In the winter of 2005, Amazon launched Amazon Prime as the vanguard of the fast and free e-commerce revolution. Amazon had experimented with free shipping prior to 2005, but that year was the turning point and – in many ways – was the seed for many of the trends we see today. For the next 12 years, shippers enjoyed modest general rate increases (GRIs), absolutely no holiday peak surcharges, and a powerful ability to negotiate with carriers on a playing field that looks nothing like the power dynamic of today. Such trends enabled shippers to follow Amazon’s lead, offering up fast and free shipping to their customers and establishing a new industry-wide consumer expectation. However, shippers today face challenges that threaten their ability to uphold this fast and free expectation, and these challenges won’t simply fade away once the COVID-19 pandemic is over. In fact, for some time now, shippers have been challenged to toe the line between consumer expectations and decisions that are good for their budgets.
The first indicator of change came in 2017, when FedEx and UPS introduced Holiday Peak Surcharges for various types of volume moving through their networks. The carriers reasoned these new surcharges would help mitigate the costs associated with the increased demand during the holiday months, and, in time, shippers largely accepted these surcharges as a new tool to be wielded at the contract negotiation table. Yet before this change, it was almost unheard of to impose universal costs onto shippers with as little warning as they received then in 2017. Looking back from today, it’s clear that as shippers begin to rely more and more on parcel carriers for their e-commerce volume, the power to dictate terms is slowly but surely drifting more to the carriers. To illustrate this concept, let’s use the Additional Handling surcharge during holiday peak as an example:
Figure A: Additional Handling Surcharges for Ground, Residential Delivery
Peak Season – 2017
(no peak Additional Handling surcharge)
Peak Season – 2021
Additional Handling Weight - $31.45
Additional Handling Dimensions - $21.95
Additional Handling Packaging - $19.95
(incl. $5.95 peak Additional Handling Surcharge)
Additional Handling Weight - $33
Additional Handling Dimensions - $24
Additional Handling Packaging - $22
*For Zones 5+
(incl. $6.00 peak Additional Handling Surcharge)
Looking at Figure A above, we can see that the peak season fee associated with the Additional Handling surcharge has doubled in just four years for FedEx alone – a significant cost increase unrelated to the annual freight GRIs carriers impose on top of these surcharges. We see similar increases in the cost for shippers when looking at other surcharges, such as the Large Package/ Oversize Surcharge. Let’s look at another example detailing the exponential increase in the peak season Residential surcharge:
Figure B: The Holiday Peak Season Residential Surcharge for Ground, Residential Delivery
Peak Season – 2017
$0.27 per package
Peak Season – 2021
$1.15 - $5.00 per package
$1.15 - $5.15 per package
(shippers must meet a weekly threshold to be subject to additional fee, actual rate varies by carrier and volume increase)
We can see from Figure B above that in the last four years, there is a 326% increase for UPS at minimum and an even more significant increase for FedEx shippers, as the carrier did not impose a Peak Residential surcharge until the 2020 pandemic.
Shippers around the world are not only facing triple digit percentage peak surcharge increases, but also the rising cost of goods, escalating annual rate increases, and tighter margins all around. In many cases, shippers are looking at profitability for e-commerce volume and starting to notice decreasing margins on certain groups of SKUs shipped to high zones and with specific package profiles. Alarmingly, it is also becoming more common for shippers to lose money on e-commerce sales due to the growing cost to deliver to the customer. In order to identify the problem areas, shippers need to have the ability to combine data from their carriers’ invoice and order data, working to detail exactly what is “in the box”, so to speak, that results in higher fees and overall network congestion. This process can be difficult, and typically involves special tools and knowledge. To truly identify a powerful solution that yields positive impact in your network, you may be required to collaborate among teams in non-traditional ways (such as external partners) and operate with both flexibility and modesty across all departments in the pursuit of long-term success. And while this message is not new to our industry, the past four years have highlighted persistent challenges that, while magnified by the pandemic, are not directly a result of the pandemic. To stay competitive, shippers must get creative to avoid cost and maintain service levels to customers before it is too late to address.
A Real-World Example
There is a growing schism for e-commerce shippers with brick-and-mortar stores in particular. One large national retailer with a strong store footprint stands out significantly as an important case study. Some specific SKUs were heavier and awkwardly shaped, which made them subject to an Additional Handling or Large Package surcharge anywhere from 70-90% of the time. As a result, the e-commerce profit margin for these SKUs was rapidly shrinking. Stakeholders at the retailer wanted to know whether they should: (1) force larger items to in-store pickup; (2) charge customers to ship these SKUs to their home; or (3) transition these SKUs to a slower, LTL like service at a lower cost. By creating and monitoring specific KPIs based around how parcel cost impacts SKU profitability, the stakeholders were able to access the data they needed to make cost mitigation decisions. This is just one example of how data-empowered decisions can lead to faster and goal-driven success.
So how long can shippers support “fast and free” shipping? Well, the answer is complicated. It may depend on a variety of factors, ranging from customer expectations (customers don’t expect the same things from every brand), carrier relationships (prioritize finding a partnership with your carrier), flexibility of your network approach (are you seeking regional carriers to help offset increasing delivery costs?), and how well informed you are of your shipping network’s data (what indicators do you have that something is or isn’t working?). However, we do know carriers and shippers alike are taking a harder look at margins and attempting to understand or increase overall profitability. Shippers should continue to reevaluate all their shipping policies to ensure that “fast and free" does not come at too great a profitability cost. This is particularly true for the e-commerce shipper, who has seen a deluge of traffic and demand beyond industry expectations because of the COVID-19 pandemic.
Ben Nickel is a Solutions Engineer at Green Mountain Technology (GMT), a Parcel Spend Management service provider for shippers with over 10 million parcels per year. In this role, Ben partners with customers to provide GMT’s strategic Parcel Spend Management solutions – Network Optimization, Spend Analytics, and Contract Management. He specializes in data analysis for cost savings projects in the worlds largest parcel networks.