The small parcel market is growing its market share every year. Why? Because everything is trending toward a direct-to-consumer (B2C) model. You’ve already noticed once-crowded malls closing shops as flowing streams of shoppers have run dry. Brick-and-mortar stores have less traffic every day because customers prefer to browse from the comfort of their homes. As more transactions occur at the B2C level, carriers are finding themselves responsible for a huge increase in small parcel shipments. The way they respond will affect every package you send.
How will carriers meet the demand?
The easiest way to answer this question is to look at the carriers’ sensitivities. What drives up their costs, and how are they adapting to handle the rising tide of e-commerce? Find the answers, and you’ll get an idea of what’s coming. First, let’s understand what carriers want.
The ideal package for most small parcel carriers is a small, heavy package going to a business plaza in a busy part of town. Since time is money — especially in our industry — carriers save big when shipments are clustered together. It’s cheaper for carriers because a typical commercial delivery route has clustered drop-off sites, more stops per mile, and more packages per delivery.
Meanwhile, residential routes are spread out and rarely have more than a parcel or two to drop off per stop. Which one is better for carrier revenues? This is where you see a big shift due to e-commerce —more parcels are being sent to residential addresses, and carriers are experiencing margin reduction. This is where you can expect carriers to focus on margin improvement.
Announced Rate Increases vs. Hidden Surcharges
UPS just announced next year’s general rate increase (GRI), and FedEx is soon to follow. As usual, UPS said they anticipate a “4.9% average rate increase.” But that doesn’t mean every parcel’s rate will increase by 4.9%. What it means is that the average will increase by that much. I crunched the numbers and found a 5.5% increase on a shirt sent to a Zone 2 customer but only a 3.5% increase on a desk sent to Zone 8. And that’s just the base rate we’re talking about—what will happen with fees and surcharges?
Look Out for Accessorial Fees
If there’s one thing I could have bet on, it’s that carriers would increase accessorial charges in 2017. I was right—UPS already announced several increases that will hit hard at B2C e-commerce, including higher residential surcharges, and delivery area and extended delivery area surcharges. What about fuel surcharges and the FedEx fees? Expect them all to go up.
Factor in the Peak Season Differential
Carriers have some difficulty anticipating holiday demand, thanks to e-commerce. Do you remember two winters ago when top carriers failed to keep up with demand? Or last winter when they were over-staffed in anticipation? So do they.
In another swipe at the e-retail market, carriers are likely to either increase peak-season surcharges (or remove discounts), expand the peak-season timeframe, or both. It’s difficult to predict exactly what will happen, but you can count on carriers revisiting seasonal fees.
Creative New Modes of Delivery
Carriers will also look to increase revenues by cutting costs on their end. They’ll find creative new delivery models, make tweaks to existing protocols, and fine-tune to shave seconds and feet off their routes. For example, they might incentivize customers to pick up shipments at their local dry cleaner, allowing them to use an urban-like delivery model while charging rural (residential)-like fees.
How do I prepare?
Now that you have an idea of what the carriers will do, you can adjust your shipping model to push back. For example, offer incentives to customers so they pick up their merchandise at your brick-and-mortar store (ex. “pick up your suit onsite and get a free tie!”). This may reduce costs and drive foot traffic that would otherwise be non-existent. Or, you can prepare thoroughly by revisiting contracts, analyzing trends to see if you can get better rates by sticking to one carrier or by using several. Whichever route you take, ensure that you are auditing your shipments and assessing your shipping data. This will reveal historical surcharge adjustments, thereby allowing you to anticipate and mitigate future adjustments imposed by the carriers.
I don’t have a crystal ball, but if there’s one thing my experience tells me is absolutely certain, it’s this: a lot of increases are coming, and they will be targeted toward e-retailers like you.
Shaun Rothwell (Founder and CEO, iDrive Logistics) is the small parcel industry’s leading data and cost model expert. With 23 years of experience in the small parcel and logistics industry, Shaun has helped thousands of companies optimize supply chains and reduce shipping costs. Visit iDriveLogistics.com for resources on optimizing costs, or click here to access a complimentary worksheet that will help road-map your cost reduction efforts. To find out more about how cost-modeling can help you prepare for the coming rate changes, contact iDrive Logistics at email@example.com or call 888.797.0929.