Is overcapacity looming in the parcel industry?

Royal Mail, Hermes, DPD and Amazon are all investing heavily in infrastructure as well as delivery fleets, between them spending hundreds of millions of pounds on capacity building to both meet demand and projected demand. Could this overcapacity force prices down with excess supply available?

UK delivery company Hermes is reported as spending over £100 million on a sorting facility in Leicestershire, one of the biggest such facilities in Europe. The company is also spending over £30 million on a parcel hub in Warwickshire.

Amazon is well known to be taking many of its delivery routes in house, and away from the companies that used to rely on it heavily. Even the multibillion pound giant Royal Mail is said to be feeling the pinch as Amazon takes more and more business in house.

Royal Mail is seeing attacks from other rivals that are becoming similar in size to the national mail operator in terms of capacity to deliver goods to almost every corner of the country over night. The investment boom is often heralded as the growth of the e-commerce market that is filling the retail gap left by the retreating high street shop industry.

Markets do mature, though for now almost every national delivery company barring Royal Mail are seeing double digit growth in business. There seems to be confidence bordering on over confidence that the industry will grow at double digit rates for many years to come. This is where bubbles form in industry, and bubbles burst. We only have to look at the 2007 Credit Crunch which has crippled mature economies for almost 10 years to see where previous spells of over confidence have led.

The Financial Times concluded in an article discussing the massive investment being made in the industry by stating, “Some analysts — and Royal Mail — have warned of overcapacity lowering the prices companies can charge.” Could overcapacity and falling prices be the pinprick that bursts the bubble?

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