In a previous Supply Chain Matters commentary we questioned whether newly announced surcharge and standard rate hikes among the major parcel carriers would impact their business models that have so much reliance on the continued growth of B2B/B2C online commerce. As we enter the full blown kickoff of the 2015 holiday surge fulfillment period, both Fedex and UPS have provided further important data regarding expected volumes and perhaps why rates were hiked as aggressively as they were.
In conjunction with its financial earnings report today, UPS third quarter results reportedly missed Wall Street estimates as a result of a reported decline in overall ground shipments. According to business media reports, revenues were further impacted by lower fuel surcharges and the negative effects of foreign currency. Of more concern, UPS executives pointed to a slowing industrial production as now impacting overall B2B shipment volumes.
In our Supply Chain Matters Newsletter released this weekend, we also pointed to a disturbing decline in overall global supply chain activity which is rapidly approaching contraction. This morning, noted CNBC stock analyst Jim Cramer went so far as to declare that recession has occurred in the manufacturing sector.
Reflecting on the upcoming holiday surge, UPS forecasted an incremental 10 percent increase in package volumes over that experienced in last year’s holiday period. Waiting further on UPS is that its pilots have authorized a work stoppage vote at an undetermined time, no doubt timed for maximum pressure and uncertainty for the coming surge. UPS executives have downplayed the threat citing ongoing negotiations and reminding investors that a work stoppage is subject to the Railroad Security Act.
Earlier this week, FedEx forecasted an incremental 12.4 percent increase in package volumes in the period between the Black Friday and Christmas holidays. The carrier further indicated that it is planning for three spikes in volume, coming on Cyber Monday, and the first two Mondays in December.
The picture is now getting clearer as to why the major parcel carriers elected to again boost fuel surcharges in time for the holiday surge and to increase rates in 2016. They had little choice since economic forces are impacting network infrastructure business models.
All the chips are on growth in B2C online fulfillment both this year and in the future. That is significant.
Despite a muted first-half of retail sales, the National Retail Federation (NRF) has predicted that retail sales in the November-December period will increase 3.7 percent to $630.5 billion. Online sales are forecasted to increase 6-8 percent to $105 billion, yet the NRF points to trends of a more prudent consumer. NRF’s recent Consumer Shopping survey found nearly half (46.1 percent) of holiday shopping will be conducted online, up from 44.4 percent last year and the highest recorded since NRF first surveyed holiday shopping intent in 2006. For the 14th year in a row, NRF’s holiday spending survey found that approximately 40 percent of holiday shoppers say they begin their holiday shopping before Halloween, while 41.5 percent say they begin their holiday shopping in November, and 18.7 will begin sometime in December. That trend was reflected in 2014 when a majority of online shopping had completed by mid-December. Thus, retailers will be concentrating online promotional efforts now and through November and parcel carriers will experience network surges in November.
The Black Friday period has never been more important for online retailers as well as to parcel carriers and retail supply chain teams. There remains retail inventory overhang from last year’s U.S. West Coast port debacle not to mention financially distressed China suppliers who have offered more attractive pricing of holiday-focused goods.
Yet, we wonder aloud how consumers will respond to higher shipping charges, or whether online retailers will elect to absorb increased shipping costs or seek alternative delivery models. The Free Shipping option and Amazon’s Prime program will be important factors in whether online retailers meet their margin and profitability goals, and indeed whether major parcel carriers meet their profitability goals.
The takeaway for B2C focused supply chain teams will be a requirement for robust, proactive inventory management and very strong ties with online marketing and merchandising teams, as well as parcel carriers. Similar to last year, online retailers will need to accurately forecast expected daily shipment volumes or risk being locked-out bt parcel carriers whose networks might reach peak capacity.
As we further pointed out in our previous commentary, the rising costs of logistics and transportation are now important factors in insuring required business profitability. All forms of predictive or prescriptive trending of expected online shipment volume will be important determinants to assessing whether online fulfillment activity is tracking to plan and whether margin and profitability goals will be met.