DHL Express to Partner with Competitor Express Ship

Case Type: business competition, competitive response.
Consulting Firm: Bain & Company first round full time job interview.
Industry Coverage: freight delivery, shipping services.

Case Interview Question #00825: Your client DHL Express is a major air freight shipper. Originally founded in 1969 to deliver documents between San Francisco and Honolulu, the company expanded its service throughout the world by the late 1970s. Currently they operate in the United States and 60 other countries.

The client DHL Express has significant international air freight shipping market share, but a much smaller share in the U.S. domestic market. Recently, some larger domestic competitors, such as FedEx, UPS, Ship USA, and Express Ship, have entered the international market. Our client DHL Express has had only marginal profits. And with the recent new entrants into the international air freight shipping market, they are concerned that they may not be able to break even this year. What should they do?

Additional Information: to be provided to candidate after relevant questions

After the interviewee develops a clear framework and asks appropriate questions, provide them with the following Exhibits.

Exhibit 1. Client’s Market Share in domestic and international market

Exhibit 2. Client’s Cost Structure vs. Competitors

Other additional information:

* Our client DHL Express recently reduced their retail prices to compete with lower prices competitor Ship USA. However, this move did not increase their market share significantly.
* Retail prices provided in the cost structure slide are typical of U.S. rates.
* Competitor Express Ship has lower delivery costs because it has significant market share in the U.S. ground business, which our client DHL does not compete in.
* International growth is expected over the next 10 years.
* The client DHL has optimized variable costs. There are no major cost savings (direct the interviewee away from this area if they mention it).

Possible Solution:

Gross Profit calculations:

• Our client DHL: $1.20 – $0.80 – $0.30 – $0.10 = 0
• Ship USA: $1.30 – $0.60 – $0.40 – $0.10 = $0.20
• Express Ship: $1.15 – $0.70 – $0.20 – $0.10 = $0.15

It is important to recognize that our client DHL will not be profitable in the express air business because it does not have domestic scale (only 15% share), which is still key for the shipping business. Even with growth in the international business they will have significant difficulty competing, especially as new entrants come in.

Recommendation:

Attempt a merger or partnership with Express Ship. Our client could provide international shipping service and Express Ship could provide domestic services. The interviewee should address the risks associated with this merger plan.