The Economics of Same-Day Delivery

Same-day delivery

After the 2019 holiday season, both FedEx and UPS will begin offering Sunday pickup and delivery.

Both have offered extended delivery options during the holiday season for the last seven years. At the beginning of 2019, FedEx made six-day delivery standard; UPS finalized a union contract earlier this year that created a group of drivers able to work on weekends.

FedEx announced its plan to offer Sunday pickup and delivery with Ground service in May. “The average daily volume for small parcels is expected to double by 2026,” FedEx president and COO Raj Subramaniam said in a statement about the expansion. That growth in volume will come primarily from order volume in the e-commerce market — albeit not from Amazon, with whom FedEx Express recently ended its contract.

UPS joined its competitor with an announcement in July. UPS’s service will include SurePost, the carrier’s last-mile delivery partnership with the U.S. Postal Service.

“Building on an expanded relationship with the Postal Service to help deliver seven-day service to our customers makes good business sense,” UPS Chief Marketing Officer Kevin Warren said in a statement.

The addition of Sunday delivery service is a pretty transparent attempt to get ahead of Amazon, which is positioning itself to compete directly with the companies that it used to rely on for package delivery. Amazon is amassing a cargo air fleet and investing heavily in last-mile delivery technologies, many of them powered by artificial intelligence. Most of Amazon’s investments seem designed to build a fleet that can make same- and next-day deliveries.

If FedEx and UPS want to compete, they’ll need to establish themselves as players who can make those tight turnaround times. Neither company is ready to replace drivers with artificial intelligence, however. Instead, they’re planning to profit from Sunday delivery by paying drivers less.

The Economics of Sunday Delivery

Most Sunday deliveries will be residential for FedEx and UPS. Residential deliveries are, generally speaking, the most expensive type of service for carriers. Drivers have to stop at one house at a time, walk to the door, and potentially wait for a customer signature. Because drivers deliver fewer packages per hour, these deliveries cost carriers more. Carriers have introduced residential surcharges, peak season surcharges, oversize package surcharges, and a host of other fees in an effort to keep up.

To maintain their profit margins on Sundays, both are turning to the cheapest labor they have available. FedEx is using its Ground unit, who work as independent contractors and generally earn less than its staff drivers. And in 2018, UPS and its unionized workforce agreed (despite some contention) to a two-tier wage system, protecting wages for longtime workers while hiring other “combination drivers” at lower rates. That lower tier will be first to work on weekends.

This wage structure isn’t new. In 2013, the U.S. Postal Service began offering Sunday delivery exclusively for one customer — Amazon, of course. At the time, full-time mail carriers earned about $31 per hour before overtime and benefits. But to service Amazon’s Sunday deliveries, USPS began hiring “City Carrier Assistants” at $17.29 per hour. USPS’s excuse was that these drivers were servicing routes that didn’t stop at every home, the way traditional USPS routes do. But it led, understandably, to high turnover and worker dissatisfaction.

FedEx says Sunday deliveries will give its Ground workforce a chance to get more hours, which translates to more pay. UPS says the role of “combination drivers” will protect its higher-tier employees from having to work weekends. But in reality, both these strategies are about adding Sunday delivery at a Monday through Friday delivery fee without incurring Monday through Friday costs.

Turning Sunday Delivery into Same-Day Delivery

Even if UPS and FedEx are able to meet demand for Sunday delivery, they won’t have truly fulfilled customers’ rising expectations for a shorter delivery time.

Consumers expect more and more items they order to be available for home delivery. There’s demand for prescription delivery, grocery delivery, and even for deliver of flower arrangements from the local florist. And when a customer orders a perishable or time-sensitive item like those, they want to receive their order the same day or the next day.

For decades, rush delivery has been a luxury reserved for special occasions and holidays. But just as Amazon Prime normalized two-day delivery over the last decade, services like DoorDash and UberEATS are making it more and more normal to order something and receive it in a matter of hours.

Between its air fleet and its home-delivery robots, Amazon is building an infrastructure that can support delivery times of a day or less. FedEx and UPS have what is in some ways a much bigger challenge: turning a fleet designed for two to five day deliveries into one that can complete customer orders on tight timelines — yet another challenge in completing with the online retail and parcel fulfillment giant that is Amazon.

Sunday delivery suggests that both companies may rely on lower-paid workers or contract workers to provide that faster service. Both have sought to make delivery routes more efficient in other ways, too, such as partnering with retailers like Walgreens for brick and mortar package pick-up and drop-off. But to compete with Amazon, they’re going to need all those strategies and more.



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