Weighing The Impact on Parcel Carriers as E-Commerce Evolves

Overview:

• Following pandemic-era industry upheaval, the normalizing parcel carrier industry has evolved by means of network re-alignment, automation and new competition.
• This report sources insight from across TD Cowen's diverse industry analysts including internet and robotics, consumer, airlines and the Washington Research Group.
• As tailwinds moderate, we see core demand continue to remain healthy with pressure on long-term yields amid a competitive marketplace.

The TD Cowen Insight

E-commerce is settling into a new normal promising growth in the parcel carrier market . This cross-sector report explores implications for logistics solutions providers. E-commerce penetration trends are robust, partially mitigated by online marketplace normalization and retail insourcing. Yield headwinds and competition place cost initiatives are in focus. Profitability can grow through an evolving landscape that narrows the margin gap via network realignment.

Evolving E-Commerce Trends in a Post-COVID World

Investors are weighing evolving e-commerce trends in a post-COVID world that could present challenges for parcel giants. The return to volume growth does not guarantee parcel success, and how carriers manage the trends discussed in this report has long term implications for shareholders. We believe success will be driven by how parcel carriers manage network re-alignment, and how they invest in automation and new technologies over the next 3 to 5 years.

Normalizing trends in a post-COVID world have facilitated a new e-commerce cycle initially led by new Chinese entrants. Our report explores the ramifications of this cycle. Consensus views e-commerce volume growth in a positive light as a top-line driver. We argue, however, that driving earnings growth with e-commerce volumes alone won't yield the best results given a drag from low weight mix exacerbated by a competitive marketplace, retail insourcing and logistics forays. We believe carriers must lean into network cost savings to maximize margins.

Cross-Sector Proprietary Analysis

We leveraged proprietary data with AFS Logistics to analyze yield and mix dynamics across the parcel landscape. We conducted cross-sector proprietary analysis on the e-commerce and parcel market. Our analysis incorporates inputs from TD Cowen's Consumer (Discretionary, Hardlines), Internet and Robotics teams to examine the new magnitude and composition characteristics of e-commerce demand given these industries are upstream to the parcel carriers. The TD Cowen Washington Research Group offers insight into the de minimis and tariff threats to volumes, while analysis from our Airlines team addresses the international airfreight landscape. The report also includes analysis of forays in the logistics space as a competitive threat to the parcel carriers.

Financial and Industry Model Implications

We expect e-commerce to continue driving ground volume growth in the low single digits range for 2025 amid softer B2B contribution. While tailwinds moderate, core demand and e-commerce penetration remain healthy per findings of our Consumer and Internet teams. We continue to model yield growth in 2025 as the ecommerce trade down to economy services normalizes but long-term yields to remain pressured amid a competitive marketplace, retail insourcing and rapidly growing logistics capabilities. Our models take a cautiously optimistic view on cost initiatives in the near term, which bear the burden of e-commerce volume profitability given structural ceiling on yield.

What To Watch

In assessing e-commerce growth and profitability, investors should monitor:

• progress on cost savings vis-à-vis network integration and automation,
• discipline in capex plans through cost takeout process,
• the stance on subsidizing final mile and
• downstream integration plans.