Photo: Fedex
Last-mile costs keep piling up
While the escalating costs of sending goods across the ocean have created headlines, continued rate hikes and fees from FedEx and UPS are more quietly continuing to increase the cost of last-mile delivery.
FedEx on Sept. 20 said it plans to increase shipping rates an average of 5.9 percent, effective at the start of 2022. The rate hike marked the first time in eight years that FedEx or UPS has strayed above annual increases of 4.9 percent.
The jump reflects inflationary pressures and the carrier’s pricing power. “The continued constrained capacity in both the U.S. domestic and international markets has led to a very favorable pricing environment,” said Brie Carere, EVP, FedEx’s chief marketing and communications officer, on a quarterly call.
UPS is expected to announce a similar 2022 rate increase in coming weeks as the two carriers have mimicked each other’s pricing moves for at least a decade.
FedEx and UPS have been regularly adding surcharges and other fees as online delivery has remained elevated since the start of the pandemic. Both recently announced surcharges through the upcoming holiday season due to expected continued strains on capacity.
FedEx and UPS are prioritizing more profitable shipments from small- and medium-size businesses. Larger e-commerce shippers that have historically won bigger shipping discounts are seeing their rates rise as carriers look to both increase revenue as well as free up capacity.
A Wall Street Journal article noted that some e-commerce players are using fees to offset rising costs. Fanatics is charging a $1.99 handling fee to cover warehousing and packaging costs.
Some shipments are being diverted to regional carriers, though capacity is limited. Some can be shifted to the U.S. Postal Service (USPS) although the agency is also steadily raising rates and just announced plans to slow deliveries. The Journal article said eliminating free shipping offers may be on the table given the cost pressures.
“It’s a real dilemma,” John Haber, a president of parcel consulting at Transportation Insight, told the WSJ, “because you have to compete with Amazon and Amazon is not going to stop offering free shipping.”
- Shipping Rates to Increase for FedEx Express, FedEx Ground, and FedEx Freight Services – FedEx
- FedEx Corporation (FDX) Q1 2022 Earnings Call Transcript – The Motley Fool
- FedEx, UPS Rate Rises Are Making Online Shopping More Expensive – The Wall Street Journal
- Peak surcharges and fees for U.S. Express and Ground services and Ground International – FedEx
- USPS to slow down some mail delivery starting Friday – CNN
- U.S. Postal Service Announces Proposed Temporary Rate Adjustments for 2021 Peak Holiday Season – U.S. Postal Service
- Service Alerts – U.S. Postal Service
Discussion Questions
DISCUSSION QUESTIONS: Are the climbing rates and fees from shipping carriers a temporary or long-term problem for online sellers and e-commerce profitability? What steps do you see retailers and consumer-direct brands taking to mitigate cost pressures?
Poll
Loading …BrainTrust
Melissa Minkow
Director, Retail Strategy, CI&T
Ken Lonyai
Consultant, Strategist, Tech Innovator, UX Evangelist
Shipping costs and supply chain delays are a long-term problem. Retailers can’t continue to absorb the higher cost to ship products for free and we are likely to see more retailers adding a handling fee or raising their prices slightly. Amazon and other member clubs that offer free shipping can increase their membership fees slightly to help offset the higher shipping costs.
Gas prices are up. The cost of labor is up. Vehicle prices are up. Vehicle maintance costs are up. So, yes, carriers are going to push up rates – especially at a time when demand for their services is extremely high. The decision for retailers is whether to pass across these shipping cost increases to the consumer and, if they do, whether to do so in part or in whole. My view is that there will need to be more realism in the costs consumers pay for delivery – this is a correction that has long been needed, but now it has become more critical. However retailers will mitigate this by pushing alternative services such as collection from store and giving consumers options over delivery speed. No one is immune from this, but retailers that run their own logistics – such as Amazon – have more control and flexibility.
Cost of shipping, like almost any other service in a free-market, competitive environment will rise and fall until it finds a stable point for a while, until some other disruption occurs. Not surprising. Not unexpected.
We need to pay people a living wage. What we are seeing is the result of supply and demand. Drivers, warehouse workers, and store associates are leaving for literally greener fields, so the delivery infrastructure is feeling the crunch of workers fleeing for higher-paying options.
Only the giants like Amazon and Walmart have any sort of leverage regarding shipping costs. The USPS just announced its latest feature combo: slower snail mail and more expensive last-mile delivery.
This is a long-term problem. Delivery costs are not likely to go down, and drones only offer an alternative for lighter items.
Retailers would be smart to refocus their ROI equation on inventory accuracy via RFID technology and greater control closer to the consumer via MFCs. At least they’ll be able to pack and ship from the most advantageous locations and know what they actually have in stock, and where.
As I see it, this was inevitable. And — as we know — what goes up never goes down. With the explosion in e-commerce, shipping has become a battleground and like the airlines, there are only a few major players and they have the power. If things like marketplaces can garner some efficiencies with the shipping companies, retailers and consumer-direct brands would be smart to focus energy there. Otherwise, it looks like the only options are to take a hit on margin or pass the costs onto the consumer.
This furthers the advantage Amazon built for themselves with Prime Air and their own trucks, which, unless you are Walmart (maybe) is impossible for retailers to compete with. The best strategy going forward is starting to look like Target’s: ship from store and, when possible, do it yourself. It would be interesting to play out a cost analysis using Lyft or Uber or your own drivers vs UPS/FedEx, etc. It could be a wash, and therefore leverage. One thing’s for sure though, with constantly rising rates you better start testing ideas like that NOW rather than simply transferring cost to consumers, which would give Amazon another advantage.
