As E-Commerce Increases, So Do Shipping Costs

In what’s become an annual ritual, FedEx and UPS once again announced rate increases. The latest increases average 4.9% and were effective Dec. 24 for UPS and Jan. 1 for FedEx.

In addition, a number of surcharges such as oversize, additional handing and residential delivery will go up in 2018 as well. This year will see UPS raising its Large Package and Additional Handling surcharges a second time in one year, effective in July.

What does this all mean for retailers? Higher shipping costs for sure, and the impact will be felt by those retailers with an e-commerce presence. E-commerce continues to make up a larger percentage of total retail sales. Through third quarter 2017, e-commerce represented 8.8% of total retail sales compared to 8.1% for the same period in 2016.

To make matters even worse for shippers, UPS’ dimensional weight divisor for packages less than or equal to one cubic foot in size (1,728 cubic inches) will be reduced to 139, matching FedEx. Additionally, FedEx will begin applying the dimensional weight divisor to its SmartPost product beginning in January. In other words, a lightweight package could cost a shipper the equivalent of a parcel several times its actual weight. Many e-commerce shipments fall within the 1-cubic-foot measurement and thus are negatively impacted.

Both FedEx and UPS believe that dimensional pricing is necessary to properly compensate them for handling lightweight and bulky packages that occupy an excessive amount of space aboard a ground vehicle. As e-commerce volumes continue to grow, the companies have said they handle a larger proportion of packages with those characteristics, and can no longer price all of them at their actual weight.

Oversize and additional handling surcharges will particularly sting as more customers become comfortable ordering large items like appliances, exercise equipment and mattresses online. Forrester Research anticipates that online purchases of furniture will grow at a compound annual rate of 15% from 2014 to 2019.

Other surcharges such as confirmation for a delivery will increase. Both UPS and FedEx will charge $4.75 for each confirmation, up from $4.50. An incorrect address will cost the shipper as well. UPS’ Address Correction charge will increase to $15.90 from $13.40 while FedEx will go up to $15.00 from $14.00.

Reasons for Increase
Why the increases? According to UPS and FedEx, it’s simply the cost of doing business. Each wants to be ‘fairly compensated’ for the services they provide. Along with the US Postal Service, each of these providers has witnessed an avalanche of volumes thanks to e-commerce.

Investments in technology and facilities to process packages faster — along with hiring extra transportation and temporary employees — have been made by FedEx and UPS in order to control volumes and maintain service agreements. However, despite the investments, UPS still found themselves in a pinch during the 2017 holiday season.

Adobe Analytics noted that last year’s Cyber Monday was the biggest online shopping day ever; a record $6.59 billion was spent online. As a result, UPS buckled and issued a statement: “A small percentage of packages are being delivered one to two days late as the company works to clear a Cyber Week backlog.” According to the company, UPS was able to catch up on deliveries — "We have resolved the situation that created the delays."

Business is booming for providers, but the lack of competition in the US domestic small parcel market continues to plague shippers, especially as e-commerce drives shipping volumes to record levels. UPS and FedEx have increased published rate tariffs by a minimum of 4.9% a year since 2010. The result of these rate changes project to almost a 60% cost increase for a shipper over this time.

When you add this to much larger increases to many of the surcharges — as well as changes to dimensional weight pricing policies — many customers have seen their shipping costs double over the last eight years.

Indeed, rates have climbed steadily over the years, often outpacing inflation. Managing shipping costs is essential for retailers who are already facing tight margins and stiff competition. Shippers need to research their options, whether it be a regional small parcel carrier, a same-day delivery provider or a change in service level.

Brian Broadhurst is VP of transportation solutions for Spend Management Experts, a transportation and fulfillment spend management consultancy that helps companies optimize spend across the supply chain reducing costs.