Jeff Berman, Group News Editor -- Logistics Management, 10/28/2008

PLANTATION, Fla.—When DHL and drugstore chain Walgreens announced in January they had entered into a strategic agreement, the stated goal was to more than double the number of Walgreens retail locations offering DHL Express shipping services to more than 6,500 locations by the end of this year, with more than 1,600 of those locations open 24 hours a day.

But fast forward a little more than nine months later, and it appears this alliance may be a thing of the past as soon as this Friday, October 31, according to an industry source.

DHL and Walgreens corporate officials did not return phone calls and an e-mail from LM on this development. But a Walgreens store staffer in eastern Massachusetts did confirm that the DHL-Walgreens shipping service deal was coming to an end this week, despite the fact that shipping business at this particular Walgreens location was steady, according to the employee.

When the initiative was first rolled out earlier this year, DHL said it would provide consumers and small shippers with access to its overnight, ground, and international delivery services at Walgreens locations. Each Walgreens location that offered DHL shipping services had a “DHL Shipping Spot” kiosk at its photo counter to weigh, label, and ship packages to U.S. or international locations.

Hans Hickler, former DHL Express CEO, told LM in January that the Walgreens partnership was part of the company’s retail strategy. He cited how when DHL acquired Airborne Express in 2003 it had become a company that was heavily weighted on large, multinational customers and its mix of small and midsize businesses (SMB) compared to large customers and mix of documents compared to large packages (he estimated it was a 60 percent to 40 percent split) “was not what it needed to be relevant to what our competitors had.” To counter this, Hickler said DHL realized it needed to penetrate the consumer and SMB market, and he added it needed a retail footprint—like a Walgreens—to do so.

This news comes at a time when DHL has been facing uphill battles on multiple fronts, including:

·        recent terminations of 80-to-90 percent—or hundreds—of its domestic sales force staffers (while DHL would not directly confirm these layoffs the sales staff layoffs, it told LM in an e-mail earlier this month it has made certain workforce reductions in line with the restructuring of its network and that it remains committed to the U.S. market);

·        no longer allowing shippers to create domestic accounts with DHL Express USA, which has been in effect since September 21; and

·        a report in the Financial Times Deutschland indicating that DHL’s U.S. operations “have been running worse than expected over the last few months, which is delaying its pending ten-year, $10 billion contract with UPS for airlift capacity to reduce its ground infrastructure operations costs that was first announced in May.

Under the planned terms of the pending deal, DHL and UPS agreed to develop a plan in which UPS will provide airlift for DHL Express U.S. domestic and international shipments from airport-to-airport within North America.

Other components of the restructuring include: rationalizing infrastructure by 34 percent by closing and consolidating US stations in low density and remote areas, low density areas in multiple station locations, and nearby stations in multiple station locations; reducing pickup and linehaul delivery routes by 17 and 18 percent, respectively; and expanding DHL’s partnership with the United States Postal Service, which will enable DHL to continue delivering to more rural parts of the US, among others. This deal has been the subject of recent House hearings, which have been focusing on whether it is in violation of anti-trust laws or decreases the competitive landscape in the parcel delivery arena.

And in its third quarter earnings conference call last week, UPS Chairman and Chief Executive Officer Scott Davis said that negotiations with DHL are ongoing and he hopes to have a deal completed by the end of this year.

But Davis did note that “the scope and size of the deal may be changed based on the customers’ reactions to their [DHL’s] announced restructuring and downsizing in the U.S. On top of that weakening economies are going to have an impact on them as it does everybody.” In addressing when the deal would close, Davis said both parties are negotiating in good faith at this point in time.

And John Allan, CFO of DHL’s parent company Deutsche Post World Net (DPWN), said last week on DPWN’s third quarter earnings call that UPS and DHL were making good progress and both parties were eager to reach an agreement, although it would have a “different volume picture” based on DHL’s cutbacks.

Morgan Stanley analyst William Greene wrote in a recent research note that due to anecdotal reports of extremely large volume declines at DHL it is becoming more difficult to see how DHL can deliver $1 billion in annual air revenue to UPS should the deal go through.

Doug Caldwell, executive vice president of ParcelPool, a small parcel delivery consultancy and services provider, told LM that a lot of the readjusting volumes pertaining to this deal—cited by Davis at UPS and Allan at DPWN—clearly has to do with the economy, adding that it is likely DHL will close more U.S. stations in the future and accelerate its downsizing in the U.S.

“That is logical considering the current business environment that all the parcel carriers are in,” said Caldwell. “Things are just not healthy in the domestic express industry. The fact that DHL may accelerate its downsizing efforts comes as no surprise. The question is as DHL downsizes in the U.S. and gets rid of its more remote locations, who is going to deliver those DHL packages? Will it be the USPS or UPS? ”

Allan added that DHL Express plans to retain a U.S. presence to support its global network, and he noted that DPWN will make an announcement on its U.S. restructuring plans on November 10. But an industry source told LM that it is likely that DHL Express “is rapidly winding down U.S. domestic ground service” by mid-November and also plans to exit domestic Saturday service and HazMat service by the end of January.

In an e-mail sent to Parcel Magazine regarding these potential announcements, DHL said: “We are continuing with our restructuring efforts, but as you know we cannot respond to rumor or speculation.”