This is a long-term industry issue, but many retailers are treating it with short-term fixes. Consumers won’t keep buying with brands that continually up their prices to cover shipping costs. We’ve started to see some retailers get creative here via vertical integration – acquiring shipping startups or reserving their own cargo planes. More of those types of solutions, plus a sustainability-centered mindset (e.g. more optimized distribution routing) will be crucial to solving this problem long-term.
Free shipping has become table stakes for online sellers. But there is no such thing – the costs have to be accounted for somewhere. As those costs rise they will become harder to ignore – for shippers and shoppers both.
This could be a question or conversation we have every year. Prices go up! And sometimes they go down. It’s that simple.
A company can’t stay in business if it loses money on every sale. That goes for the shipping companies, too. And when they raise their prices it could impact how retailers, especially e-commerce retailers, charge for merchandise that can include “free shipping.” Spoiler alert: It’s not really free shipping! The cost of the free shipping is built into the price of the merchandise. But you knew that.
Retailers and DTC brands will have to raise shipping rates and/or raise prices on their products to absorb the continued increases on the logistics side. Amazon is not immune as their Whole Foods business added an additional delivery fee just announced the other day. Will this end soon? The optimist in me would love to say yes, but pragmatic realism points in the opposite direction. There are too many market dynamics that underpin this vicious cycle, and one, in particular, has been highlighted in the article. UPS and FedEx try very hard to keep their annual price increases between 2 percent and 3.5 percent. When we see rates of 5.9 percent or higher, it’s a reflection of something bigger happening in the world. Unfortunately, I think we’re looking at continued pricing pressure for at least another 18-24 months.
Ever since the Teamsters’ strike of 1997, both UPS and FedEx have annually raised rates — and with the introduction of the “fuel surcharge” after 9/11 (that has nothing to do with the price of fuel and also only goes in one direction), the real rate hikes for smaller consumer items and home deliveries have been more in the +/-5% range. Even if inflationary pressures ease in 2022, we’ll still be looking at this same press release next fall.
It seems that any efficiencies that vendors have realized over the past two decades from e-commerce, automation, and outsourcing have all gone into more and more ridiculous free shipping offers that everyone has to play along with. Looks like the chickens have finally come home to roost.
It’s absolutely bizarre that in the chaotic, competitive last mile market we find ourselves in, the USPS can both raise rates AND slow down deliveries. While private enterprise can continue to offer free delivery (not really free) and ever speedier delivery. There’s no emoji for that level of bizarre.
The “last mile” has always been a problem for online merchants. COVID-19 has certainly exacerbated this issue. According to McKinsey, the average company can expect to lose 45 percent of one year’s earnings over the next decade due to supply chain disruption.
Going forward, the challenge is for online retailers to develop non-UPS or FedEx alternatives, such as drop boxes, pick up at c-stores, etc. They need to develop the online equivalent of BOPIS.
Over the next decade inflation and rising costs — inclusive of last-mile — are less problematic due to the net productivity effects of technology. However in the short to medium term, for companies without pricing power, the accelerating rate of change for inflation, rising commodity and labor costs is extremely painful as these seriously erode company margins and threaten future viability. Pass-through of increasing prices in the form of minimum order size, one-time or subscription fees, and reducing labor content and working capital needs to be acted on quickly for retailers to survive the margin pressures over the next one to two years.
I just came back from a trade show and this was the topic from all vendors. Many vendors used to include freight and shipping in the cost of an item, but a great majority can no longer do that due to large increases in shipping rates.
The convenience of working/shopping from home with residential deliveries will eventually taper off a bit as workers return to places of business. Long-term strategies should focus on the meaning of convenience as it evolves with the workforce. BOPIS and curbside pick-up may be a more secure and efficient strategy in forming consumer shopping patterns for now and for the future.
Long-term effect — I can’t recall when UPS and FedEx ever reduced their shipping rates. Demand has been growing at over 21% CAGR YOY for parcel delivery since 2014. Companies like Walmart, Target, Home Depot et al have been implementing internal logistics that include last mile delivery options for some time. Walmart’s GoLocal is a prime example. Amazon of course has continued developing its delivery capabilities, surpassing even FedEx in parcel count.
Retailers will need to work through different ways of localization, drive more store traffic, or build their own delivery logistics to avoid paying shipping companies. Someone will be paying for shipping — at the retailer, shipper, or shopper levels — that’s not changing anytime soon.
At what point will they kill the golden goose? The delivery companies have a very strong position right now but if the costs continue to rise at some point the pricing of online sales will be so high customers will reject them. The belief that this is a totally elastic pricing market is false. Customers will not pay over the odds for long. At the least it will slow the growth, which is good for bricks and mortar retail. At worst it will start to turn the tide.
This was a deferred problem that’s finally come to light in the guise of inflation, pandemic driven employment, and supply chain issues. Regardless, e-commerce is going to slow–at least slow its growth rate, as the honeymoon around free shipping closes.
The windfall brick and mortar has hoped for is coming, but the net net won’t amount to much as online sales are impacted.
“Both” is the answer, as in:
And the response so far seems to be to make even more outlandish promises.
Those Moses-like people you used to see carrying signs saying “REPENT”… I think this is what they were talking about!