UPS flexes its muscles on shipping terms
UPS is taking a harder line on shipping fees, particularly around discounts for bigger packages.
The Wall Street Journal reports that UPS recently began to approach retailers about changing the terms of their contracts, looking for better compensation or eliminating deliveries for big-bulk items such as grills, mattresses and patio furniture. The big items clog up of conveyor belts at sorting centers, take up extra space in trucks, and require extra handling for both drivers and sorters.
In the past, those costs were waived or discounted as part of contract negotiations with the promise of heavy volume. But related shipping inefficiencies have become more problematic as e-commerce growth has surged.
After missing some holiday deliveries due to weather and last-minute order challenges in 2013, UPS earlier this year indicated that productivity suffered this past holiday as it over-prepared for the peak season.
"Though customers enjoyed high quality service, it came at a cost to UPS," said David Abney, UPS’s chief executive officer, in its fourth-quarter release. "Going forward, we will reduce operating costs and implement new pricing strategies during peak season."
On its fourth-quarter conference call, Mr. Abney stressed the company "absolutely will charge our customers more for the extra costs that we have in peak" shipping season.
Photo: UPS
On its first-quarter conference call, UPS officials further said it had chosen not to pursue some lower yielding contract renewals.
"It’s not like we just walk away," said Mr. Abney on the call. "We try to give options and we try to show the value. There are some cases that we choose not to pursue."
Retailers are already said to be facing higher shipping fees due to a shift in January by both UPS and FedEx toward using dimensional weight pricing for most parcels. While fees in the past had been based solely on weight, packages now take into account external package dimensions as well. The change is partly designed to motivate customers to adjust packaging, i.e., reduce the number of oversized boxes filled with foam surrounding much smaller items.
- UPS Plans to End Some Shipping Discounts for Holiday Season – The Wall Street Journal (sub. required)
- United Parcel Service First Quarter 2015 Conference Call – Seeking Alpha
- Dotcom Distribution CEO on Impact of DIM Weight Pricing – Multichannel Merchant
- UPS Announces Expected 4Q Results – UPS
- United Parcel Service Fourth Quarter 2015 Conference Call – Seeking Alpha
- UPS Eliminates Discounts for Large Retailers – ecommercebytes
- FedEx Announces 4.9% Rate Increase for 2015 – Multichannel Merchant
- A weighty shipping change ahead worries shippers – Internet Retailer
Discussion Questions
How do you expect e-commerce companies to react to the positions taken by Fedex and UPS? Will retailers absorb or pass on higher shipping costs to consumers this coming holiday season?
Poll
BrainTrust
Gajendra Ratnavel
CEO, L Squared Digital Signage
Dick Seesel
Principal, Retailing In Focus LLC
I figure e-commerce companies will just raise their prices a bit to cover their costs, but leave “Free Shipping” intact. It’s way too big of a motivator to change that model.
I consider this a shot across the bow at Amazon, really. No one ships more air than Amazon. No one.
Free shipping is a powerful competitive advantage online, especially during the holiday season.
I seriously doubt the retailers are going to take a hit as a result. It will be absorbed, at least partially, but probably not reflected in the direct shipping fees during the holiday season when everyone seems to be offering free shipping.
You will probably see higher shipping on sites like eBay though.
Well many of us knew this was coming, as “free shipping” really isn’t free. Amazon will try to muscle UPS to keep the gravy train rolling, but UPS is trying to get their house in order, and I believe will hold their ground on huge bulky items. God only knows what new shipping company is going to pop up promising to deliver for less than UPS, but I would be skeptical.
UPS and FedEx are the two best at what they do, and costs are going to rise. Will the online merchants eat the new costs? I doubt it, and the new “Free Delivery” will be built into the cost, hoping that the consumers won’t notice the increases.
Brick-and-mortar is watching this, and I expect some ad campaign comparing value vs. online pricing in the future. Who wins? UPS and FedEx, as online will still grow every year. Convenience costs extra, and many people will pay extra for that, so we’ll see how this goes. Amazon may have to up their Prime fees in order to keep the ball rolling, and most will continue to cough up the extra. They will add more online extras that costs almost nothing to soften the blow and most likely will not lose much business. This is pure capitalism at its finest, as the two giants must learn to find common ground and make sure online stays relevant for the mass amount of products moving across the globe.
There is no such thing as “free shipping,” no matter how aggressvely the service is pushed by e-commerce and omnichannel retailers. Somebody ends up paying for shipments that are too close to shopping deadlines like Christmas, or too bulky in the first place. So it’s understandable that the big carriers (UPS and FedEx) need to think harder about the impact on their own shareholders.
The question becomes whether retailers have any negotiating leverage against the two giant carriers, or whether they are willing to pass along costs to their customers even in the form of higher prices (so they can continue to offer “free shipping”). There will be a lot of back-and-forth between retailers and delivery companies before agreements are reached, so the initial volley by UPS and FedEx may not be the last word.
