The COVID-19 outbreak created an entirely new world for the small package industry, especially when it comes to the hidden costs that come with annual increases in parcel rates.
Not long ago parcel carriers were transporting 20-25 percent of their deliveries to residential addresses. By 2019, that number increased to about 50 percent. This year, 70 percent of all parcel carrier movements involve a residential address. The shift is largely driven by a consumer who is shopping from home either by choice, necessity or both.
According to the Department of Commerce, U.S. retail e-commerce sales for the second quarter of 2020 were $211.5 billion, an increase of 31.8 percent over the first quarter of the year. During the second quarter of 2019, e-commerce sales increased just 12 percent over the same period in 2018.
These are some telling numbers, and they paint a picture of a shifting consumer purchasing environment that’s pulling the major parcel carriers right along with it. For example, UPS saw its residential delivery volume increase 65 percent during the second quarter. This is just one of several carriers being asked to absorb and handle volume increases unlike anything their networks have ever experienced.
Here’s what shippers can expect on the parcel shipping front as 2020 winds down and the holiday season kicks into full speed.
2021 Parcel Rates: FedEx
FedEx Express (Domestic, U.S. Export and U.S. Import), FedEx Ground, and FedEx Home Delivery shipping rates will increase by an average of 4.9 percent. FedEx has increased these rates 4.9 percent every year since 2007. FedEx Freight will increase rates by an average of 5.9 percent.
These are a sampling of the changes becoming effective Jan. 4, 2021:
- Institute a 6 percent late fee to U.S. FedEx Express and FedEx Ground customers who don’t pay their invoice within their agreed upon payment terms. UPS implemented this fee in 2003.
- New $16 Additional Handling Fee for packages where dimensions are greater than 105 inches in combined length plus girth.
- Additional handling charge for weight increased 6.25 percent to $25.50.
- Additional handling charge for packaging increase 7.7 percent to $14.
- DAS for Home Delivery is 7.5 percent from $4 to $4.30.
- Oversize charge for Home Delivery has increased 8.3 percent from $120 to $130.
- Residential Delivery charge for Home Delivery charge increased 8.75 percent from $4 to $4.35.
- The ground minimum package charge (zone 2, 1 pound list rate) has increased by 6.44 percent to $8.76.
- 2Day and Express Saver (3 day) shipments will take larger increases.
- Longer zones have larger increases than shorter zones for Express services.
- Surcharges have increased by more than the announced 4.9 percent for the ones most commonly applied.
Even though the GRI is 4.9 percent your true rate increase will be somewhere between 4.9 percent and 8 percent depending on usage of these additional services. This is the type of analysis Transportation Insight provides to our clients. Every year a GRI report is generated for our clients to aid in understanding the impact these rates will have on their transportation spend.
When Peak Season Lasts All Year
Carriers typically experience peak season about six weeks a year. Because of COVID-19 carriers have been running at peak season pace for several months straight. There’s never been this level of capacity utilization in the small package network, and it’s clear that carriers weren’t ready for it. As a result, the massive increase created management difficulties for the carriers which, in turn, implemented COVID-19 surcharges that create new cost management challenges for shippers.
These charges went into effect in the U.S. during the first quarter of the year, with UPS and FedEx creating a peak season operating plan for spring and summer (to handle the demand of home delivery while simultaneously experiencing the collapse of their commercial delivery volume). This created major problems: commercial deliveries are traditionally carriers’ most profitable and have been reduced to a fraction of their “normal” levels.
Tracking the cost impact of these surcharges isn’t always straightforward. UPS created a $0.30 charge for residential and SurePost packages while also raising by $31.45 a surcharge on difficult-to-handle parcels (e.g., extra-large boxes). FedEx imposed its own surcharges on large shippers and added a $0.30 charge for express and ground residential deliveries, and a $0.40 addition for SmartPost deliveries.
Navigating the New Gauntlet
With COVID still impacting the shipping environment, carriers rolled out holiday peak season surcharges. For 2020, these charges will be broad-based and targeted at the shippers that more significantly impact the parcel carriers’ networks.
Charges for UPS will range from $1, $2, and $3 for ground residential and SurePost packages. These charges will begin Nov. 15 and continue through Jan. 16, 2021. UPS is also tacking on an additional handling charge of $5 per package, a large package surcharge of $50, and an over-max-limit of $250. These charges will be in effect through Jan. 16.
FedEx began its holiday peak season surcharges of $4.90 on Oct. 5 for packages needing additional handling. Oversized package incur a $52.50 surcharge and unauthorized packages cost an additional $350. These rates will be in effect until Jan. 17. In addition, FedEx’s residential ground packages incur surcharges capped at $4 per package, while residential express shipment surcharges are $5. The latter charges are both based on specific formulas.
The U.S. Postal Service (USPS) will implement its own peak season surcharges beginning Oct. 18 and running through Dec. 27. The fees still need to receive regulatory approval, but we expect them to be passed. The USPS fees will be applied per package and will pertain to all commercial shippers.
For the first time, we’re also seeing small package regional carriers implementing surcharges. Because these fees are based on formulas and difficult to compute, planning for, managing, reporting and auditing the surcharges is difficult. Unfortunately, the combination of COVID-19 and an e-commerce boom overturned the parcel industry’s apple cart, and the change will be forever felt as parcel shippers navigate this new gauntlet.
For most companies, speed is the most important supply chain deliverable. They’re looking to move volume to the end consumer to achieve speed at an acceptable price point. We’re also seeing many companies:
- Exploring opportunities for faster growth or service into specific markets.
- Going direct to consumers
- Pivoting to maintain Amazon Prime designations by complying with requirements taking effect in February.
Managing these complexities on your own has become a major headache for parcel shippers – especially when logistics management isn’t your core business. Not prepared to make long-term commitments in technology, infrastructure, and employees, more companies are turning to third-party logistics providers (3PLs) to move quickly and affordably in this customer-centric business world.
Third-party fulfillment allows companies to ramp up quickly to meet demand. It also creates a more elastic fulfillment environment that can be scaled up or down, depending on the volume of freight that’s moving through the operation. A 3PL will also help you lay out a master plan in advance, and then adjust accordingly as rate hikes, surcharges, and other variables come into play.
In light of the rising costs of parcel shipping—and the myriad surcharges that went into effect in 2020—the biggest questions that shippers are asking themselves right now are: Where should I place my inventory? And, what SKUs should I be stocking in order to meet customer demand? The companies that find the right balance between these two points will then be the ones that maintain profitability through this uncertainty…and beyond.For live insight from our transportation industry experts, join our webinar on October 22 at noon. Part of our Supply Chain Masters Digital Event Series, this SME Roundtable delivers actionable information you can use to improve your transportation cost control and supply chain performance.