Despite the booming e-commerce and run on online gifts during the Christmas period, the UK parcel delivery industry is in a cut throat race to the bottom. According to consulting firms Transport Intelligence and LCP Consulting, the wishes of consumers of free and fast delivery are putting fierce pressures on the profitability of parcel delivery companies, which are struggling to stay alive.
An example of the suffering UK parcel delivery industry is the case of City Link. This company had been experiencing deficits for five years before it was sold to Better Capital for £1 in 2013. After a year and a half, the company used up Better Capital’s £40 million investment, which it had provided to help to turn around the City Link, and went into administration last Christmas.*
There are a number of key factors affecting the profitability and sustainability of parcel delivery businesses in the UK. According to Better Capital, one key factor is the “massive overcapacity in the market which is driving down prices”, with large companies such as Amazon, that formally hired out their delivery needs, now starting in-house services themselves. A second factor is that consumers act extremely reserved in their choice of transportation for their product, and are unconscious about the consequences of their choice on the people that deliver their products — expecting fast, traceable and conveniently services for which they will pay as little as possible (and preferably shopping around to pay nothing at all). “Somebody has to pay for that ‘free shipping’ and at the moment that’s been the express parcels companies,” says John Manners-Bell, Chief Executive of Transport Intelligence, the consulting firm. Between overcapacity and tight margins, companies have been slashing prices.
The effect of this interplay of forces and the will of delivery companies to survive is that especially the delivery workers are facing extremely low wages, long hours and unsecured freelance working conditions. City Link as an example, generally employed foreign workers willing to be hired and let go when needed (given the seasonal nature of the work), hiring their uniform and radio and riding around in their own van for as little as 45p per parcel. Commentators point out that City Link was forced to offer “sub-market pricing” to win contracts, which created the spiral of losses. Now many of those losses have been offloaded to its freelancers, who, as unsecured creditors can expect to get as little as 1p back for every £1 they are owed for their work over Christmas.
While the workers and parcel delivery company investors are suffering the brunt of the costs and bankruptcy, the retailers and their business model, as well as the consumers refusing to pay for the services rendered, continue to create these conditions. Retailers “put a lot of negotiating pressure on the carriers, the carriers respond to it, but of course when they fail the carriers get vilified. It’s all a bit of a vicious circle,” says Alan Braithwaite, Chairman of LCP Consulting. The consumers’ demand to have their parcels “tracked” creates further infrastructure burdens on parcel delivery services, having to create complex IT systems, Braithwaite adds. “These guys add costs faster than they make profit.”
* The bankruptcy will be handled by professional services firm EY that expects “substantial redundancies” as it has not been able to find a buyer yet.