Challenge Getting Critical Mass

DHL had big aspirations for its parcel and express business in the U.S. after it acquired Airborne Express in 2003. The company has made major investments in sales, marketing and infrastructure in an attempt to penetrate the U.S. market, the world’s largest. It had to spend heavily to upgrade its ground assets in the U.S., which were modest compared to those of FedEx and UPS.

Today, however, DHL’s share of the express and parcel market in the U.S. remains about 9%, according to most estimates. Deutsche Post recently reported that is writing down the value of its U.S. assets by $887 million, and that its U.S. package-delivery business has incurred annual losses of nearly $1 billion.

There have been some successes, however. For example, DHL recently announced an agreement with Walgreen’s, in which it will set up shipping locations for small businesses and consumers at more than 6,500 Walgreens locations by the end of this year, similar to what FexEx offers at its Kinko’s print stores chain.

The U.S. experience is an exception for Deutsche Post, which in general has enjoyed solid growth and profits in the rest of the world. DHL enjoys strong positions in Europe and Asia. However, its stock price has lagged the market. The Wall Street Journal reports that Allan, relatively new to the CFO spot, is taking a look at DHL Express US in part to “mend ties with investors who criticized the company for focusing too much on empire-building at the expense of profits.”

The researchers at investment firm Bear Sterns believe Deutsche Post may shed its domestic U.S. express and parcel business, while continuing to serve U.S. shippers for goods going to international markets. That could argue for a hybrid strategy in which it sells a controlling interest in the U.S. operation, but maintains a stake to help feed its international services.

Does DHL’s U.S. Presence Constrain UPS and FedEx Pricing?

Some observers believe even with its small share of the U.S. market, DHL still acts as an important force that benefits shippers in negotiations with UPS and FedEx. DHL has made no secret about its use of aggressive pricing to gain market share, and general economic theory has generally found the presence of a third competitor in any market can have a substantial impact on pricing leverage to customers versus a duopoly.

Jerry Hempstead of Hempstead Consulting, with a long career in the parcel business, supported that view on his recent blog, stating that “DHL serves a substantial role in the U.S. market as a mitigating competitive factor in containing rate increases for the parcel shipping public. Without a third player, FedEx and UPS control the game. Shippers will long for the rational rate increases of the past” if DHL exits the market or is sold to FedEx or UPS, he believes.

He added, “The shipping community needs to support all three parcel carriers in order to have the market leverage that a third viable carrier provides.”

Hempstead thinks it is unlikely that Deutsche Post would sell DHL Express US in its entirety, since the operation contributes significantly to the whole of Deutsche Post’s World Net operations.

“DHL’s various business divisions are highly interlinked. Removal of DHL Express from the U.S. market would substantially hurt the other (profitable) business units,” he adds.

What do you think is likely to happen to DHL US? Is its presence an important factor in constraining pricing from FedEx and UPS? Let us know your thoughts at the Feedback button below.