These past two weeks have featured some concerning news from both FedEx and UPS, news that should make all of us wonder if both of these carriers get the notion that they could upset the “golden goose” of their current growth strategies, that being their participation in the boom in online fulfillment.
Access Point Program
UPS continues in its rollout of a new Access Point program directed at alleviating unsuccessful initial attempts to deliver a package. This program requires people in certain neighborhood locations to fetch their own packages at a nearby pick-up location, such as drug store, dry cleaner or convenience store, if the initial attempt is unsuccessful. UPS claims that this new expanded program will trim costs associated with second or third delivery attempts. However, UPS has since discovered via social media, some pointed package receiver response to the program. One consumer complained of having been forced to manually lug a portable air conditioner six blocks in order to get it home. Other consumers complain of the inconvenient hours of neighborhood locations or of the specific locations of the designated pick-up points.
According to reports, UPS wants to have 8,000 Access Point locations available across the U.S. by the December peal holiday shipping point, including over 4000 existing UPS Stores. Drop-off locations themselves receive some compensation for each package, but it is described as minimal. Instead, UPS pitches merchants that they get increased foot traffic in their establishments. Thus, consumers get the added stress of a local merchant getting them to buy other goods.
The parcel carrier points to prior customer surveys indicating that consumers preferred the neighborhood drop-off, instead of having to retrieve an undelivered package at a local UPS owned facility. Consumers likely had other concerns related to packages sitting on doorsteps and subject to theft. However, the surprise with this approach is the decision to defer to drop-off after only one delivery attempt. In essence, UPS decides that it can squeeze out yet another dollar of operating cost while affording the opportunity to deliver more single delivery attempt packages. We speculate the program could also cut down on the need for some augmented delivery help during the peak of the holiday season.
One effect of Access Point could be online consumers favoring those combination brick and mortar and online retailers who offer a free pickup in local store fulfillment option. Independent online retailers such as Amazon, EBay, Wayfair and others will thus not be overly pleased.
Added Fuel Surcharge
And then there is the latest announcement of an added fuel surcharge from both FedEx and UPS, at the same time that the cost of crude and energy supplies hover at unprecedented lows. According to The Wall Street Journal, both carriers’ fuel costs are down 35 percent from year earlier periods. That equates to a substantial level of operating cost savings.
FedEx’s added surcharge takes effect on November 2, just-in-time to take advantage of this year’s holiday surge period. The global carrier had already increased its fuel surcharge index in February of this year.
In its defense, FedEx indicates that the latest added surcharge is required as a response to heavier packages and a rise in residential deliveries. Yet, both FedEx and UPS instituted new dimensional pricing schemes this year that have boosted revenues.
Shipper response has naturally been less than positive, especially online retailers who know that free shipping is one of the prime determinants for online shoppers to hit the Buy button. Earlier in the year, both carriers had decoupled fuel-surcharge index changes from base rate increases, now exposing more shippers with contracts to more unforeseen shipping costs and fees associated to fuel surcharges and added package centered fees. For the upcoming holiday season that is just about to begin, the unforeseen shipping costs could spell the difference in needed profitability for online retailers. This is particularly sensitive to those online retailers who are still dealing with bloated inventory overhang brought about by last year’s U.S. West Coast ports debacle.
The National Retail Federation indicated this week that it expects retail sales to rise 3.7 percent this holiday season, less than the 4.1 percent gain incurred last year, as sluggish U.S. job growth and other economic factors continue to weigh on consumer spending. Online sales are forecasted to increase from 6 to as much as 8 percent, compared to 5.8 percent last year, with the assumption that more shoppers shift their purchases to the Web. That compares with online sales growth of 5.8 percent in 2014. NRF forecasts are typically optimistic when first issued.
This momentum in online sales could well be dampened by the latest attempts of major parcel carriers to boost their short-term margins and profitability. Online retailers will either pass these added costs on to consumers by modifying free shipping practices or they will elect to absorb them, taking potential hits to their margins. In essence, parcel carriers run the risk of impacting the “golden goose” of their current growth which is the rising tide of online sales and fulfillment.
This scenario opens the door for new industry disruptors, either large online retailers, or other transportation services providers to be the beneficiaries. As we echoed in previous commentaries, the United States Postal Service has become one of Amazon’s prime delivery partners in parcel delivery. There are specific reasons why, and most relate to shipping costs. Amazon’s ongoing deployment of automatic package sortation facilities bring that online retailer much closer to last-mile delivery partnerships that can bypass the current dominant parcel delivery firms.
Once again, the pressures and zeal for short-term financial performance to satisfy equity markets runs the risk for compromising the core mission of supply chain’s purpose in servicing end customer needs.
We want to hear from readers. Are parcel carrier’s pushing too far in dampening online fulfillment?