UPS and FedEx dominate parcel delivery in the U.S. and around the world. They’re continually competing with each other to win contracts and develop new shipment services. But they’re also both racing to keep up with consumer demand for fast, low-cost, high-volume delivery services.
In some cases, that’s good for the businesses whose products they deliver. As UPS and FedEx increase delivery density, invest in new technological solutions and develop new services, businesses can promise their customers the speedy delivery they want.
But to maintain their own margins, these giants have started charging by dimensional weight and created new and ever-increasing surcharges on oversized, unauthorized and holiday-season shipments.
Businesses have seen the impact of these new pricing models on their budgets. Many shippers have made strategic changes in response — including some that carriers were hoping for.
Americans are Buying Some of Everything Online
Americans are doing more and more of their shopping online. The average customer ordered just under 15 parcels online in 2016, up from just under 10 in 2012, according to a survey by supply chain consulting firm AlixPartners LLP.
UPS and FedEx have both increased delivery density in response.
Further, carriers now deliver everything from paper towels to refrigerators. Many of these are lightweight packages that still take up a lot of room, which used to cost very little because carrier pricing was primarily based on weight.
UPS and FedEx have since made dimensional weight a common pricing mechanism, meaning those savings on lightweight packages have vanished.
Increasing volume has also led UPS and FedEx toward creative solutions. FedEx partnered with Walgreens to create package pick-up centers, reducing drivers’ workloads and saving on transportation costs. UPS put some package walkers on electric bikes. This allows them to cover more ground faster. We expect innovations like these to define the industry in 2018.
How E-commerce has Changed Consumer Sentiment
As the e-commerce market continues to expand, so do consumer expectations.
Customers expect quick shipping. Only 60 percent of buyers are willing to wait more than five days for packages to arrive, according to a survey conducted by supply chain consulting firm AlixPartners LLP in 2016. That’s down from 74 percent in 2012.
Over the same period, people who said two days was the longest they’d be willing to wait for packages grew from 4 percent to 18 percent of the market.
But despite the pressure for fast service, Americans still prefer free — by a wide margin. According to Deloitte’s 32nd Annual Holiday Survey of consumer trends conducted in 2017, 88 percent of customers told questioners they’d rather have packages shipped for free than as fast as possible.
Clearly, these twin demands challenge carriers and businesses. Carriers want to protect their bottom as labor and transportation costs are on the rise in shipping, but consumers expect free shipping. It’s a perfect recipe for passing costs onto the companies who are sending these products.
The Rise of Strategic Surcharges
UPS and FedEx have long used fees and surcharges to try to influence shipper behavior — think late fees and overweight package fees. Because carrier margins are now squeezed elsewhere, they’ve implemented more and more of these charges to influence shippers while maintaining profits.
First, carriers continue to increase dimensional weight rates to ensure they recoup costs (and more) on those bulky but lightweight packages — clothing, exercise and hobby equipment, tech accessories. Many businesses who have the resources to do so now develop custom packaging that is fitted to their products. This saves them money on dimensional weight and gives carriers more room in their trucks.
Second, carriers have strategically shrunk the definitions of oversized packages and added additional handling surcharges for smaller packages. In 2018, FedEx reduced dimensions for oversized packages by 25 percent and for additional handling surcharges by 20 percent. While some products can’t be shrunk, businesses may seek more efficient packaging to avoid these fees.
Finally, both carriers have added fees to holiday season shipping. UPS created a week-to-week fee schedule for 2018 that hikes fees the week after Thanksgiving and the week before Christmas, when volume is highest. Will this encourage shippers to move more shipments during those interim weeks? We’ll find out next year.
Whatever UPS and FedEx do will likely be imitated by the rest of the shipping industry. The changes they have already made to keep up with customer sentiment seem permanent. And since we expect these trends to continue, companies who rely on shipping need to understand how their unique shipping spend is impacted — and how they can evolve in response.
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