DHL Express U.S. CEO Hewitt sizes up the 2023 Peak Season

Logistics Management Group News Editor Jeff Berman recently caught up with DHL Express U.S. CEO Greg Hewitt to discuss various topics, including: the 2023 Peak Season; the freight economy; and variuous logistics trends and themes. Their conversation is below. 

Logistics Management (LM): How are things going so far on the Peak season front, coming off of a flat year, last year, to a large degree. What's sort of jumping out at you so far?

Greg Hewitt: I'd say this year is looking more like a normal year. Overall, when I look back at the pre-pandemic period and coming out of the pandemic period, when all trends and all cycles were different, new and, and unique—and if you look back five-to-seven years before that, it was usually pretty normal to see about a 40% lift in volume in Peak, which we define as after U.S. Thanksgiving through Chinese New Year—you usually see about a 40% lift in stops and moves compared to the normalized summer months. So, where do we stand so far? In the first few weeks as we've gone through it, we're up 38%. It is feeling a lot more like a normal Peak Season. I think we had forecasted for the year to be up 14.6%, so this year has been impressive. That is what we based our staffing and modeling around…for investments in needs for vehicles, scanners, and people.

We just saw the impacts of Black Friday and Cyber Monday. They were up 11%. So, it's in line. I think, with our forecast. The one thing I'll call out that I think is different than prior years, I would have said historically Peak Season would have a little bit more balance—balance in terms of that growth coming from both online customer purchases and in e-commerce, or business-to-consumer deliveries and traditional end-of-year/end-of-season lifts in business-to-business, where inventories get moved out, bigger orders around Peak and traditional segments like automotive engineering and manufacturing, and high tech. What I would say is this year's volume growth is heavily-fueled by the e-commerce and B2C. So, we're seeing far more of that growth coming in that area. In particular, I think it's fair to say fast fashion is growing, into the US. Consumers in the U.S. are buying fast fashion and those are you see those from big e-commerce companies out of China, which are really growing very fast along with the traditional players like Amazon. Now, for me what that means is probably more delivery stops and more shipments, because the traditional business-to-business is a little bit heavier weights and we're still seeing declines in weight and declines in in the heavier B2B moves but that's being offset by heavy, B2C volumes in and out of the U.S.

LM: I remember you mentioned that the declines in weight the last time we talked in July, so that definitely still holds true. Would you say that given the numbers you just read off, in terms of the volume gains, did they match up with what you were expecting there? Are they on par with 2019 levels?

Hewitt: We would still be above 2019. We have stayed well above pre-pandemic levels. And when we spoke in July, I was watching weight and weight inbound from China. What we found we were doing was the China Plus One lanes had been offsetting some of it. We were growing more outbound than we had historically and we were still seeing from the network, heavy deliveries from B2C. That is what drives my investment in infrastructure and cost is delivering for the network. So, our weight per shipment is still up about five kilograms from pre-pandemic levels and we have maintained and grown. Our shipment count is significantly higher and our revenues are substantially higher. We've almost doubled the business in 10 years. So, we've still continued to grow. But we did come back from, I would say, our peak financial performance, in terms of revenue and weight in 2021, 2021 to 2022 to 2023 has seen a steady decline back. I would say we've level set now, and we're going to be a little bit heavier. We kept some of the business that came over to us during the pandemic. People were shifting back towards traditional modes of ocean and air freight. I think a piece of the business we’ve got, we have maintained. The cut-off point for when people go air cargo, commercial, or over to the ocean, that breakpoint has gone up a little and we have maintained some of that. It will continue to be a focus for us, as we go into the next year, which is making sure people recognize the quality and the importance of a fixed network and trying to maintain some of that B2B Business add a little bit higher weight while still handling the continued growth in B2C and ecommerce.

LM: A recent DHL survey found that supply chain and inflation concerns had dropped 13% and 11% respectively, year-over-year. Those are impressive numbers when you look at how much of a factor inflation was really not all that long ago. What do you think of those findings?

