Chapter 11: More on Lillian Vernon

Jerry Hempstead of Hempstead Consulting is a great friend and former colleague of mine. After 32 years in the express and parcel business in the United States, Jerry "retired" a couple of years ago only to become one exceptionally busy guy. Jerry's expert knowledge of the parcel business has led him to some very interesting consulting engagements in China and the United States.

The article below is an Opinion/Editorial reflecting Jerry's personal insights. Jerry can be reached at gmhempstead@aol.com

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After reading Richard Palarea’s article on Freightdawg.com,  “Two Catalog Retailers Seek Court Protection”, I thought I might add some additional history and perspective especially about Lillian Vernon.

Once upon a time, Lillian Vernon probably had the lowest residential delivery rate for parcels ever negotiated. They once used a parcel consolidator called APX.  APX was the company that purchased RR Donnelley Logistics out of Chicago.  Donnelley had previously acquired the parcel consolidator CTC Logistics out of Minneapolis. APX was a BIG parcel consolidator!

For those who don’t know what a parcel consolidator is, these are firms that pick up from high volume shippers of residential delivery parcels like e-tailers (Amazon, Zappos), multi-level marketers (Mary Kay, Tupperware, Avon), telemarketers (Home Shopping Network, QVC), catalog retailers (JC Penney, LL Bean, Lands End) and check printers like Deluxe, Clark American and Harland.  They make pick ups then directly inject the collected parcels downstream into the USPS delivery network. They use the USPS Parcel Select product and charge the shipper a rate that is less than a deeply discounted UPS Ground Residential Package. The margin is extremely thin at only a few cents per package.

The two big players were APX and Parcel Direct. FedEx bought Parcel Direct in August of 2004 and changed the name to Smartpost. On March 15, 2006 APX filed bankruptcy. This bankruptcy profoundly changed the rules for residential parcel pricing because when APX went out there was a domino effect and the marketplace lost DDU Express, Total Logistics Services (TLS) Parcel Logistics Service (PLS) and Parcel Corp of America. This meant that Smartpost could charge  more for its services as it became (by far) the dominant player in the parcel consolidation industry.

There really was little Lillian Vernon could do other than to switch to Smartpost at a rate that was higher than they were paying to APX but much lower then they could get from DHL@home (which had higher operating costs than Smartpost) or UPS Ground Residential. For the mailing of the Lillian Vernon catalog and for pieces less than 1 lb. there was no alternative to the USPS and those prices went up substantially in May of 2007.

Now I did get upset with the statement of Michael D. Muoio, the CEO of Lillian Vernon in January at the time they announced a massive layoff; in a recent interview he said  “The December layoffs at Lillian Vernon Corp. stemmed from rising postal costs, the falling U.S. dollar and lower-than-expected holiday sales." its chief executive told a trade publication. 

"The most damaging was the postal rate increase of 20 percent," said CEO Muoio, who also cited the parcel carrier rate increase of 25 percent, according to a story on the Web site of Multi-channel Merchant magazine.

"Basically, FedEx and the U.S. Postal Service reached down into our pocket and took out $8 million," Muoio said. "For us, there was no choice."

FedEx Smartpost was the next cheapest method for Lillian Vernon to go to. They bailed Lillian Vernon out when they stepped up to the plate and transported their packages when APX went under. Now with the bankruptcy filing of Lillian Vernon, FedEx is out over $3 million dollars. FedEx most likely will never see a dime of this money because of the bankruptcy filing.

FedEx and the US Postal Service are not to blame. The USPS charter calls for them to operate at break even for their service. The USPS does not set its own rates. The Postal Regulatory Commission sets the rates. The PRC is a federal commission appointed to protect the mailers, not the USPS. There is a complex system of checks and balances on what and how the USPS charges for its service.

FedEx on the other hand is deregulated and they are a publicly traded company on the NY stock Exchange. Last time I checked there was still a system of free enterprise in this country that says FedEx can charge whatever they want to and shippers can use whatever carrier they want to ship with. Had UPS or DHL@ home been used in lieu of FedEx Smartpost , Lillian Vernon may have gone into bankruptcy sooner.

"At the end of the day, it was Lillian Vernon that had some complicity in the fall of their consolidator, APX and then their own subsequent demise."

I think the Lillian Vernon scenario points to a great reason why it is very important for there to be three viable parcel carriers in the United States. The presence of three express players, who can competitively price and service parcels, has served to contain price increases and allowed shippers to negotiate significant concessions from the carriers. All three bring unique capabilities to the market. In order to keep pricing fair, all three need support. If DHL does not stay viable in the US then the potential is there to see a lot more Lillian Vernon’s in the not too distant future. If there is a duopoly in Express and ground then the shippers can blame themselves.

