With FedEx And UPS Rate Increases Looming, Shippers Explore Their Options

The coming rate increases in ground service byFedEx and UPS have businesses scrutinizing every aspect of their parcel-shipping programs.

Both companies are preparing to introducedimensional weight pricing for all parcels in U.S. ground service — UPS on Dec. 29, 2014, and FedEx FDX -0.28% on Jan. 1, 2015. The change means that the cost of shipping any package will be based in part on the item’s volume — the amount of space it takes up on a truck. Up to now, the two carriers have limited the use of that formula to domestic ground packages measuring three cubic feet or greater, and for air and express shipments.

Depending on the zone, the change could mean an increase in shipping costs of up to 30%. It is expected to affect an estimated one-third of FedEx’s ground business.

Shippers are waking up to the implications of the pricing change. Major customers of Kewill, a provider of transportation-management software, are examining their shipments “on a product-by-product level,” said chief marketing officer Evan Puzey. Those that pack their own goods are looking at ways to minimize package size. But for others that resell items that have already been packaged by original equipment manufacturers, the options could be limited.

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“Most likely they’ll run test models on dimensional versus actual weight calculations to see what the impact’s going to be,” says Puzey. In cases where the shipping price is due to rise, they’ll attempt to renegotiate with carriers to obtain a more competitive rate.

Only the largest customers of FedEx and UPS will have the clout to wrest concessions from the carriers, however. Others will either have to absorb the increase or turn to alternative services.

The likeliest benefactor is the U.S. Postal Service, whose Priority Mail option will continue to charge a flat rate for domestic shipments of up to 70 pounds. The Postal Service has recently undertaken a major marketing push to draw business away from FedEx and UPS, providing tracking capability and free insurance, and partnering with leading e-commerce players such as Amazon.com to offer Sunday delivery in major cities.

Shippers might also turn to regional parcel carriers such as OnTrac in the western U.S., Lone Star Overnight in the Southwest, and Eastern Connection and Pitt Ohio Express in the Midwest and Northeast. “There are certainly scenarios where smaller, regional carriers will be trying to take business off [FedEx and UPS] by offering competitive pricing,” said Puzey. That’s assuming the regionals don’t follow suit with their own dimensional-pricing formulas for all packages. But it’s likely that they’ll hold the line, at least for awhile, in order to grab business from the two industry giants.

At the very least, shippers might decide to spread their business around, especially if they lack the volumes needed to get better deals from FedEx or UPS. “A lot of our customers are seeing the benefit of a multi-carrier system,” said Puzey.

With the rate change just months away, companies need to be taking a close look at their product mix and packaging procedures. They’re likely to find numerous opportunities for cutting down on materials and reducing shipment dimensions. The world of e-commerce, in particular, is rife with the use of filler materials that often require boxes several times larger than the products they contain.

Puzey said companies will have to balance the need for protecting a package’s contents with the cost of shipping overly large, lightweight boxes under dimensional pricing schemes. “I think we’ll see a lot of businesses putting stricter processes in place, to make sure they’re using the smallest possible packaging.”

UPS fully expects shippers to adopt greener packaging strategies. “The company believes that as a result of the dimensional weight pricing method, more shippers will seek to optimize their packaging practices,” it said at the time of the pricing announcement. “These efforts will reduce excess packaging materials and overall package sizes, leading to related reductions in fuel use, vehicle emissions and transportation costs.”

Yet to be determined is the impact that the rate changes will have on the pricing of items bought over the internet. Free shipping is a fixture of many e-commerce sites, but whether sellers can afford to keep offering that perk after Jan. 1 remains to be seen. Many could find themselves unable to absorb the increase, even if they stand to lose business and customer loyalty by raising prices.

Meanwhile, Amazon, eBay, Google and other major e-commerce sites might step up efforts to launch their own delivery services, which are already popping up in major cities and pose a considerable long-term threat to the major parcel carriers. Higher rates from FedEx and UPS could only serve to hasten their development.