The big shipping companies are in a bind. They need to adapt to the new realities of e-commerce and turn a profit for their shareholders. This puts retailers in a bind. Consumers expect free delivery regardless of package size and weight. In true capitalistic fashion, something’s gotta give. Look for retailers to increase the free shipping threshold, like Amazon did (from $25-35), or build the higher shipping costs into the prices of products.
Two reactions to these changes:
Retailers are going to be in a tough spot on this one. To consumers, shipping is just part of pricing now. And price is still the ultimate arbiter among otherwise equivalent services and products.
Just this weekend I had to jump online to order a new temp controller for a grill. The original site I selected (proprietary item so had to be the same from all sellers) on price popped up “$12.95 shipping.” I returned to the next seller, who happened to be on Amazon, whose price was ten dollars higher but had “free shipping” (and I am not “Prime”).
In a great CRM move, the company whose site I visited first sent me a follow up email asking why I had chosen not to complete my order with them. I took the time to explain that their total cost to me was higher — despite their advertised price that drew me to the site being ten dollars less for the item — and that it is “total cost” that matters. Never heard back.
For the convenience of shopping online, UPS and FedEx will cause retailers to pass along increases and customers will accept increases.
Free is a magic word, but as noted by almost everyone in today’s comments it seldom, if ever, actually means free. The delivery company has to be paid by the shipper and they have the choice of absorbing the cost or passing it on to the consumer.
The cost typically increases as the weight increases but even light-weight packages can be expensive to ship. There is something called dimensional weight pricing meaning that even if the package is very light but bulky the shipper will be charged based on size and not weight.
Bottom line — someone has to pay the freight.
From a pragmatic perspective there really isn’t much retailers can do to reduce their shipping cost as long as the price delta between UPS and FedEx remains relatively stable.
This isn’t to suggest there is any form of price collusion between these two formidable shipping competitors. Rather, it is to acknowledge a simple fact: neither organization has ever appeared willing to take much beyond a short-term margin hit in exchange for market share.
In a market of essentially two players, it’s easy to stick to your price points and the price difference between the two companies at any given time simply isn’t enough to incent major customers to defect. When one of these giants loses a customer it is more probably related to service issues rather than prices.
Again the answer is that e-commerce companies don’t have a broad range of choices. They need shippers and neither of the two major players show any sign of blinking on price.
As to whether digital retailers will absorb or pass along costs, that’s relatively simple. Price reduction remains one of e-commerce’s most attractive appeals. Many consumers expect online prices to be lower than in-store. If delivery costs are passed through, e-commerce becomes less attractive to value shoppers and retailers run the risk of losing sales.
So the right answer seems to be that retailers will try to pass along as much of the cost burden as they can to shoppers, but that isn’t likely to make them whole in terms of negating increased shipping rates.
We get all excited and uppity about shipping costs. Rarely do we react the same to labor costs or rental increases. How do retailers absorb those? They either increase prices or decrease margins. Shipping costs for the internet guys will be the same. They either increase prices or decrease margins. Shipping for the internet retailer is really the same cost of doing business as the cost of running a brick-and-mortar store.
With wages, benefits and fuel expenses declining the reasoning for higher shipping prices will escape most of the consumers. The average man on the street does not see that fewer shipping sales increases the variable costs of goods sold necessitating an increase in sell price. With the previously mentioned reductions slow business growth and increased taxes must be a serious problem for the big guys. This is good news for the smaller delivery services looking to expand. E-commerce companies will look for additional suppliers to keep their price advantages over the brick-and-mortar stores — that you may count on.
UPS is simply speaking in terms of what most should already understand. Free shipping isn’t free. Nothing is free. It is either absorbed in the retail price, the margin of the retailer, or buried in a contract of a provider. It’s not a hard conclusion to come to that it is likely all three.
E-commerce retailers will find the balance necessary to continue to veil the free shipping concept until every retailer offers free shipping or it becomes of no value as a point of differentiation.
Consumers will like not seeing the line item of shipping on their bill until the retail price becomes too high or there is no perceived value.
We will likely see a few more sane retailers set a dollar threshold for free shipping but we could be a ways away from that yet.
If the biggest impact is on bulky items, I’m wondering what percent of shipments this represents. I’m guessing for most e-commerce companies this will have little or no impact, since I’m guessing it would be a small percentage of their transactions.
For those who deal primarily with large bulky items it will be a huge impact and may indeed drive more people to brick and mortar locations if they need to increase their product price or charge for shipping.
I see this as UPS saying: Everybody is going to pay a little more so that UPS can keep the Amazon account. If Amazon walked on UPS their ground trucks would be at 65 percent capacity. UPS is not bullying Amazon, it’s the other way.
It’s also a boomerang effect that will play out in the coming years. E-tailers have won market share by absorbing shipping costs, and consumers have been spoiled by receiving things cheaper than in-store under the illusions of free shipping.
Somewhere along the line consumers need to be educated that “convenience” has a value. Not just a cost, but a value.
Amazon and others have done a less-than-great job of transmitting why 5 to 15 percent over brick-and-mortar price is value.