2022 was a year of rapid change for parcel shippers. So was 2021 and 2020. Now, shippers are turning their attention from what has happened to what will happen next.
The winds of change aren’t done in 2023. Inflation is still high, and FedEx/UPS are feeling the heat. 2023 will see the highest shipping rates on record, with an average increase of 6.9% from both carriers. However, the actual impact on shippers will be in the double digits.
Shippers must be prepared for economic and operational challenges, which can impact sales and profits.
To predict 2023’s greatest threats and opportunities for shippers, our data science team dug into approximately $20B in transportation data we’ve collected. Here are the trends, what it means for 2023, and how shippers can adapt and overcome this year.
Shipping Demand Is Normalizing
Much has been said about declining shipping volumes. Since April 2022, shipping volume is down nearly seven percent compared to the same span a year before. FedEx has seen a 9.6% decrease, and UPS a 3.4% decrease.
While carriers may be presenting this as a sign of an economic downturn, our data indicates that rather than a shocking slowdown, the reduced volume is more of a normalization back to pre-pandemic levels. While it may be a decrease from 2021, volumes are still well above where they were in 2020.
This view aligns with data from the International Monetary Fund that indicates that while the latest share of online spending is still higher than pre-COVID levels, it’s only 0.6% higher than the projected growth trend for e-commerce before the pandemic.
On-Time Delivery Performance Is Improving
COVID-related challenges and surging e-commerce demand combined to produce historic lows in on-time delivery and performance in early 2022. FedEx’s performance ratings declined to 56.3% in February 2022. However, they’ve improved considerably, hovering around 85% since October 2022. UPS’s on-time performance has consistently been higher than FedEx’s, but they still struggled to meet their standard performance levels. In May 2022, their on-time performance dropped to 81.5%. As of December, it’s back to 97.6%. FedEx’s performance ratings dropped from 83% in December 2020 to 57% by February 2021. Demand normalization is a key factor in the significant performance improvements.
Accessorials Continue to Be Targets for Rate Increases
The 6.9% GRI only scratches the surface of rising costs. From 2020 to 2023, accessorial and surcharge fees increased 15% to 30%. For many of our clients, this has produced actual year-over-year rate increases in the double digits.
Disproportionately large accessorial fee increases show us that both carriers are making efficiency a top priority. Packages that are shipped to remote locations or require additional handling are not efficient, which makes them less lucrative. Rather than absorbing those costs, carriers are passing them back to shippers. Carriers are making it clear that if it’s not small or lightweight, it’s not efficient for them to ship.
Examples of this include a 20.25% UPS Large Package fee increase from 2020 to 2023 and a 17.7% increase to FedEx AHS Packaging charges.
UPS and FedEx Are Facing Labor Challenges
The UPS-Teamsters contract, the largest collective bargaining agreement in North America, is set to expire on July 31, 2023. The result of negotiations could have a major impact on UPS and its clients. Inflation and supply chain labor constraints have given Teamsters more bargaining power than they’ve had in the past, and those leading negotiations have threatened to strike if an agreement isn’t reached by August 1, 2023.
Meanwhile, FedEx is facing its own challenges. They’ve missed quarterly targets, and independent contractors (who make up most of their ground network) have complained that fuel costs, fleet maintenance, and other inflationary pressures have made it unprofitable to continue delivering for FedEx under their current agreements.
Potential strikes are on the table for segments of both major carriers’ labor forces.
Different economic indicators conflict on whether or not a recession is coming, but the short-term outlook signals that the global economy is rapidly weakening. Even if the US avoids a recession, we’ll likely see a significant slowdown of economic growth in 2023.
Consumers may be wary of spending on non-essentials. Rising shipping costs may deter customers from making purchases or push them to buy more in-store.
How Shippers Can Adapt in 2023
Improving on-time performance and normalizing package volumes should make some parts of a shipper’s life easier in 2023. They can feel more confident that carriers will meet their shipping demands and that the shipping timelines they provide to customers will be accurate.
At the same time, these positives are countered with concerns over skyrocketing shipping prices, labor shortages, fuel prices, and a limited choice of national carriers. Meanwhile, consumers still expect fast transit times at low costs. Meeting these expectations while absorbing higher shipping costs may leave some shippers with an unprofitable business model.
Here are 4 strategies to prevent that:
- Diversify your carrier mix
The days of relying on a single carrier are over. Building a mix of carriers reduces risk and can help lower costs. LaserShip-OnTrac’s new transcontinental expands their footprint to 30 US states. A litany of other regional carrier options exist, and more and more diversification opportunities arise each year.
- Optimize your distribution network
Shippers must look for new solutions, such as partnerships with fulfillment centers, encouraging pick-up from brick-and-mortar stores, and evaluating and optimizing their distribution network to ensure packages are shipped from the best locations. Understanding trends in what you’re shipping where, and storing those products in the right locations, can help reduce transit times and costs by limiting the need to pay for faster service types.
- Eliminate package inefficiencies
With each carrier’s GRI targeting inefficient shipments, avoiding oversize and dimensional weight charges is critical to reducing shipping costs. Additionally, optimized package sizes can save money in packaging material costs while reducing your carbon footprint.
- View your carrier as an ally
Your carrier reps are your partners. When you’re successful, they’re successful. They might not be as flexible with discounts as they were in the past, but they may have other ideas. If you arm yourself with data about where you’re getting hit with high fees, plus ways you're improving operations to be a more efficient partner for them, the more likely it is they’ll work with you to find the best solution for each party.
Data Is Key in 2023
If the pandemic taught us anything, it’s that planning for worst-case scenarios is critical. Should an economic downturn come, shippers must avoid paying the most they ever have for shipping services, especially if they’re fundamental to your business.
Luckily, there are more cost-reduction opportunities than you might think, but you need data to know where to make meaningful improvements and what pain points to address with your carriers. With data analysis, smart shippers can turn uncertainty into opportunity in 2023.
Caleb Nelson is Chief Growth Officer at Sifted.
This article originally appeared in the January/February, 2023 issue of PARCEL.