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No holiday for delivery firms as fuel prices remain elevated

Some have fuel surcharges in place, but many do not and will feel the effects of higher fuel prices

As fuel prices rise, the ability of last-mile delivery firms to either absorb those costs or pass them along to customers could be key to their survival. (Photo: Jim Allen/FreightWaves)

As fuel prices have surged in the U.S., last-mile delivery companies have been put in a precarious position. Some have tried to implement fuel surcharges to cover the added costs, while others already had surcharges in place for this scenario. But with fuel prices doubling in some areas in less than two weeks’ time, even surcharges will take time to recoup some of that increase.

In the last week, Uber (NYSE: UBER) and Lyft (NASDAQ: LYFT) have announced surcharges, and DoorDash (NYSE: DASH) has implemented a gas rewards program that will pay delivery drivers 10% back on gas purchased using a prepaid Visa debit card the company will issue.

Shipt had a rewards program in place prior to the recent run-up.

“Shipt offers a shopper perks program that connects shoppers to discounts for things like gas. We partner with GasBuddy, which allows Shipt Shoppers to access gas discounts through a gas card, and GetUpside that gives Shipt Shoppers up to 25 cents cash back per gallon on their gas purchases,” a Shipt spokesperson told Modern Shipper, adding that the company already ensures Shipt shoppers earn at least $16 per hour and more where the cost of living is higher.

FedEx and UPS have fuel surcharge programs in place for their ground units. FedEx Ground (NYSE: FDX) customers will pay a 15.25% surcharge on all shipments while UPS (NYSE: UPS) has implemented a 14.5% surcharge on ground delivery.

The reality for most last-mile delivery companies though is not as clear-cut.

“Some of Merchants’ major clients have shared that the increase in allotments for fuel will not cover the massive fuel jump and that rising fuel costs are likely to accelerate adoption of EVs,” a spokesperson for fleet management company Merchants Fleet told Modern Shipper. “Merchants advises companies to work with their fleet management partner to explore opportunities for reducing operating costs through effective life-cycle strategies.”

Cost increases

Since the run-up in fuel prices could be temporary, it is not expected to greatly impact the customers’ end cost. Daniel Sokolovsky, co-founder and CEO of middle-mile delivery firm Warp, said the average product price may see a small increase of 1% to 2%, but not as dramatic as inflation overall.

“The rich will get richer in the sense that midsize brands that are doing well with growing volumes will be able to press their logistics vendors for the lowest rates,” he said, adding that gig drivers are at a distinct disadvantage. “Last mile is a very low-margin business as it is, so their ability to push rate increases onto their customers will be make or break them. The drivers themselves aren’t in a good position to handle the higher prices, as they are still getting paid the same as before.”

Gig drivers, Sokolovsky said, will quickly jump to the platform that is offering the best reimbursement or highest pay. Regional carriers could be hurt since many did not have fuel surcharge programs in place.

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“Their models will have the most challenges because they’ll be competing for supply with the food delivery and rideshare companies that have deeper pockets,” he noted.

Adam Bryant, CEO of AxleHire, said delivery companies adding fuel surcharges is not surprising, but the end consumer shouldn’t see large increases in shipping costs.

“No delivery company is in a position to absorb the fuel price increase,” he said. “Last-mile delivery is very competitively priced, and margins in this business are low. The good news is that fuel is not the most significant part of the delivery cost structure. So if the fuel price goes up by 25%, it doesn’t mean that we have to raise prices or find another way to cover 25% of the cost. Labor is most commonly the highest delivery cost, which helps to dilute the overall impact in this instance. Given the fuel increases get amortized over the packages delivered on a route, the price increases are not as frightening as it might seem on the surface.”

Delivery firms should not be afraid to approach shippers about surcharges, as most are familiar with the concept, Bryant said.

“Shippers broadly understand that a small surcharge for package delivery will be due to fuel price increases,” he noted. “Last-mile carriers that aggregate volume to drive density are able to amortize the rise in fuel over a higher number of packages and minimize the impact to the shipper to a more nominal increase.”

Some carriers have already started to implement surcharges, explained Krish Iyer, vice president of strategic partnerships and industry relations at Auctane.

“We are beginning to see fuel surcharges baked into prices with some of the other carriers, whether it’s called a ‘usage fee’ or something else, or just higher rates altogether,” he said. “For many years, regional carriers billed themselves as being easier to work with due to the lack of surcharges [but that is changing].”

Wait and see

Guy Bloch, CEO of Bringg, said the impact will take some time to develop, especially for the smaller operators.

