handling some or all of the 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 most of them 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 compares shipping prices and service 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 some of the discount on to their customers.

While fulfillment companies enable online retailers to off-load mundane elements of the business, very few fulfillment companies actually deliver parcels. UPS and FedEx are exceptions, since each offers both regular “end to end” ground delivery and lower-priced-but-slower “origin to DDU” ground delivery (FedEx SmartPost or UPS SurePost, for example). But many online retailers prefer not to use UPS or FedEx for fulfillment – or Amazon, which typically demands considerable competitive information from a “Fulfillment By Amazon" client. 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.

Pre-shipping fulfillment is an 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. 

Our Leg Up

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The UPS/FedEx price umbrella presents an opportunity even for inefficient new entrants, but the opportunity is greater for efficient ones. New entrants will be equal, at least theoretically, in their abilities to collect parcels and (after sorting) to truck parcels to destination areas. 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 this quickly and cheaply will succeed. Those who cannot will fail or limp along. Our sorter will be inexpensive to build and install. It will occupy little space. It will be inexpensive to operate and maintain. Our low cost structure will be the single most important reason we will succeed. We expect to sell out in 5-6 years, and to structure our business so that gains are federal-tax-free under IRC §1202(a)(4).

Early Hurdles

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We anticipate early-period resistance from some prospective customers (though our very low rates will persuade most). We intend to overcome resistance in several ways.

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

But online-retail managers do get fired for not earning a profit, a feat that becomes more difficult each year as shipping costs skyrocket. We will boost their odds by cutting their 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 all 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 here: the “95/5 rule”). It is an easy matter to determine which online products sell best, and the number is fairly small. 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 or near 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 (and still earns large profits), UPS and FedEx will make room for us. We won’t require much. More would be better, of course, but well under 1% will be enough.

My Background

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Though I am a business lawyer by trade (Harvard Law School, 1974), I have received valuable help from parcel-industry engineers, patent lawyers, parcel-industry business professionals, independent consultants and many others. Equally important, both branches of my family include highly successful 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 applied for patents on a much earlier version of our sorter (and was granted a patent by one country, which I have not bothered to maintain since the sorter design has improved a great deal since then). Patents may be available for our current sorter, though efficient execution, occasional plan tweaks, and limited disclosures of confidential information are likely to count for more.

A Second Market – Bigger Than The First? Local Same-Day Delivery

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This web page focuses on our principal business: low-cost, world-wide, 2-3 business-day delivery of consumer parcels from a single hub. But other market segments are attractive too. The segment described in this section – local same-day delivery – eventually may be even bigger than the first; it already may be. 

Though Amazon’s share of the US online market is reportedly 46%, there are many other online retailers, some quite large. Walmart’s online business is a good example. Though Walmart is known principally for bricks-and-mortar stores, its online sales jumped 40% (year over year) in the second quarter of 2018.

Some of Walmart’s online orders are fulfilled from distant distribution centers, and so Walmart may be a prime customer for our principal business. But most online orders are fulfilled from a Walmart distribution center closer to the customer. Some orders are picked up by the customer at a nearby Walmart store, while others are delivered to the customer’s home. Either way, online orders are almost always delivered by private couriers – not the Postal Service – if the customer asks for same-day delivery.

Nearly 60% of Walmart’s revenue comes from grocery-store items, which highlights a key point. Every online order requires two sorts, not one. First, the separate items in the order must be collected and sorted to one or more shipping containers addressed to the customer. Second, sorted orders must be "bunched" (sorted) to the customer’s delivery area for hand-off to the courier who will deliver them. Most on-line retailers handle the first sort themselves, and hand off shipping boxes to the chosen carrier for the second sort.

But the carrier can handle both sorts if its sorter is capable. Ours is. It can perform both sorts, quickly and in a small space. Our sorter requires less than 30,000 square feet to fulfill 534 orders at a time – many more if the orders are sorted in “waves." Multiple orders destined for homes (or Walmart stores) in the same area can easily be sorted to a chosen spot in our building, where they can be “bunched” for hand-off to couriers. Sorting and delivery can be inexpensive and quick.

Same-day deliveries need not be world-wide. We could, for example, offer highly profitable same-day deliveries in only the Boston, New York, Chicago, Los Angeles and San Francisco areas. This second market segment nevertheless may be bigger than our first – soon, or even right now. 

Where We’ve Been and What’s Next

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Where We’ve Been. I've spent thousands of hours and roughly $500,000 on this business opportunity. I do not expect to be paid for any of this – except through ownership of last-in-line common stock. 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 (see graphic above) reflects hundreds of changes over the years – a few major (long ago), most minor but useful. The planned route map  (see continental-US 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 opportunity.

Some great ideas occur to entrepreneurs spontaneously and are instantly complete. Other ideas are developed methodically over a long time. This one 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 – including my parents, grandfather and uncle: 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. Usually the successful inventor ends up in the same place either way – problem solved – but the proper sequence ensures that the problem is serious. This one is: E-commerce is booming, but consumer-parcel shipping is too expensive and usually too slow.

What’s NextThe next step is to build 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 options on hub sites; (3) begin rate discussions with the Postal Service – see “Why Our Postage Rates Will Be Very Low” above  – which may (but probably will not) persuade us that we should deal instead with different destination-area carriers (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 destination-area facilities. 

Assuming that we decide to proceed further after this “prototype” time frame, we will (1) buy the sorter components and arrange for them to be shipped to our hub; (2) acquire the hub site and build the “shell” building to house the sorter; (3) sign a rate agreement with the Postal Service and/or other carriers; and (4) identify potential hub managers. 

When the sorter components arrive at our hub, we will install the sorter. During installation, we will (1) hire hub personnel, and make appropriate arrangements with (2) one or more trucking companies; (3) liaisons at destination-area facilities; and (4) our initial customers – who probably will be charged highly discounted rates. 

Once installation is complete, we will commence 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 and operating frequency as quickly as possible. 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 (IRC §1202(a)(4)).

The Perfect Solution

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By using our low-cost, compact sorter and a “one-point-to-many-points” delivery model, 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 (ours 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 2018