A sidebar to our previous Supply Chain Matters commentary related to Amazon’s Q2 financial performance relates to UPS, and its recent announced efforts to impose added surcharges to B2C retail shipments during select week leading-up to this year’s Christmas holiday.
In a commentary last month, we raised the specter that UPS’s added surcharge efforts would lead to added structural shifts in online business practices. The question is whether this would benefit UPS at the expense of shippers and the broader retail industry.
The motivation for the new UPS pricing actions were obvious, namely to protect or boost the carrier’s own profit margins by compensating the carrier for needs to add surge personnel and logistics capacity. UPS has communicated that such added charges will motivate retailers to plan merchandise promotions earlier in November and thus lower the need for peak staffing and augmented capacity costs. However, the open question is whether holiday consumers will change their shopping habits, especially those procrastinators who always wait until the just before the holiday to execute holiday buying decisions. Up to this point, rival FedEx has not weighed in with a similar structural surcharge.
Thus, we viewed as interesting that The Wall Street Journal ran yet another article today indicating that UPS expects most retailers to agree to the higher “necessary” surcharges. One could get the impression that the parcel transportation provider needs to reinforce the message of necessity for shippers to fall in-line with added holiday peak surcharge rates.
Online retailers are fully aware at this point, that Amazon’s model of Free Shipping has become the expected norm for consumers to finally execute their online purchase. They further comprehend that the power of Amazon is in its flexibility to accommodate online consumer buying needs even on the day before Christmas. Retailers are thus placed in another difficult position. They must compete for consumer business by matching Amazon’s or Wal-Mart’s capabilities to accommodate consumer buying preferences right-up to the actual holiday, and must find ways to absorb the added parcel transportation surcharges. Retailers with significant brick and mortar store presence can channel Free Shipping toward in-store pick-up. However, smaller specialty retailer and businesses lack such flexibilities and lack the leverage to negotiate rate flexibility with the likes of a UPS.
Thus, more-and more-specialty producers and retailers will likely evaluate placing goods on the Fulfilled by Amazon platform if not this year, next year.
The sum-total is that UPS may well find another way to sustain or grow near-term margins, but Amazon will gain even more online market influence.
Perhaps in 2018, UPS will not need added surcharges to fund its surge transportation needs since Amazon will have its network already at the ready.
Something to consider.
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