“We need to see it unfold over the next few weeks,” he told Modern Shipper. “I can tell you, regardless of the fuel situation, we have a shortage of drivers in the market. The shortage is there and if the drivers will now make less money per hour, that will probably push them to make different decisions on how to spend their time, but we have to see it unfold.”

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Bloch said that short-term impacts will likely be absorbed by the market, but fleets in the delivery space should not wait for the current situation to resolve itself to deal with high fuel prices.

“The fact is that today, the logistics market is going through transformation and at the same time we have the technologies to innovate,” he said. Retailers should be considering options to create more efficiency in their logistics network. That could include increasing buy online, pick up in store (BOPIS) options, ship from store, and even looking at alternative delivery options such as cargo bikes, robots and electric vehicles.

Iyer said some in the last-mile segment are learning the lessons that larger freight carriers have known for years — “it is hard to deliver packages without passing on some of the costs to your consumers.”

Options abound

Taking the alternative view, the experts Modern Shipper spoke with noted there are several options smaller fleets and independent delivery drivers can take today to mitigate the rising fuel costs.

Merchants provides life-cycle and fleet management solutions and many of its customers are in the last-mile delivery space. The company has already committed to converting large segments of its vehicle fleet to electric power, but the company suggested firms facing high fuel prices that are unable to switch to electric at this time consider other options, including replacing older vehicles with more efficient and higher mile-per-gallon vehicles, optimizing delivery routes, improving use of telematics to reduce fuel consumption and lowering idle time tolerance.

Katherine Lehman, manager of marketing demand generation for Onfleet, said route management can be a critical tool that is underutilized by many providers.

“Route management is the act of making your delivery operations as efficient as possible,” she said. “Onfleet anticipates the fuel cost saving through better optimization is between 20% and 40%. This typically involves the use of route optimization software used to ensure things are running smoothly at a street level. It does this by monitoring driver behavior and truck activity to determine that the optimized routes are being correctly followed and safe driving is being practiced.”

Lehman said, when utilized properly, route management can mitigate the impact of the fuel increase in the last-mile delivery segment.

“Fuel previously accounted for about 10% of the overall cost of delivery. Currently at roughly $4.325 per gallon of gas according to the AAA national average and about 20 miles driven per gallon, the fuel per $10 delivery is roughly $2.15 or 20%,” she noted. “With fuel prices climbing higher, this can double or even triple depending where the delivery is being placed. That means those costs get pushed back on to the shippers.”

Shipper options

The proliferation of last-mile carriers in recent years does give shippers options.

“With the advent of many more new last-mile [and middle-mile] options, shippers do have the ability to better manage the impact of these surcharges than they did in years’ past,” Iyer said, noting programs run by ShipStation, ShipWorks and even the U.S. Postal Service that offer no fuel surcharges.

One thing that likely won’t change, though, is free shipping.

“Free shipping is here to stay,” Sokolovsky said. “It should be looked at as a customer acquisition tool, a revenue generator and not a cost center. The brands that overreact to this moment in time and try to permanently adjust their approach to free shipping will lose in the long term — Amazon and Walmart aren’t slowing down.”

Bloch noted that shopping behaviors are also unlikely to change.

“The behavior and buying habits of people changed and people got comfortable buying online,” he said, but did add that if high fuel prices become the norm, he could see brands rethinking their delivery strategies.

“At the end of the day, some brands charge today for delivery,” Bloch said. “I can order food and pay extra for delivery. It’s not uncommon. I definitely see a situation here if the margins become pressing on the brands, they could change their policies on delivery and pricing.”

Iyer sees the potential for brands to set higher cart levels to access free shipping, and especially changes to returns management.

“Although many consumers expect retailers to offer free returns now, especially in apparel, we may see many retailers telling more of their consumers to simply keep the item,” Iyer said. “In these cases, the return processing cost itself is high, but the shipping costs, especially with increased fuel surcharges, might make it too challenging to process the return.”

Click for more articles by Brian Straight.

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Brian Straight

Brian Straight leads FreightWaves' Modern Shipper brand as Managing Editor. A journalism graduate of the University of Rhode Island, he has covered everything from a presidential election, to professional sports and Little League baseball, and for more than 10 years has covered trucking and logistics. Before joining FreightWaves, he was previously responsible for the editorial quality and production of Fleet Owner magazine and Brian lives in Connecticut with his wife and two kids and spends his time coaching his son’s baseball team, golfing with his daughter, and pursuing his never-ending quest to become a professional bowler. You can reach him at [email protected].