FedEx/UPS duopoly flexes muscles on shippers

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FedEx announces 4.9% rate increase for 2018; actual impacts will be larger

The biggest parcel carriers, FedEx and UPS, are laser-focused on their margins and squeezing e-commerce shippers with rate increases and surcharges, according to an industry survey by Shipware, a leading parcel and LTL consulting firm. Shipware discussed their findings in a Stifel conference call on Thursday. Although e-commerce shippers are largely committed to renegotiating their rates to lower their costs, at the same time they admit that renegotiating rates has become more difficult due to a lack of competition among parcel carriers and switching carriers has become next to impossible due to operational complexity. 

Despite their dissatisfaction with the rates they are paying, 76% of surveyed shippers agreed that it was ‘very difficult’ to switch primary carriers. In the current e-commerce shipping marketplace, it appears that the carriers hold the leverage and shippers are only fitfully discovering how they can reduce their parcel spend in the new regime of dynamic, cost-based pricing. A significant portion of shippers are resorting to extreme measures to avoid price hikes: Shipware found that 35% of shippers admitted to waiving service claims in order to avoid  peak holiday surcharges (and 13% were not even aware of peak season surcharges). 

Only 46% of shippers are changing box dimensions to help mitigate dimensional (DIM) pricing, which has become a bigger factor in parcel spend in recent years. 28.6% of shippers report switching to polybags wherever possible to package their parcels more efficiently. In dimensional pricing, a shipper’s parcel price is determined by multiplying the height, width, and length of the package and then dividing it by a dimensional divisor. Since 2011, the divisor has dropped from 194 to 139, which represents a substantial increase in price. Both UPS and FedEx have intensified their use of dimensional pricing because it helps them tie the prices their charge more directly to the costs they incur—DIM pricing has become a major driver of both carriers’ margins. Nearly every shipper, even those with high ground volumes, are being affected by DIM pricing—the only shippers avoiding major price increases are those shippers moving very heavy, very dense packages.

Shipware discovered that for online customers, the most important delivery aspects are free shipping (75.8%) and fast in-time transit (69.7%)—this is the ‘Amazon effect’ quantified. Shippers are aware of the new precedent set by Amazon Prime and reported that the most important impacts on their business were pressure to decrease time in transit (67.6%) and pressure to lower shipping charges (52.9%). It appears that shippers have a generally good idea of what delivery aspects are most important to their customers and are trying to meet expectations. 

What alternatives do shippers have to the FedEx/UPS duopoly? There are not many: the United States Postal Service (USPS) remains an option, and 39.5% of shippers also anticipate Amazon Logistics entering the carrier market in the next 2-5 years (for the record, Stifel thinks that Amazon Logistics will remain asset-light). Shippers think that the biggest advantage the USPS has over the other two major parcel carriers is the lack of accessorial charges, which they hate and can represent 20-30% of their overall parcel spend. The USPS does have some perception issues that form barriers to widespread adoption by shippers—shippers tend to think that the USPS performs worse than it actually does. 

The Stifel call also featured Dave Sullivan, a pricing analytics expert with Shipware, who spoke about the carriers’ announced rate increases and what that will actually mean for shippers. Although 4.9% annual increases have become the industry standard over the past few years, the actual impact to shippers’ parcel spend is only loosely correlated. For example, rates increase by larger margins on smaller, lighter packages, and decrease sharply as parcels become heavier. Sullivans’ analysis found that a typical package moving through UPS’s SmartPost system could see rate increases anywhere from 38.8% to 103%. Peak holiday season surcharges will also increase by more than 25% in 2018 over the 2017 rates. 

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