The small parcel transportation and delivery industry, under the lead of United Parcel Service (UPS), once again elected to add yet another business challenge to online retailers. Only this time, Supply Chain Matters anticipates structural shifts in online business practices likely to occur because of this move.
This week UPS announced a series of delivery surcharges timed to the busiest online fulfillment period in the United States, that being the period between the Black Friday shopping and Christmas holiday period of 2017. UPS plans to impose a 27-cent per package surcharge on all ground packages destined to U.S. residential addresses between the period of November 19 and December 2, a period that includes the Black Friday and Cyber Monday online and in-store shopping holidays. Likewise, surcharges will be imposed for the period that includes December 17 through December 23, the traditional last-minute holiday shopping surge period. For this period, the surcharge amounts to an extra 27-cents for each ground shipment, 81 cents for each next-day air, and 97 cents for two or three-day delivery. Again, these surcharges only apply to package deliveries to residential addresses, as opposed to business.
UPS further announced added dimensional package surcharges of an additional $24 to the existing surcharge of $70 for packages weighing more than 150 pounds or exceeding certain large package dimensions. Further included is a peak surcharge of $249 per package for “overmax” packages.
The motivation for the new UPS pricing actions is obvious, to protect or boost the carrier’s own profit margins by compensating the carrier for needs to add surge personnel and logistics capacity. More than likely, rival FedEx will also initiate similar pricing actions. The effect for online retailers is yet another assault on their business margins, already stressed by the increased cost factors for online fulfillment needs. While dominant online retailers such as Amazon and Wal-Mart have the financial and market power to buffer such increases with sheer market influence, that may not be the case for all other online retailers.
An obvious behavior continually reinforced by online consumers is their reluctance to pay for shipping, and thus Free Shipping remains the ultimate determinant for online shopping cart execution. We therefore anticipate that the effects of this week’s UPS pricing actions will be added motivations by many online retailers to either permanently change online buying behaviors or explore added parcel delivery alternatives. That most likely will include planning holiday related online merchandise promotions even earlier than Black Friday. Online retailers with brick and mortar presence will follow Wal-Mart’s lead in incenting online customers with free shipping or added discounts to pick-up online purchases at local retail outlets or receiving lockers. The U.S. Postal Service will likely see added package volumes during the busiest holiday periods, with the added risk that the service will not be equipped to handle such a surge or be able to recover added costs. Third-party logistics services firms, who are already marshaling resources and services to handle the need to support online purchases of larger-sized goods such as appliances, furniture and like will also benefit with increased holiday volumes, as well as opportunities to negotiate added services to online retailers. Like China, we could well observe the formation of independent parcel delivery entrepreneurs similar to an Uber or Lyft type of on-demand transportation, supported by advanced routing and dispatching technology.
In other words, if the intent of small parcel carriers was to somehow permanently change online buying trends, they will indeed get their wish. However, as what occurred last year when Amazon demonstrated the prowess to implement its own parcel transportation and last-mile fulfillment capabilities, online retailers will have little choice but to explore other more cost-effective options to protect their margins. That will open the door to new industry disruptors.
From our Supply Chain Matters lens, the takeaway from this latest industry development is the continuing industry dynamics as to which business entity, or which supply chain or customer fulfillment partner stands to gain higher margins and profits from the ongoing explosion of online commerce. It involves the realities that consumers have become patterned to shop for the best online deals offering free or reduced shipping, regardless of time-period. Same or next day delivery is becoming part of this expectation.
At the same time, there is the reality that online fulfillment shifts the cost burdens from that of operating physical stores, where consumers take-home their purchased merchandise, to an online era that requires ever more expensive pick, pack, and parcel transportation costs. The forces related to financial gain ultimately lead to added structural changes and to new winners and losers in the weeks and months to come.
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