One of the best — and sometimes the worst — things about the parcel shipping industry is that change is inevitable. Whether the economy is up or down, there is excess capacity or no available capacity. No matter if the carrier’s performance has been stellar or lacking, a consistent cost increase will occur each year (although this may vary slightly based on the factors listed above). However, as with many other predictable things in life and in business, the carrier’s General Rate Increase (GRI) will occur each year.
The state of the economy significantly affects costs, specifically carrier contract procurement events. This is closely tied to parcel volume demand and the available capacity of carriers. Parcel list rate costs always go up. However, the openness of carriers to cost concessions and other contract negotiable items depends on whether they need more volume or are at capacity with their current book of business.
In this regard, the parcel industry operates like any other supply-and-demand economy. The more available capacity, the more volume the carriers want. When capacity is over-extended as it was during parts of 2020 and all of 2021, the carriers do not want additional volume unless it ensures higher profits from those shipments. This greatly affects their openness to discussions during parcel contract events.
To reiterate:
1. List carrier rates will go up every year, regardless of external factors.
2. Carrier capacity significantly influences how carriers approach contract procurement events.
Factors Influencing Carrier Contract Procurement (Beyond Capacity)
Carrier capacity is not the only factor that can make a significant difference to how carriers approach contract procurement events, but it is probably the most common and widespread. The attractiveness of a specific shipper’s packages and shipping characteristics can also make a large impact. For example, carriers may also consider the percentage of residential vs. commercial packages, density of both pick-up and destination locations, percentage of express vs. ground vs. economy shipping services normally chosen by the shipper, and number of odd or larger size packages the shipper normally ships (just to name a few.)
If we take a quick look back at a few years prior to 2020, carriers were mostly keeping up yearly growth in parcel shipments for their capacity. Contract compromises were relatively equal with most discussions focused on managing peak volumes and allocations. Overall, both sides were able to balance their priorities in a fairly amicable way.
By mid-2020, parcel volumes soared, and carrier capacity was overwhelmed. The supply and demand imbalance shifted the advantage to carriers, who could demand increases and extra fees without a lot of leverage to fight it from the shippers. Carriers focused on growing profit margins while shippers felt a little taken advantage of from a parcel contract perspective.
By 2022, the surge in parcel volumes had subsided, and the carrier’s capacity had caught up with the volume demands. With capacity no longer being an issue, carriers sought more volume. This shift led to carriers being more open to shippers’ requests for cost concessions. However, the carriers couldn’t just cut costs at the request of the shippers without taking huge declines in their margins, which would have been unacceptable to their stockholders.
In 2023 and into 2024, we have seen the carriers and shippers engage in much more open dialogues about contracts and pricing. However, most of the cost concessions the carriers agreed to have been quickly followed by announced service guide changes and fuel index adjustment to help the carriers re-coup and maintain their current margins.
What’s On the Horizon for Parcel Shipping?
Looking at the year ahead, I expect the situation to remain similar to 2024. I don’t expect an outright “price war” from the major carriers, as they can’t afford that with their commitments to Wall Street and their stockholders. However, I do expect the carriers to find ways to incentivize the shippers to stay with or move volume over to them.
Additionally, there are also looming changes at the USPS that are making them it and more like the Big Two carriers. The Postal Service is getting better consistency in its service and on-time delivery and strategically making it harder for other carriers to use them as a last-mile carrier only. Specifically, USPS has a distinct advantage on very low-priced/small shipments (e.g., less than one-pound packages) due to its mail service.
Additionally, OnTrac (formed by the merger of LaserShip and OnTrac) now claims to cover 70% of US households and seemingly continues to expand coverage on a regular basis. Tack on the niche and smaller regional carriers, and there is an excess of capacity currently. Ultimately, my expectation is that the carrier contract events will continue to be like 2024. Shippers are going to expect some kind of relief from the contracts they signed two or three years ago.
And beyond? Every time I hear these words together, I think nostalgically about the 1995 Toy Story movie and Buzz Lightyear’s phrase, “to infinity and beyond.” We have a hard time predicting what parcel shipping will look like a year or two down the road — much less “and beyond.” Parcel shipping, at least for the foreseeable future, is not a commodity. Therefore, there are too many variables for blanket statements to resonate with accuracy for each specific contract and situation.
For at least the next three years, it seems that the market and contract expectations will likely stay the same unless there is a major disruption, such as another event like 2020 that causes a surge in “shop from home” behavior, or Amazon deciding to remove all restrictions and become a full carrier. These two events would affect capacity in very different ways, which would alter the landscape of parcel contract procurement events.
Setting Up for Success – No Matter What the Future Holds
- Know where your contract stands.
- Fully understand your costs – are they driven primarily by your base rates, accessorial fees, or fuel?
- What trends are you seeing? Are you receiving a lot of penalty fees associated with size or weight? Are you fulfilling orders from optimal origin locations?
- Work with a trusted third party who can give you some insights into your contract and identify opportunities for improvement.
- Have this trusted advisor also review your network and find places where you are not shipping optimally. These changes can be made outside of a contract event but will help set you up for a better discussion with carriers going forward.
Whatever the future holds, one thing is certain: changes in parcel shipping are inevitable. Green Mountain is here to help you navigate the upcoming changes in 2025 (and beyond) and create a world-class parcel network. Let us guide you to the top of the shipping summit.
Rick Miller is a Director of Strategic Solutions at Green Mountain, having joined the company in 2015. Rick oversees a group of manager teams, providing best-in-class Parcel Spend Management solutions for large parcel shipper clients. He also oversees the Advisory Services team, responsible for keeping up with parcel market trends and insights as well as providing parcel contract pricing advice to all Green Mountain clients (representing more than $12B in annual parcel spend).
This article originally appeared in the January/February, 2025 issue of PARCEL.
