Delivering America

Until DHL came along, FedEx and UPS had a seemingly comfortable duopoly in package delivery. It is getting less comfortable.

The German post office is not so German anymore. Deutsche Post World Net, as it is now named, still earned most of its USD1.7 billion in profits last year delivering letters. But Chairman Klaus Zumwinkel has bought some independence from economic stagnation at home with $18 billion worth of acquisitions, most prominently DHL International.

Now his air and ground forces have launched a U.S. invasion under the DHL banner–right into the teeth of a FedEx-UPS duopoly that holds 79percent of this market.

DHL's USD50 billion (revenues) parent is already the world's largest airfreight carrier, flying to more places than anyone else. Deutsche Post had a small investment in the San Francisco-based courier for years but bought the company lock, stock and delivery van two years ago. Outside of Germany it looks more like the intrepid DHL took over Deutsche Post than the other way around. Either way, what Zumwinkel wants is to rule global logistics.

To do that he needs America, the busiest express market in the world, with 34 million packages delivered daily. Zumwinkel gained a toehold last year, with the USD1 billion acquisition of Airborne Express, the third-largest U.S. express delivery service, but he wants much more than Airborne's 6percent market share. Better to dub the whole operation (including Danzas, the Swiss freight forwarder bought in 1999) DHL–which is shorthand for "overnight it" in most of the world.

Result: a colorful invasion, involving 18,000 trucks, 30,000 drop boxes and millions of delivery packets sporting DHL's new corporate colors: red lettering on a screaming yellow background. (No one could miss those trucks; the colors are so loud that they helped lower the company's insurance rates.) This summer DHL sounded a cheeky battle cry, saying in one ad: "The Roman Empire, the British Empire, the FedEx Empire. Nothing lasts forever." DHL faced an awareness challenge. Though famous abroad, the name had only a 6percent U.S. brand recognition earlier this year. So the ads first had to explain that DHL is a courier service, like FedEx or UPS. Now 27percent know.

FedEx launched a humorous ad campaign of its own, attacking the other guys for rigid service and touting its new ground service with 35percent savings over UPS. Big Brown hasn't countered the campaigns yet, but its dominance of U.S. ground shipments is under attack from both sides now.

UPS and FedEx fired their first volleys at Deutsche Post via their lawyers. They filed a series of complaints in Washington and Brussels, including one asking the U.S. Department of Transportation to cancel DHL's registration because DHL would use profits from its postal monopoly in Germany to engage in predatory pricing in the U.S. Deutsche Post, listed in 2000, is still majority-owned by the German government, but the DOT threw out the case, finding no evidence of "any unfair competition in the U.S. market by any of these DHL companies."

"Their number one complaint was that we shouldn't be here in the first place," says John Fellows, the Canadian in charge of DHL's American business. "But we're not going away."

As DHL expands in the U.S., its two rivals are trying to catch up everywhere else–especially in Asia. FedEx wants to be the first international shipper with a big hub in mainland China (DHL is building in Hong Kong), and UPS plans to add flights, thanks to a bilateral aviation agreement between the U.S. and China.

"But nobody knows Asia like we do," counters Fellows. "We have more profits and more volume in the region than anyone else."

Part of that edge is explained by history. DHL was started in San Francisco by three Americans who shuttled bills of lading from the West Coast to freight forwarders in Honolulu, saving their ships from sitting idle in port waiting for paperwork to process. The three started flying farther west, setting up offices in the Philippines, Japan, Australia, Singapore and eventually in Europe–everywhere but in the U.S. While FedEx and UPS covered North America with planes and trucks, DHL was dropping into places like North Korea and Croatia.

Thanks to world trade flows, DHL's Asian connection may be opening more doors than its ads. DHL is selling to the director of logistics or supply-chain management. Nearly any company that makes or distributes physical goods is likely to be aware of Asia and what DHL does there. Even a small importer may deal with 500 different factories in China at different times, some in the hinterland where UPS and FedEx can't compete yet.