Hewitt: You touched on the two things that I think surprised me a little. I was surprised that inflation was not a higher concern, because definitely, for me, in managing my unit costs, I'm seeing record productivity levels. We're seeing huge volumes coming in. But inflationary pressures, in particular around wage rates, but also around any lease renewals are showing no slowing of that inflationary pressure. I thought that would be a bigger issue to respondents, compared to them still saying that supply chain delays with 33% noting that that was still their biggest concern. My observation had been in the things I was hearing from my sister organization and customers was there was much better stability in air cargo this year and in ocean. I think those of DHL, FedEx, and UPS have had relatively stable fixed networks with good capacity and, if anything, it's been a bit of a price war on some of the commodity lanes like China, because there's excess capacity and capability. I was a little bit more surprised that people were still worried but, I guess, some of that goes to the lag effect of timing and that if you've been bitten and you've struggled and your business was impacted last year or the year before because there wasn't capacity, you couldn't get orders out or you wound up paying astronomical prices for it, maybe the memory is just long and that showed in the in the survey where, for me, I hear a little bit more noise from our customers around inflation still being an issue. Staffing and labor is still an issue, and there is still a soft amount of demand in traditional industry segments. E-commerce is ecommerce and they're pretty happy and they're still growing but when I look at the traditional ones, it's still like we don't have all of the orders, we're working down inventories and demand isn't that high. I'm waiting to see how the year end goes because September, in fairness, was the first quarter-end that I saw that behaved normally in three or four years, meaning Peak being 40% up. You could set your watch by it and we planned accordingly. Normally, at the end of every quarter, we see a rise in weight, in shipments, and in revenue as companies’ kind of clear out for quarter-end. It's like everybody wants to get their orders in, book their revenue, and get shipments out, because there is a lot of new freight on dock as soon as it leaves. That's a historical trend that during the pandemic and coming out of it, we were not seeing. September was the first time I saw that a normal lift and I thought maybe we are back to normal. October didn't really show it continue. November, not as much. So, we'll see if December has that year-end push on theB2B that might bring a little bit more balance to my Peak numbers and might push us over that 40% and take us from that 11% or 12% we are seeing now up to 14%. That's what I'm hoping.

LM: While the headline numbers point to inflation improving, there is that “stickiness effect.” Are you seeing that?

Hewitt: Absolutely. Sometimes, the impact of inflation takes time to materialize. In fairness, my union agreements as an example, didn't get renegotiated in real time when the inflationary run really spiked up during the pandemic and into earlier this year. So, as it's coming down, I think we're still normalizing and dealing with situations where we need to make sure the wage rates are correct. Certainly, the normalization in real estate takes longer to come out of it as well because leases aren't done month-to-month and in real time. So, although the economic indicators are good, with inflation rates coming down, we're hoping interest rates will come down as we go into 2024. All of those are good signs for the economy and should drive demand and economic growth. But I think the inflationary pressure kind of lags on a little bit longer.

LM: How are inventory rebuilding efforts factoring into the peak side of things and inventory churn among, when we view that type of stuff, because just because consumers are obviously active this time of year?

Hewitt: That's a good observation. I do think maybe traditional retail may have inventory. I think that's what's an impact in our business-to-business segments. They're trying to clear out inventory and they are not peaking up at the same rate that maybe new e-commerce like fast fashion. That's why I think we always looked at the trends I. If I didn't get into the details and really understand them, I could say, “Hey, we're back to normal peaks levels, 38% will be up 14% year over year. We're managing it effectively our resources are in play. All good thumbs up, but I think if we're really looking for how's the economy doing what's going on, you have to recognize we've got some outliers.

LM: What are some examples of those outliers?

Hewitt: The explosion of fast fashion and the emergence of American consumers with a strong U.S. dollar being able to buy these goods in real time. They are helping offset maybe downturns in other parts of the economy and masking it. And that's why it'll be interesting to see how December ends, and do I see the B2B segment finish with a little bit of a lift, as people clear that inventory out maybe in preparation for recovery in 2024.

LM: While excess truckload capacity, coupled with medium-type demand, continues to impact carriers’ ability to really have pricing power. How do you see that scenario on the air cargo and ground sides? Are they similar, in terms of pricing power?

Hewitt: One of the hallmarks of our success through the pandemic—and coming out of it—has been pricing discipline. What I have observed is there are markets, that as companies have the supply chain, which commonly gets quoted as “China Plus One,” which is the other markets they can diversify from. We were well positioned and set up there and have capacity capability and with our service capability would price that at a premium. We are capitalizing on that. In the trucking industry, that probably plays a lot closer to me on some commodity lanes, where there is a lot of commercial lift, most notably being South China into the U.S. In that market, we have seen more capacity come back.

LM: In what ways?

