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.
Athletic footwear retailer sharpens assortments
Coinciding with its mission to better manage inventories, Finish Line is updating its merchandising processes.
Eager to tighten its planning strategies, Finish Line, which was managing its operation of 950 locations and online sites through spreadsheet-based solutions, engaged with a solution provider and reviewed multiple potential consulting partners. The retailer also selected Columbus Consulting to advise the retailer throughout the two-phase project.
The first phase, completed this past October, encompassed all aspects of merchandise financial planning, including strategic planning, preseason financial planning, in-season forecasting and open-to-buy management. Upgrading these solutions and processes centralizes data and provides Finish Line with one version of the truth, enabling better communication across the organization.
The second phase of the project, scheduled to be completed in the spring, includes store planning and grading, key item planning and assortment strategy. These new capabilities will allow Finish Line to plan deeper in assortment, better control logistics and profitability, increase visibility across the business, and improve its merchandise presentation and assortment across stores, according to the retailer.
“We hit the ground running with the implementation of the new technology solutions, and we are taking important steps to update our merchandising processes,” said Brad Eckhart, senior VP, planning and allocation, Finish Line.
Finish Line was attracted to Columbus Consulting’s experience in the industry and familiarity with the technology. “This plays a critical role in our success as we move away from our current spreadsheet solutions and evolve Finish Line’s technology capabilities,” he said.
“The implementation of a merchandise financial planning system is the first step in a multi-phased merchandising systems roadmap,” Eckhart added. “Ultimately these technology improvements and new processes will sharpen Finish Line’s focus on our customers and lay the foundation for our ultimate goal of assortment plans by location.”
How Retailers Can Have ‘Many Happy Returns’
Holiday season 2017 has wrapped up, and early reports indicate there was a bow on top for retailers this year. As all presents have been opened, consumers have started heading back to the store or post office to return unwanted gifts and other merchandise, and now the question is whether an influx of returns, especially if not handled in the right way, might unravel that bow for retailers.
It’s predicted that U.S. consumers will return 13% of purchases this holiday season. Managing the flood of returns effectively and in a cost-efficient way will be critical to closing out a jolly holiday season, but it won’t be easy. Returns, and especially online returns, can wreak havoc on bottom lines.
How can retailers avoid a looming logistical mess this year?
The three types of returns, and their cost to retailers
Basically, there are three options retailers can offer to consumers regarding returns: return to the store, return to a distribution center (DC) or return to a third-party logistics (3PL) company. These three channels have varying costs and processing times to handle a return.
Returns in-store are usually the cheapest option for retailers, with a $3 variable cost per return, according to AlixPartners estimates. It’s also offers retailers same-day product processing for resale, the quickest of all options. Plus, it seems to be what online customers want, with 60% of online shoppers preferring to return items to a store when given a chance according to one survey.
But relying entirely on store returns isn’t optimal all the time. Processing returns eats up a lot of store-personnel resources and takes away from their actually selling. It also can have a big impact on resale margins because items that customers return — such as items which that particular store didn’t originally sell — often wind up lumped on the sale rack. In-store returns can also have a negative impact on customer experience, especially if a return transaction takes a long time or is unpleasant.
Then there’s the return-to-DC option. According to our research, this channel is generally twice as costly to retailers per return than the in-store channel, with a $6 average cost per return. Plus, when an item is returned to a DC, it takes about four days until it’s available for resale, according to our research.
While returns to a DC allow stores to focus on their core business of selling, there are staffing-cost downsides to using DCs. Retailers bear the burden of flexing up or down on staff at DCs during any selling season — and that can be a tough challenge, especially during the holidays. No retailer wants to be drowning in thousands of return packages when it would rather be gearing up for the next selling season.
The final option is to, effectively, pass the buck on returns and have shoppers return by mail to a 3PL. That option can offer fewer headaches, but can also mean more bucks literally get passed out of the retailer’s cash register. According to our research, this approach costs retailers an average variable cost of $8 per return — and generally takes six days before a product is available for resale.
Still, depending on the situation, 3PLs can seem like a big, red “easy button” for retailers because the option offers the most flexibility for retailers and the least distraction, despite the higher cost and processing time. Using 3PLs is easy for customers too — all they have to do is box up the sweaters they don’t want and send them to a 3PL. The 3PL can quickly check to make sure the products are in good shape, sort them, and send them to the retailer for resale.
Take a hybrid approach to returns
Processing returns may be a pain, but there are ways for it to cause less heartburn — not to mention also a great opportunity to increase sales and build a loyal customer base. To avoid post-holiday indigestion, we recommend taking a hybrid approach that combines the best of in-store returns and 3PL-type returns. That approach includes:
1. Make the return process easy and painless for shoppers. That means retailers should think about offering policies like zero shipping fees for returns, which should be budgeted into the returns cost model.
2. In general, use the in-store return model, but make sure sales associates are well-trained, easily accessible to consumers and using simple workflows to manage returns. Since about 70% of shoppers buy something else when returning their stuff in a store, retailers may even want to incentivize store returns by offering a special discount or perk.
3. Use 3PLs to scale up around major selling seasons — and use them, rather than retailers’ own DCs, for online returns. Many, if not most, of our clients who use 3PLs say this frees up resources to focus on what they are best at: selling. However, make sure the 3PLs deliver up to the brand’s standards.
Bottom line: Not being too rigid about one returns option vs. another, or tied to what was used in the past, can help retailers have more “many happy returns” in the future.