Deere & Co., the USD15 billion tractor and backhoe maker in Moline, Ill., is one of DHL's global customers. David Panjwani, who manages Deere's global transportation, plans to invite DHL to bid for more of the company's U.S. business. Meanwhile, Panjwani has no plans to throw UPS and FedEx more China business. "DHL is our partner of choice in China. They have the best connections with all levels of government," he says.

But Fellows has his work in America cut out for him. Airborne gave him 355 stations, 15,000 trucks–and a demoralized staff. He is spending most of his time trying to make the old Airborne crew think a little more like DHL. "DHL prides itself on being in the top tier worldwide. At Airborne, after worrying for five or six years that the company might go bankrupt, most of the employees were feeling second- or third-tier," he says. Fellows brought in fix-it executives from his previous employer TPG, the privatized Dutch post office, including Richard Metzler, who heads marketing. Metzler understands the enemy. He spent 18 years at FedEx, where he helped return the European business to profit. But he says he couldn't abide the bureaucracy when he returned home to headquarters in 1997 and left to work with Fellows, first at TPG and now at DHL. "FedEx and UPS are like the industrial engineers of the shipping business," he says. "Their greatest strength, their sheer size, is also their greatest weakness. The more efficient they are, the less human they are."

His plan: to go after "the soft underbelly" of UPS and FedEx. "Most small and medium-size companies feel like they are an annoyance to FedEx and UPS," says Metzler. When they need help sorting out a problem at customs or making a difficult delivery, "they are starved for human interaction. They don't want a recorded message or a Web site." FedEx and UPS probably make "90% of their profits from the 20% of their customers who get no (big-shipper) discount," he says, though UPS denies his math.

Podium Distribution is one such company. The closely held $75 million skateboard-shoe importer already uses DHL to ship samples from South Korean factories to its headquarters in Torrance, Calif. "We save one or two days using DHL, and they give us better rates," says Podium's boss, Mark Feig. But on the ground in the U.S., he adds, "most goods go by UPS. Our retailers are so used to seeing those brown trucks every day at 10 a.m."

DHL has an answer for those familiar brown trucks. "We did a test on ground freight with DHL. They moved the goods one day faster and then cut the price," says Feig. "They basically told us they would do whatever it takes."

Is Fellows also starting a price war? Can he afford one? He is losing $350 million a year in the Americas, according to Morgan Stanley's research, with an ambitious goal to break even next year. It's expensive to build a presence to match that of his rivals. Seven new regional sort centers will open by the end of this year and five more next year. DHL hopes to grow into them, and cutting prices is one way to bring in business fast.

He is also trying to make it a little easier to find DHL. There are now DHL drop-off centers in 990 OfficeMax stores around the U.S. At 4,000 retail shipping mom and pops, DHL has been added to the menu. That still doesn't compare with the 50,000 points that accept FedEx packages or the 67,000 that take UPS. Nor does it compare with the street-level advertising and the all-day, every-day service that FedEx added when it bought Kinko's earlier this year. Ditto UPS with the 3,000 Mail Boxes Etc. storefronts acquired three years ago and rebranded with the company's brown logo. Metzler knows he can never match their presence but figures he can compensate with service.

Next year DHL Danzas, DHL's air and ocean division, will begin marketing a "warehouse on the water." One of its customers is Gear for Sports, which custom-monograms baseball hats and sweatshirts for American colleges. The goods will move from the firm's Guangzhou factory floor, across the ocean, through U.S. Customs. Then they will be broken up into shipments of one or two cartons and sent overland to campuses from Oregon to Florida, eliminating a stop at a Gear warehouse in Kansas, says John Joerger, head of global logistics. Gear for Sports has been flying goods on UPS planes. The ocean/ground service will take longer but save the clients money and Joerger headaches.

DHL has even managed to send some business back to Zumwinkel in Europe. Skechers, the California shoemaker, stuffs most of its international letters into an airway bag and puts it on a DHL plane headed for Europe. The bag is opened by Deutsche Post, and individual letters are forwarded to their global destinations. Michael Cardenas, in charge of domestic shipping for Skechers, estimates the cost savings at 60% over U.S. Postal Service rates. He thinks he can save almost as much switching some domestic traffic to DHL from FedEx and UPS.

Score one for Fellows. But can he cut rates and still make a profit?