Delivery service DHL gives up American dream

Many an ambitious, long-nurtured growth strategy will be abandoned during this rapidly worsening downturn. Bravely sticking to their original plans may ultimately make heroes of a few bosses, but in most boardrooms caution is now the watchword.

DHL, the overnight-delivery arm of Deutsche Post World Net, a logistics conglomerate, is a case in point. On Nov. 10 DHL said it would shut down its express-delivery service within the United States, with the loss of 9,500 jobs.

Five years ago DHL, which had been acquired by Deutsche Post in 2001, targeted the American market with much fanfare, eager to demonstrate that it was at least equal to the two delivery giants, FedEx and UPS. This was a crucial step in the campaign by Deutsche Post's boss at the time, Klaus Zumwinkel, to create a global "one-stop shop" for delivery. (The former McKinsey consultant stepped down in February this year after a raid on his home in Cologne, and on Nov. 7 he was charged with tax evasion.)

From the start, DHL found the American market far tougher than Zumwinkel was expecting; the recent savage decline in consumer spending was the last straw. FedEx and UPS were no cozy duopoly; they competed intensely, and fought DHL's every innovation. When DHL hired the U.S. Postal Service (USPS) to do its domestic deliveries, a move that was popular with customers, FedEx and UPS immediately followed suit.

More recently, the government-owned USPS has also become a formidable competitor in its own right, consolidating its No. 3 spot in the market. "The post office has got really good, and is now competing aggressively on price for the first time," says Hank Mullen of the Visibility Group, a transportation consultancy.

The quality of overnight delivery provided by FedEx, UPS and USPS within the United States is now remarkable, on time more than 95 percent of the time, said Mullen.

DHL was not helped by problems in its infrastructure that affected service quality, including culture clashes when integrating Airborne Express, an express-delivery airline it acquired, and its overreliance on independent contractors. By the early part of this year, DHL was hatching a plan to outsource its domestic network to UPS, which raised some antitrust concerns. Some form of this proposed partnership may yet be agreed on, but DHL's decision to shut its main U.S. facilities is expected to cost as much as $3.9 billion, and to drive Deutsche Post into an overall loss in 2008.

Although its withdrawal ostensibly boosts FedEx, UPS and USPS, DHL had only around 4 percent of the domestic market. Moreover, it may now price more keenly to increase its share of the international express-delivery market, which usually has higher margins than domestic shipping. That said, the economic downturn is ensuring that this is a shipper's market, and any hopes that prices can be raised in today's climate look forlorn.

For at least 18 months small manufacturing firms and retailers have been suffering from weakening demand, says Brett Daberko of YRC, a leading road-based delivery company, which is increasingly up against FedEx and UPS in the road-freight market.

The past few weeks have seen conditions in retailing worsen alarmingly, however. Bankruptcies are increasing. Some economists now think that consumer spending in this quarter will be perhaps 5 percent lower than in the fourth quarter of 2007 -- a decline on a scale that nobody had thought possible.