Squeezed by a relentless string of pricing hikes by integrators, a growing number of retailers and online merchants are looking for alternative options to deliver their goods to consumers. This trend intensified in the wake of the 2020 peak season, when FedEx and UPS held the line on capacity allocations, which left shippers scrambling for ways to get their goods to consumers before Christmas.
The rapid growth of e-commerce has been accompanied by a steady drumbeat of pricing increases by the integrators, piling on the pressure for shippers, who are caught between a rock and a hard place. Either they swallow the elevated costs or risk losing business.
Over the course of last year FedEx and UPS have piled on surcharges for parcel shippers, including the customary peak season surcharge. Traditionally this ends in mid-January, but this year it has remained in place indefinitely. FedEx announced in December that the peak surcharge would continue beyond January 18 this year, albeit at lowered levels. The company cited elevated traffic volumes as the reason for the decision. According to one parcel shipping consultant, the surcharge will continue until late March.
From January 18 “until further notice”, FedEx charges an additional $30 for oversize items, $3 more for parcels that require additional handling and 75 cents extra for packages in the SmartPost service, which used to be delivered by the US Postal Service before FedEx decided to take the last mile delivery in-house.
The Memphis-based firm turned the screw again in January when it announced a new surcharge of 30 cents per parcel on residential deliveries. This is due to come into effect on February 15.
In addition to those surcharges shippers are facing a general rate increase of 4.9% for this year with both FedEx and UPS. Regular customers with shipping contracts obtain more favourable rates, but pricing for them has also gone up.
In the run-up to Christmas, however, even higher payments could not secure additional space on their networks for merchants who found that their sales were exceeding expectations. Both integrators refused to take on extra traffic from clients that was beyond the volumes agreed earlier based on those shippers’ sales projections for the peak season. Mindful of schedule disruptions from excessive volumes two years ago, FedEx and UPS were anxious to control the influx of traffic into their networks.
From their vantage point, the strategy worked. For the third week of November UPS reported an on-time performance record of 96.9%. FedEx was close behind with a score of 96.6%.
Both integrators have focused increasingly on e-commerce. Both have courted small and mid-sized shippers. In the large customer segment, FedEx has aligned itself with Walmart, which named the integrator as its designated carrier for returns in December. UPS, which has seen its business with Amazon rise strongly, expanded its partnership with eBay a few months back, a step that included the integration of UPS services on the giant e-tailer’s global platform, so shippers no longer have to take the extra step of going to the UPS website to print shipping labels. eBay also receives discounts on the integrator’s second-day air and ground services.
UPS underscored its focus on the parcel sector in January when it agreed to sell its UPS Freight arm, which covers the LTL sector, to TFI for US$800 million. Management described the decision as being in line with its “better not bigger” strategy that seeks to concentrate on core activities.
For the integrators the focus on e-commerce appears to be paying dividends. The most recent quarterly results posted by FedEx in mid-December shows a 16% gain in revenues to US$20.6 billion, while operating income soared from US$554 million to US$1.47 billion. Total package revenue was up 11%, as domestic package volume rose 15% and international package numbers were up 18.6%.
For shippers the financial situation looks less rosy. According to one parcel shipping consultant, free shipping, which has come to be expected by consumers as the norm, is unsustainable for many retailers.
A study published by Capgemini Research found that the average cost of a delivery is US$10.10, but customers are only willing to pay on average US$1.40 for delivery.
The financial squeeze, coupled with the experience of insufficient delivery capacity during the peak season, is forcing retailers to look at alternatives. Parcel consultants have registered a heightened interest in using fulfillment providers and also in regional carriers to take some of retailers’ traffic. While some merchants look to shift the bulk of their deliveries to such providers, others just want to have an alternative in place if things get tight again. Either way, shippers are increasingly looking to find other options that the big parcel carriers.
Ian Putzger