Jerry

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Comments

[Jerry Hempstead]

If a shipper wants to use the USPS directly then normally you are stuck with Priority Mail or Parcel Post rates. Only Amazon really has the critical mass to enter sufficient volume downstream at BMCs or DDUs to get the Parcel Select work share discounts. The Parcel Select rates, in particular at the DDU level are very low. But in order to get the rate you have to take your parcel all the way to the delivering post office. So shippers don't have the network or the critical mass to make economic sense to do this. Using a parcel consolidator like Smartpost allows a shipper to participate in the low Parcel Select rates and share some of the savings over Priority Mail and or UPS Ground residential. In the home delivery space price is far more important than speed.
When there is the need for speed a shipper then can bump up the service to FedEx Home Delivery or DHL@home, or then UPS three day or FedEx Express saver, or then second day service. If one uses FedEx Smartpost it does not preclude the purchase of other faster or more predictable service levels, they are complementary. But my experience with catalog, etail, mlm and tele-sales is that people are willing to trade transit time for price.

[Sasha Green]

Question: If Lillian Vernon was using APX to access the USPS delivery network, why wouldn't they just work directly with USPS?

I can only assume that Smartpost offers necessary services that USPS doesn't, but I'm not aware what they are.

[Richard Palarea, COO]

RE: DHL-US Ops

Eric - everything you report squares with what we've either learned or been told by trusted industry folks (inside DHL and outside). I certaily didn't intend on creating a panic in the streets.

My two cents corraborating and agreeing with what you said.

[Eric]

Everybody relax. While I work for DHL, I am NOT an official spokesman, nor do I know much beyond what everybody else reads online, however I observe the following.

1. DHL leaving the US would not only be commercially disastrous, but its impractical. Such a departure would be highly doubtful. There is too much invested in the US market and subsidiaries located here.

2. The company continues to invest in scalable infrastructure including Polar and Atlas Air jumbo jet support for the express network. DHLE owns 49% of Polar.

All this makes for nice headlines for news sites, but its a pain for those who work every day to satisfy DHL customers.

3. The Aerologic all cargo airline will serve the DHLE network as well as the DGF heavyweight network in due course.

4. Several logistics companies have reduced staff lately. DHL reduced by 600 out of 21,000. That sucks, but its less than 3% of the total employed in the US.

5. DHL just reached a national contract agreement with the Teamsters. If DHL wasn't committed to the US market, why bother?

6. Will DHL Express modify its US network? Maybe. However nothing has been presented either internally or in the press.

Anybody who writes differently is absolutely basing that on conjecture or a crack pipe. (and not every analyst who is quotable in EUROPE, knows much about the US parcel market.)

[Richard Palarea, COO]

That last paragraph takes my breath away. I've been avoiding having to mentally deal with the real chance something dramatic will happen to DHL-US, because it will fundamentally change my business, as well as the ability to garner fair pricing by every one of of my clients, Jerry's clients and the general shipping population that cares about paying a fair price for service.

The general concensus among those I've polled about SmartPost is that it works fine, so long as it is the only method of delivery their customers ever see from them. Unfortunately, it isn't the only mode they use. FedEx would be "smart" to unbrand SmartPost from the FedEx brand. The average residential delivery recipient can't make a distinction between FHD, any of the FedEx express services and SmartPost. All they see is the FedEx brand and they ask the same question; "why does this take so long?".

Case in point: take a look at Woot! (www.woot.com). This direct to consumer clearing house offers one product per day at a discounted price and in limited quantities. I'm a huge fan of the site -- and it used to be a best-kept-secret. Over the past few years, it has grown from an obscure techie hangout and novelty to a bonified e-tailer. The last move the company made was to their own tailor-made warehouse and offices; a far cry from where they started (probably in someone's garage somewhere). This thread is but one example of the rants: http://www.woot.com/Forums/ViewPost.aspx?PostID=1372603&PageIndex=2&ReplyCount=88#post1857899

Fortunately, Woot! has a great internal culture and brand and has admitted that SmartPost isn't a great customer solution, but that everyone has his price. I guess the price was right. They have even created a logo for SmartPost on their site. When offered, an image of an illustrated snail appears next to the shipping info with "SmartPost" labeled on the graphic. Cute - but also a reality for Woot! shoppers.

Enough about Smart Post.

What I'll always appreciate about Jerry is his vast knowledge and experience in the parcel game. I'll never have the war stories he has when I'm as gray as he is -- mainly because most of the big revolutions have already taken place. Unless, that is, I have a chance to sit my grandkids on my knee and bore them with stories about the "Great Pricing Collapse of 2010" when DHL ceased to exist. Perish the thought!