DHL's American Adventure
No question, those cheeky DHL ads seem to be everywhere, from the New York City subways to the World Series. In a TV pitch, a FedEx worker goes on holiday, enjoying parasailing and golf -- only to see DHL trucks speeding parcels to their destinations. Then there's the bus stop poster that takes a swipe at UPS: "Yellow. It's the new Brown." And a print ad proclaims what DHL hopes is inevitable: "The Roman empire, the British empire, the FedEx empire. Nothing lasts forever."
In short, it's war, as DHL, the $28 billion delivery and logistics company controlled since 2002 by Deutsche Post World Net -- the privatized German postal service -- fights to become a credible alternative in the U.S. to FedEx Corp. (FDX ) and United Parcel Service Inc. (UPS ) DHL is the largest express carrier in Europe with a 40% share, and the largest international express carrier in Asia, also with 40%. Now DHL, whose U.S. base is in Plantation, Fla., is seeking to build its presence by expanding its trucking routes, creating air hubs, and advertising heavily to raise awareness of its brand in a country where it has only 7% of the air and ground parcel market.
With North American express traffic accounting for nearly half the worldwide total, no carrier with global ambitions can afford to ignore it. And DHL has set its sights on the small- and medium-size U.S. businesses that are increasingly involved in foreign trade. "It's a global economy now," says John Fellows, CEO of DHL Holdings (USA) Inc. "You have to be everywhere."
But taking on FedEx and UPS, which together command 78% of the U.S. parcel market, is a daunting task. It was only in May that the company won a bruising legal battle, when regulators turned aside challenges by FedEx and UPS that the planes DHL contracted to use here constituted illegal foreign control of an airline. Completing the integration of Airborne Inc., the Seattle carrier that merged with DHL last year, has been a massive job. And DHL's limited ground network has hurt its ability to attract domestic customers who want to cut costs by sending parcels overland rather than by air. In fact, until this year, DHL had almost no ground network in much of the Midwest and Rocky Mountain states.
The result: DHL, with $6 billion in American revenues, projects it will lose $630 million in the U.S. this year and $380 million in 2005. The company has also pushed back the break-even date for U.S. operations by a year, to 2006. Even after reaching profitability, Fellows says that DHL's return on investment is unlikely to top 4% for the next few years.
It's clearly going to take a lot more than a snappy ad campaign to turn DHL into a winner. Analysts and investors are already raising substantial doubts about whether DHL can be a viable No. 3 in the U.S. Since the mid-1990s, Deutsche Post has acquired over 100 logistics, transport, and freight-forwarding services, and expertly integrated them to build its worldwide business. DHL and Airborne were to be the crown jewels, the acquisitions that extended its grasp into the world's richest economy. But Deutsche Post "underestimated the challenges," says Raimund Saxinger, a fund manager at Frankfurt Trust in Frankfurt.
Chief among those challenges has been the lack of ground transport capability. DHL had virtually none when it was acquired by Deutsche Post, while Airborne was just getting started. Now, with high fuel prices boosting the cost of air shipment, the parcel market in the U.S. is shifting toward ground transport, which is DHL's weakest link. So DHL is investing $1.2 billion over the next three years in sorting centers, drop-off points, and other network improvements. Nationally, for instance, DHL has only 16,000 drop-off points -- about one-third FedEx' number. "It takes a lot of money and a lot of talent to build a high-quality network. That's a big hurdle," says Kurt Kuehn, senior vice-president of worldwide sales and marketing for UPS.
But DHL is determined to build out its network. "If we did not have an efficient pickup and delivery system in the U.S., it would be very tough for us to hold on to our No. 1 position in Europe and Asia," says Klaus Zumwinkel, chief executive of parent Deutsche Post and the mastermind behind its global strategy.
DHL is better situated in terms of air transport. Since 2000, it and Airborne have collectively invested $1.9 billion in the U.S. and Canada, much of it on projects such as the consolidation of air operations at its Wilmington (Ohio) hub. Construction of a West Coast hub is under way. But those outlays only begin to get DHL into the game. "
It does not close the gap," says Satish Jindel, president of transportation consultant SJ Consulting Group Inc. Over the same period, he says, FedEx and UPS each spent more than $6 billion in North America.
In addition to its $150 million media campaign, DHL is counting on improved customer service to build its business. While the company knows that it won't be easy to separate customers from their UPS drivers, it's trying to mold a more customer-friendly workforce. Analysts say that task was neglected by Airborne. In one survey, DHL now rates even lower than Airborne did on customer satisfaction. To remedy that, Fellows says he's using Starbucks Corp. (SBUX ) as a model. The coffee purveyor is known for screening workers as carefully as it screens beans. "It's training, but it's also hiring the right person," Fellows says.
Personalized service can be a winning pitch for some customers. Shoemaker Skechers USA Inc. already has shifted about a third of the business from its Manhattan Beach (Calif.) headquarters from FedEx to DHL, which it also uses for international shipments. "I've been responsible for shipping and receiving for 13 years, and it wasn't until this past year that I met my FedEx rep. DHL is constantly out here," says Michael Cardenas, Skechers' office services manager. He also praises DHL's hustle. "UPS and FedEx are more reluctant to go to remote locations. DHL will just do it. If their driver has to sit in the parking lot and fill out the air bills, he'll do it."
For now, DHL has modest goals in the U.S. The company aims just to raise market share to between 10% and 12%, Fellows says -- a statement that draws derision from competitors. "I don't think that customers will turn over their mission-critical operations to a fledgling operation whose stated goal is to become the No. 3 player," says William G. Margaritis, vice-president for investor relations at FedEx. Even if DHL doesn't break even in the U.S. by 2006, don't expect it to stop trying. With a deep-pocketed corporate parent, it can keep plugging away for years. "They can afford a U.S. problem," says analyst Markus Hesse at HVB Group in Munich. Good thing, because it looks like a problem that's not going to go away soon.
By Jack Ewing in Frankfurt and Dean Foust in Atlanta, with Michael Eidam in Atlanta