Hewitt: All of us in the fixed world invested in capacity during the peak so we have more. There was pressure on rates to come way down, as people sought to fill their weight load factor in their capacity. We were in a good position because what with we had done, the economies of our business meant that as people needed us, we acquired or purchased expensive charter capability, or aviation capacity, to fill the demand and the need. As the market changed, the price point dropped dramatically with excess capacities on the market. What we did is shed ourselves of that excess capacity that was not owned. It was more expensive, because now the consumer wasn't going to buy it at that expensive rate. So, we let it go. And we've refocused and retrenched by building strong weight load factors on our own aviation network, and we've done that well, and we've stayed out of and also avoided getting into pricing wars to try and add growth or capacity for the sake of growth. It's better to maximize each lane, fill it up with good things and focus our energy on getting our transit times and our service back to pre-pandemic levels. We have our intra-Americas back to pre-pandemic levels, and we have Europe back to pre-pandemic levels, and we're getting tighter on Asia. That one is still probably about a day behind where we were pre-pandemic. I expect us to get there early in 2024. Our focus has been on getting the service quality and that differentiation back so that our premium price on a fixed network is warranted, because there is a service variation from consolidators who are buying excess capacity at a lower price and moving it. That's where we've seen it. It's been an interesting dynamic this year for sure.

LM: Shifting back to your customers, how were things different from a preparation perspective, in terms of DHL working with your customers and collaborating with your customers for peak as it relates to a Peak Season playbook, of sorts, if you will. Were there any differences in approach compared to the past couple of years, which were certainly unique?

Hewitt: Not really. I think our approach has always been, we recognize that during peak, everybody's volume should go up, and everybody is going to be fighting for capacity. And, so, planning early and understanding their forecasts allow us to make sure we have the space for them. And we don't need to go into things like caps or turning business away. We were able to get pretty good forecasts from our customers. I think they were optimistic but conservative so that we didn't have to overspend, in terms of bringing on the people or the equipment to manage that. We've been very clear on how we'll maintain and deliver the service around it. I don't think it changed. I think the only thing that that we saw was that while there was tremendous optimism for anybody that was operating in an e-commerce world, I think there was a little bit more uneasiness or questions on the business-to-business side on us waiting to see whether the demand lifts or not. And they weren't as bullish, I guess, as maybe the e-commerce side was.

LM: With e-commerce accounting for roughly 10% of total retail sales, have you changed things, in terms of how you serve and work with customers that are primarily e-commerce-focused?

Hewitt: Yes, we added specialists in e-commerce, particularly in the technology area and business IT front to make sure that our platforms, our connectivity, our capability integrates with marketplaces and the platforms that they go to market with and drive sales. I think the other piece would be the investments in recognition that given that the consumers are buying in a virtual world online, we need to make sure that the way we serve them from a customer service standpoint, and from a pickup and delivery standpoint, fits that model. What does that look like? Making sure we've got the technology in our vehicles to provide real-time information about where customer shipments are on route, accessible via the web, connected via text or WhatsApp platforms like our on-demand delivery, and our CS (customer service) team. What we're seeing is a conversion away from direct calls and wanting to speak to people to more chats and leveraging IVRs (interactive voice response). It's more about tailoring our service to make sure we're meeting the consumer demand where they want it. But ultimately, everybody the fastest and latest pickup time, and the earliest delivery in the shortest window and we design our network around that.

LM: With all the geopolitical tension and turmoil between the between the U.S. and China, is that a kind of an overarching concern, given the interwoven network between the U.S.? How do you how do you deal with that as such a global organization?

Hewitt: Being as global as we are, we have strong businesses in all markets, including a very large and very strong business in China. We have good relations with their government officials. We are very respectful of being neutral from a geopolitical standpoint. So, we recognize we have to operate within the laws compliantly within every country and as such, we are pro trade. We believe that globalization and the global economy benefits the people of China as much as it benefits the people of the U.S. and that when the government's look at it, that way, there isn't an interest in impacting the health and welfare of their own people. From our standpoint, we just need to keep being competitive, to continue to make sure we have infrastructure in both areas and that we have lifting capacity to flex when those markets do. As companies have looked because maybe doing business in China is more difficult, or maybe they're shutdowns, made people realize how dependent they are, we are truly stepping up and helping people whether it's Malaysia, Sri Lanka, Vietnam, Thailand, Mexico…wherever people identify as an alternate source of manufacturing and distribution, where there is a certified international specialist to help them know what they need to bring to go into that market and to build once they found good vendors there and to know that they have a trusting supply chain that can reach their market. That's the role that we play in that area.

LM: What are some things you will be focusing on in 2024?

Hewitt: As we head into 2024, I think one of the big topics on the horizon will be around sustainability. We launched our GoGreen Plus service, which is really focused on sustainable aviation fuel as the most realistic path to insetting and reducing carbon emissions and getting towards being carbo- neutral. We've had some good early success in having companies look at that and recognize that this is a great opportunity for them to start their strategy around being carbon-neutral. More and more companies are recognizing the importance of doing their part for the planet, much like we add in the fact that we've given them a great platform to do it.