E-commerce sales were steadily increasing before 2020, but they absolutely exploded in the wake of COVID-19 and social distancing.
For example, online consumer spending increased by 44% between 2019 and 2020, while online sales grew from 15.8% to 21.3% of total retail sales. Although this uptick is great news for retailers on the surface, new shipping costs are eating into some of that revenue. Because e-commerce sales show no signs of slowing down, retailers must find a better way to balance shipping surcharges and overage costs.
The rapid increase in e-commerce sales places pressure on shipping and logistics companies, which now operate beyond their normal capacity. They attempt to process the influx of parcels with existing — and sometimes inadequate — infrastructure. Without enough sorting facilities, delivery vans, or personnel, the companies are working hard to meet both consumer and retailer expectations regarding delivery times. According to ShipMatrix, on-time delivery rates for the 2020 holiday season, the busiest time of year for shipping companies, were slightly better for FedEx Corp. and United Parcel Service Inc. compared with 2019.
Achieving that goal requires hiring temporary holiday workers — more than 100,000 in the case of UPS last year. But in January, 2021, parcel volume remained high even as those temporary workers' contracts ended. Companies such as UPS and FedEx have had to make a choice: scale up and hire more permanent employees, or scale back and accept fewer packages.
In what seems to be an effort to do both, these shipping giants have initiated a series of surcharges. It's the shipping companies' way of not only bringing in more revenue to increase capacity, but also slowing down the influx of parcels by weeding out retailers who refuse to pay surcharges. Before 2020, retailers could ship a certain number of product units before overage charges kicked in from logistics partners. However, with the e-commerce boom resulting from COVID-19, retailers pushed through those quota barriers, leading to higher shipping surcharges.
According to UPS, any customer that shipped more than 25,000 domestic parcels in a one-week period starting in February, 2020 must pay an extra 30 cents per parcel. Any customer who shipped more than 1,000 parcels, or 10 parcels that required additional handling or met the definition of a "large package" during that same time period, is subject to additional surcharges per package: a $3.00 "additional handing" surcharge and a $31.45 "large package" surcharge.
FedEx, on the other hand, has increased all shipping costs regardless of the number of packages being shipped by a single retailer.
Effect on Retailers
On the one hand, retailers can pay the surcharge and pass it on to consumers by increasing their shipping and handling fees. But for companies that have made free shipping an integral part of their value proposition and brand identity, this is impossible to do. They must eat the costs of the surcharges or find alternative delivery solutions.
There's also the risk that shipping problems could reflect poorly on retailers. Whether a hurried delivery driver leaves a package on the driveway instead of on the front porch, or an overwhelmed sorting facility loses a package entirely, numerous shipping-related scenarios can lead to unhappy customers. They may voice their complaints in the form of one-star reviews on the retailer's site, rather than blaming the shipping companies.
At a time when online reviews impact up to 90% of consumers' shopping habits, this isn't a risk that retailers can afford to take — especially small to medium-sized businesses that are disproportionately affected by this problem. Unlike an Amazon or Walmart, smaller retailers that ship much less likely do not have solid, long-built relationships with major delivery providers like UPS and FedEx. They can’t afford to discount the importance of delivery when it comes to acing customer service. It’s important to find carriers that are not only fast and affordable, but also trustworthy and capable of embodying your brand values.
Diversification offers stability. Retailers already know the importance of working with more than one supplier, or of cross-training employees. When a go-to supplier or star employee isn't available, they already have a backup ready to step in. So why rely on just one or two shipping companies or modes of transport?
Instead, know when to use UPS, when to use FedEx, and when to use last-mile shipping services. For example, if you haven’t shipped enough parcels to qualify for UPS's surcharges, be sure to stay under the 25,000-parcel quota. Even exceeding this quota one time could cause your shipping costs to increase. Always calculate the cost difference of using FedEx versus UPS or the United States Postal Service to ensure you're choosing the most cost-effective solution.
For local deliveries, take advantage of a last-mile shipping service, which can draw on a network of drivers to transport packages from the retail store or distribution center to the buyer's front door. By partnering with last-mile providers, you can offer same-day delivery, sometimes in as little as 90 minutes.
The good news is that it’s possible to get a better handle on extra costs. You can avoid quota surcharges for additional shipping activities by seeking assistance from knowledgeable industry partners, and through employment of additional creative methods.
Jay Sackos is vice president at Dolly.
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