FedEx Corp.’s recent decision to incorporate package size in the pricing of its ground service will result in a significant boost in shipping costs – but it could also open up competitive opportunities for the U.S. Postal Service.
FedEx surprised shippers and industry observers with the announcement that it will adopt dimensional weight pricing for all ground shipments as of Jan. 1, 2015. Up to now, it has limited that formula to packages measuring three cubic feet or greater.
“Dimensional weight pricing is a common industry practice that sets the transportation price based on package volume – the amount of space a package occupies in relation to its actual weight,” FedEx said.
The move, which mirrors the way in which FedEx prices its expedited services, will reportedly affect a third of the company’s ground shipments. The price of moving a box with 12-inch sides in a short zone, for example, will rise by about 30 percent.
“For those packages that fall into dimensional ratings, you’re going to see that surcharge kick in,” said Amine Khechfe, co-founder and general manager of Endicia, a seller of electronic postage services.
Industry observers expect UPS to follow suit, although the company has yet to make an announcement to that effect. “UPS reviews its pricing on an annual basis,” it said in a statement. “This includes base rates and accessorials. We continually evaluate our policies to remain competitive in the industry. Our focus is on being fairly compensated for the value we provide to our customers.”
Still, said Kheche, “History has shown us that the private carriers tend to mirror each other on surcharges.” Similar action by UPS will send customers scrambling for ways to rein in shipping costs, either by seeking concessions in their contracts with the two big parcel carriers, or by shifting some business to national or regional rivals.
Kheche believes the price hike will be a boon for the Postal Service. (And, by association, Endicia as well.) “This is definitely an advertisement for them,” he said. It could further solidify the Postal Service’s relationship with Amazon.com, which recently expanded its Sunday delivery service to 15 additional cities, after piloting the option in Los Angeles and New York City. Amazon is still smarting from the delivery delays that plagued UPS and FedEx during the 2013 Christmas shopping season – a problem that the Postal Service didn’t experience.
In addition, the FedEx move could accelerate Amazon’s reported plan to launch its own fleet of trucks and drivers for local deliveries. The company already offers same-day delivery of groceries with its own trucks in Southern California, San Francisco and Seattle, through its AmazonFresh service.
A migration of business to the Postal Service from FedEx and UPS was already underway before the FedEx announcement. Quoting from a recent report by the Colography Group, Kheche said that “USPS has seen 10-15% growth in small lightweight (5 pounds and under) parcel volume since 2011 where the Post Office is making the final delivery, whereas FedEx and UPS have both seen declines, giving USPS a significant share of this market.”
But Kheche also believes the price hike will benefit FedEx (and UPS, assuming it follows the move) in the end. “I’m assuming they’re going to lose some packages, but overall they will probably gain in profitability and yield per package,” he said. “In the past, we’ve seen that surcharges have been able to add to the growth and profitability of private carriers.”
The FedEx action on ground pricing comes at a time when most of the industry’s attention has been focused on developments in expedited service, especially the growth of same-day delivery. “The media are all looking at same-day as the next thing,” said Kheche, “but in the end it’s really a rounding error for carriers today.”
With the introduction of dimensional weight pricing, ground service should become an even more important source of profit for the company.
The pricing change will likely cause many shippers to reevaluate their carrier portfolios. “I would definitely say that this dimensional announcement is going to put the Postal Service in the driver’s seat,” said Kheche. Based on Endicia’s analysis, a switch to the Postal Service will likely make sense for 12-inch-cube packages of up to three pounds, and even four pounds for larger shippers.
The development comes at a crucial time for the Postal Service, which reported a net loss of nearly $1.9 billion in the second quarter of fiscal 2014. It is scrambling to make up for a huge decline in first-class mail volumes, which represent 42% of annual revenues and are expected to drop by some 4 billion pieces for the full year. Shipping and packages, by contrast, account for just 18.6% of revenues.
Recently the Postal Service has been working to boost service levels for Priority Mail, introducing free insurance, improved tracking and day-specific delivery. Together the changes are expected to generate new revenue this year of more than half a billion dollars, it said. Still, packages look to be the Postal Service’s best chance for reversing the losses that have been piling up since the coming of the internet.