This is an excerpt from Thursday’s (5/27) Point of Sale retail supply chain newsletter sponsored by ArcBest.
FedEx remains inundated with elevated parcel volume stemming from continued online shopping resulting in longer delivery times, service blunders and upset customers. According to ShipMatrix, from March through mid-April, about 87% of FedEx Ground shipments arrived on time, compared with 95% for the similar service at UPS.
Convey, a delivery-tracking software company, also reports parcel carrier service data and estimates FedEx’s deliveries were 71% on time in April, compared with UPS at 88% and the U.S. Postal Service at 90%.
FedEx has said it is accelerating plans to increase its network capacity and is recruiting new workers to add capacity and improve service. However, the company said it expects Ground capacity to remain constrained until the end of the calendar year and is giving priority to its small and midsize business segment along with its premium home-delivery product.
But not every company can hire and train at Amazon’s speed. FedEx has implemented surcharges time and time again throughout the pandemic, and FDX executives even referred to peak surcharges as “the new normal” last summer. “As we plan for peak of fiscal year 2022, our peak surcharges will continue to play a critical role,” FedEx Chief Marketing and Communications Officer Brie Carere said in March.
FedEx will increase three peak surcharges on Express and Ground shipments beginning June 21, the carrier announced last week. Affected surcharges include an additional handling surcharge, a residential delivery surcharge and a peak surcharge on Ground Economy. Oversized peak surcharges remain the same. FedEx cited high volumes and tight capacity, stemming from the pandemic, as reasons to increase the surcharges.
What’s it matter? There are a few factors that make these most recent surcharges noteworthy. First and foremost, they’re big. FedEx gave customers a month’s notice, but overnight will double the surcharge for residential delivery. For brands heavily reliant on e-commerce, the residential surcharge doubling to 60 cents per package will have a direct impact on margins.
Second, the competition is likely to follow. Like Target, Walmart and Best Buy rolling out promos on Prime Day, UPS could follow FDX with similar increases. The two companies have moved in tandem with implementing peak surcharges over the past year.
Lastly, alternatives to the big boys are limited. Indeed, there are many regional parcel carriers that provide as-good-if-not-better service in a confined area as FedEx or UPS. But regional parcel operators only hold 5-7% of the market, according to regional carrier LSO CEO Dick Metzler. Despite being many orders of magnitude smaller, regional parcel carriers can provide high-quality service in their coverage areas.
Nate Skiver, the founder of consulting firm LPF Spend Management, said carrier diversification is one tactic to combat the peak surcharges, particularly for medium to large shippers. “By moving volume to alternate carriers, shippers can either reduce expense or remain below volume thresholds which trigger FedEx and UPS peak surcharges,” Skiver told RetailDive.
Final thoughts. The volume thresholds implemented throughout 2020 by FedEx and UPS caused great pain among smaller shippers but have been a boon for regional parcel networks. “We’ve gained a lot of customers that either FedEx or UPS capped them and raised prices significantly,” Metzler told me during this week’s Great Quarter, Guys. He referenced one customer he’d gained this year that had been with FedEx for 30 years, but just before peak season last year FedEx “asked them to get rid of 30% of their volume, and not very politely.”
Metzler has been in this industry a long time and believes FedEx and UPS have “created a visceral reaction” with their decisions in 2020. He spoke to conversations he’s had with customers that say if they could figure out how to punish FedEx and UPS for 2020, they would. “But they can’t, so it’s just a reality.”
Metzler did question whether FedEx and UPS had “a day of reckoning coming,” but candidly added, “not from the regionals, because we’re only 5-7% of the market.” He said it’s a matter of when, not if, Amazon gets into direct competition with FedEx and UPS. “That becomes a different story.”
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