We wanted to call Supply Chain Matters reader attention to recent reports indicating that parcel and ocean container carriers are placing added cost pressures for online commerce and retail providers when they can least tolerate such actions.  Once again, the logistics and transportation industry response is one of selling limited capacity, either real or orchestrated.

While the benefactors could be individual carriers, the consequences could really be a detriment to needed priorities in the months to come.

global parcel delivery cost squeeze

Background

Last week, The Wall Street Journal reported that parcel carriers UPS and FedEx were exercising capacity pricing power to extract added hefty price increases. (Paid subscription or metered view) The report specifically cited familiar sources with knowledge indicating that shoe retailer Foot Locker had received notice from longtime carrier partner UPS at the end of June that the retailer would face a hefty price increase due to increased shipping volumes related to online purchases. The gist of this report was stated as:

The pandemic has created a moment of reckoning for e-commerce carriers like FedEx and UPS with a surge in online shopping that has pushed their networks to capacity. Increased demand has also given the delivery firms a window to charge higher rates as retailers need their services more than ever.”

This report further indicates that some large shippers, more than likely those that have had to now shift the bulk of retail volume to online channels, are dealing with notice of price increases in the double-digit percentage range. Some are seeking alternative regional carriers to contract added parcel volumes with, but again, available capacity is limited.

The industry is well aware that residential deliveries are three times more expensive in delivery costs. In the past, both carriers had programs to pass residential deliveries to the U.S. Postal Service (USPS). The Trump Administration has since placed added pressure on the USPS to charge more for parcel delivery. Now, a newly appointed head of the postal agency, a Trump donor and confidant, is mandating policies that will slow down delivery cycles, in order to dramatically cut overall operating costs and possibly capacity as-well.

A further reinforcement of this situation comes from UPS’s latest report of quarterly financial performance, reporting a 13 percent increase in revenue and a $1.8 billion profit for the June-ending quarter. The carrier’s reported daily shipment volume rose 21 percent in the quarter, the highest ever recorded with a 65 percent increase in residential deliveries. The latest report to investors and analyst’s came from newly appointed UPS CEO Carol Tome΄, the prior CFO of home improvement retailer Home Depot. The CEO specifically indicated that the carrier has room to raise shipping rates for large retailers and shippers, noting that under her watch, the carrier will focus on becoming “better not bigger” in terms of future capacity expansion. Rather interesting that coming from a prior retail finance management role, that Tome΄ can now indicate that retailer’s can just pass added transportation costs on to products offered.

As we have often noted in prior commentaries related to parcel carriers, as one goes, so does the other in terms of pricing actions. We will not delve into the political dimensions of only two major parcel carriers or regional postal service policies.

The notions of capacity pricing squeeze are apparently not just limited to parcel delivery.

We noted this week that the Shanghai Containerized Freight Index, an indicator of the spot-rate per 40-foot container for ocean transport from Shanghai to the United States stands at a ten-year record high at $3,167. This is in the midst of a significant decrease in shipping volume. The rise has been attributed to the high number of blank (cancelled) sailings that ocean carrier lines have instituted since the pandemic outbreak. Not only have shipping costs risen considerably, service levels have eroded as-well, both at the height of shipping volumes of inventory planned to the final quarter’s holiday fulfillment period. Here again, shippers with volume-based contracts will likely be feeling similar pressures at contract re-negotiation or sooner.

Finally, least we mention that global air freight capacity remains limited and subject to spot rate increases, even as global airlines seek to fly more freight than passengers, but running into resistance from regional regulators, especially China.

 

What It Means

We are calling reader and supply chain management team attention to these dynamics since it is our belief that global transportation and logistics networks are going to experience even more capacity pressures in the coming months. Beyond the usual holiday fulfillment period in Q4, any added surges in coronavirus outbreak levels will likely result in consumers once again turning more to online buying for everyday food, grocery and deemed essential goods. Further outbreaks add to global-wide shipping of needed medical supplies and drugs. Finally, with bulk of our global population anticipating the development of a vaccine by either the end of this year, or early 2021, carriers know that capacity will continue to be scarce.

Amazon’s recent significant capacity breakdown is an important reminder that even with deep pockets, service levels can deteriorate rather quickly when consumers fear for their health and safety.

The pandemic brings not only significant health and safety risks, but potentially severe economic risks for regional and global-wide economies. The implications of consumers and businesses having to pass along higher transportation costs to deemed essential costs adds more economic harm and added inflationary stress to populations. That is not a good cocktail for a timely economic recovery or for investors or businesses looking to cash in on supply and demand imbalances.

 

Bob Ferrari

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