In my last article, I reported on recent positive economic trends as well as provided an update on the status of The Marketplace Fairness Act. This legislation provides a practical way for state, county, and local governments to collect sales tax for goods sold on the Internet. The law only applies to businesses with more than $1 million a year in annual sales. The legislation, which passed the Senate with an overwhelming majority in May 2013, is currently sitting in the House. It appears unlikely the bill will garner the votes required for passage in the House as small businesses, along with almost all Republicans are leading the opposition. Small businesses argue the costs associated with implementation of the bill as well as staying compliant will be cost prohibitive and will have a severe negative impact on small businesses. One thing is certain though – while Wall Street continues to rise and set records on a daily basis, retail growth continues to miss forecasts (The S&P 500 recoded its 8th straight daily gain on July 15, 2013, The Dow Jones Industrial Average and The S&P 500 finished at record highs for the 3rd consecutive session and The Nasdaq reached levels not seen since September 2000). This is both good news and bad news for retail shippers.

The good news is that there appears to be excess capacity in the market, which in turn drives down shipping costs for savvy retailers. On Friday, July 12, UPS released a profit warning almost two weeks before they were expected to announce Q2 2013 earnings. Overcapacity in the global air freight market, increasing customer preference for lower yielding shipping solutions, and a slowing US industrial economy drove revenue and operating profit below expectations. UPS CFO Kurt Kuehn offered further caution and lowered earnings forecasts for the remainder of 2013 as he expects downward economic conditions to persist. Many economists consider UPS and FedEx results to be solid forward looking indicators of the overall health of the global economy. 

In late June 2013, FedEx CEO Fred Smith forecast a similar dreary outlook, citing “tepid economic growth and customer preference for less costly international shipping services.” FedEx had previously announced a business realignment program, designed to significantly reduce management costs over the long term. Approximately 3,600 employees have agreed to the voluntary employee separation program and nearly 40% of the employees vacated their positions at the end of May 2013.

What is clear in these announcements are that shippers are increasingly moving premium air shipments to ground as well as moving standard ground shipments to lower cost deferred ground shipments, with the last mile delivery completed by the USPS. These services such as UPS Surepost, UPS Mail Innovations, FedEx SmartPost and DHL Global Mail offer shippers a much lower cost, mainly by avoiding costly accessorial charges such as residential and delivery area surcharges. However FedEx implemented a delivery area surcharge of $0.25 per package on all SmartPost shipments effective Monday, July 15, 2013. UPS is expected to follow suit as they have already built functionality to charge these fees in their manifesting software. Regional parcel carriers such as OnTrac, Lasership, Eastern Connection and Courier Express continue to offer excellent parcel delivery services at a very reasonable cost, putting further pricing pressure on the main parcel carriers.

The bad news for retail shippers is that while there is downward pricing pressure for parcel carriers, retail sales continue to drag. In many cases less shipment volumes lead to higher shipping costs per unit. June 2013 retail sales grew for the third consecutive month but at a paltry growth rate of 0.4% versus May, coming in at half the expected growth rate of 0.8%. Previously announced May 2013 gains were also revised down by over 15%. Auto sales and gas prices were the bright spots, however core sales, a measurement that excludes auto, gas and building materials to align with more predictable consumer spending only increased by 0.1%. Some economists believe that the elimination of the payroll tax cut is finally manifesting and consumers are spending less. Brick and mortar department stores continue to feel the pinch, posting their fifth consecutive monthly decline. While disappointing, the news is much better than in June 2012 as year over year retail sales increased by 5.7%.

We’ll continue to monitor new developments and keep you updated on trends that will impact parcel shippers and the cost of moving goods in next issue's Spend Perspectives! Enjoy the rest of your summer!