As the clock ticks down to Dec. 25, shippers are under the gun to deliver packages to doorsteps before Christmas.
Holiday shopping, the peak retail season, is expected to reach a new high this year. Holiday retail sales in November and December are forecast to hit $679 billion, a 4 percent increase from the same period a year earlier, according to the National Retail Federation.
Shoppers are spending ever more on e-commerce. Fifty-nine percent of consumers surveyed by the federation cited the web as the most popular shopping destination this year.
The fervent web shopping bodes well for the U.S. economy, but it doesn’t come cheap. UPS and FedEx both announced rate hikes for the holiday season. The increases target the expense of delivering packages to residential neighborhoods.
“The most impactful surcharge and the one that most retailers care about this time of year is the residential surcharge,” said Dave Sullivan, director of pricing and analytics for consulting firm Shipware.
Some shippers are using “ship-to-store” options to avoid the residential surcharge, offering discounts if consumers agree to have the product shipped to their local brick-and-mortar store, Sullivan said.
UPS applied a $0.27 fee per package to ground residential shipping the weeks surrounding Black Friday and Cyber Monday. The surcharge will also apply the week before Christmas — Dec. 17 to 23.
The increase in cost is to maintain the service levels that customers expect, especially during significant volume surges, according to a UPS spokeswoman. The company projects deliveries between Black Friday and New Year’s Eve to increase 5 percent from 2016.
“UPS believes everyone should pay for the quality of service,” said Cathy Roberson, an analyst for global logistics research company Logistics Trends & Insights. “It’s costing them a lot more to ship because of the mass of volume. Profitability also has not been as high.”
“E-commerce has been both a benefit and a pain,” Roberson said.
FedEx is taking a more cautious approach to its rate strategy.
Although FedEx was expected to match the fee hikes during certain weeks in the season, it did not follow suit, said Keith Schoonmaker, an analyst for Morningstar Research.
The shipping service expects about 400 million packages to pass through its network during the season, and estimates more than double average volume on the three Mondays during peak. FedEx attributes Monday activity to online shopping over the weekends.
“FedEx is growing and a lot at the expense of UPS,” Roberson said.
FedEx did increase rates for oversized shipments and so-called nonconveyables, which are large packages that cannot automatically pass through the firm’s sorting system, Schoonmaker said. UPS also implemented similar charges.
“The volume of oversized packages moving through the FedEx Ground network during the holiday season is about 11 percent of all volume handled by FedEx Ground,” according to a FedEx spokeswoman.
These types of fees affect retailers that ship large, bulky products. “They will definitely be attempting to take advantage of mitigation strategies such as ship-to store,” Sullivan said.
In an attempt to “smooth out” the Black Friday and Cyber Monday spikes, retailers enticed buyers to do their shopping on other days, he said.
Many Black Friday sales started early, and retailers tried to push Cyber Monday purchases toward the end of the week or delay shipping product until the following Monday, he said.
But retailers could not influence buyer behavior. More than 174 million Americans shopped in stores and online from Thanksgiving holiday through Cyber Monday, according to the NRF. Black Friday and Cyber Monday also were the two most popular days for online shopping, according to the NRF.
The flurry of activity is not without help from the United States Postal Service.
“The USPS refers to the relationship with UPS and FedEx as ‘co-opetition,’ since they are both competitors, vendors and customers,” Sullivan said. Both private carriers lean on the postal service for last-mile delivery of packages that run through specially contracted programs — UPS Sure Post and FedEx Smart Post.
USPS delivered 62 percent of all residential packages in 2016. Just over 8 percent came from UPS and 13.4 percent from FedEx, according to data from Stifel Financial.
Unbeknownst to many, “it is the largest package carrier for residential deliveries,” Sullivan said.
The holiday shopping season will not mark an end to the high-fee environment. On Dec. 24, both UPS and FedEx are raising rates across the board. Most notably, ground delivery for both carries will go up 4.9 percent. USPS will implement general rate increases on Jan. 22.
The new higher rates will affect retailers immediately following Christmas.
There used to be a lull in shopping after the holidays, but the Internet never closes, Roberson said.
“People will try and get in on the after-Christmas sales, and all the returns begin that week too.
“Most of returns from retail will accumulate. Returns week is a big money maker for carriers,” she said.
As the retail eco-sphere enters the new year, the proliferation of e-commerce will only intensify. Online and other non-store sales grew 10.5 percent year-over-year in November, reflecting the growth of online shopping, according to the NRF.
“Everyone used to gear up for massive peak season, but now they will have peaks and valleys throughout the year,” Roberson said. “Eventually you won’t see much of a slowdown.”
“A lot of businesses are running their operations online too,” she said. “Between manufacturers and wholesaler or suppliers, and manufacturers have multiple suppliers. These interactions will create so many packages.”