E-commerce Shipping Costs Continue to Rise

By November 20, 2017 News

Summary

We had the pleasure to host Rob Martinez, Dave Sullivan, and Gordon Glazer from Shipware ( shipware.com) on a call this past Friday to discuss the recent annual price increase announcements from the major parcel carriers: FedEx (FDX, Hold, $216.00), UPS (UPS, Hold, $112.94), and the U.S. Postal Service (USPS). Shipware represents shippers of all sizes, helping them to save typically 10%-30% on their annual parcel spend, as it is estimated that 90% of shippers are overspending on small package, largely due to the fact that they have no benchmarking ability. As we know from following UPS and FedEx, the pricing environment has firmed in recent years, and both companies have been emphasizing margins over market share, making it even more difficult for shippers to get a good deal. Below are a few key takeaways from the call.

Key points

“Help – we’re stuck in a duopoly,” complain most small package shippers

In a recent Shipware survey of small to large parcel shippers (annual parcel spend ranged from a few millions dollars to over $100 million), across industries – from e-commerce/consumer to tech to healthcare to manufacturing – shippers feel it is more difficult today than in the past to negotiate due to the lack of competition and the fact the carriers are focused on profitability over share gains. Furthermore, 76% of the shippers surveyed said it is hard to switch carriers, mainly due to operational complexity, and 73% have not changed carriers in at least two years. Certainly one reason is that the carrier contracts usually include revenue-based incentives, making it harder to shift business, especially mid-stream. In some contracts, there is even a cash penalty (~2% of annual parcel spend) for cancelling early.

The Amazon Effect is real

Over 75% of shippers surveyed have been impacted by Amazon’s growth in e-fulfillment and logistics. This is reflected in what was found to be most important to customers – free shipping, fast transit time, and easy returns. Interestingly, when asked if they thought Amazon Logistics would really go head-to-head with FedEx and UPS, over 80% believe they will (at some point), and 65% think they will within the next five years. Our view remains that Amazon will control as much capacity as it makes sense for them to control – in an asset-light manner – but that the USPS, FedEx, and UPS will remain significant service providers (especially the USPS).

The annual rate increases impact every customer differently

If a shipper plugs in the announced average rate increase of 4.9% into its 2018 budget, it will be wrong (and may be miles off). Know your freight. For example, longer-haul air is up more than Ground-competitive short-haul air, and rates on heavier packages are seeing lower increases, which helps the carriers get down to an announced 4.9% average.

E-commerce shippers get ready 

FedEx SmartPost rates are going up January 22, 2018, as the dimensional weight (DIM) divisor is coming to all SmartPost packages to bring pricing in line with Ground and Express. This is likely to result in significant double-digit increases for most SmartPost shippers. While it was not talked about on the call, we believe DIM is coming next to LTL (FedEx Freight and UPS Freight). The companies already have dimensions on the freight and use it for costing; it’s just a matter of time before the pricing is simplified.

How to deal with higher parcel shipping costs?

Most shippers are trying to mitigate DIM pricing via contract negotiations (and the range of DIM divisors among survey participants was much larger than we expected), while 46% are changing box dimensions, 29% shifting to polybags, and 18% to on-demand customized box sizing. We would recommend shippers also look at switching modal mix – Air to Ground, Ground to SmartPost/SurePost, or other – to get the best deal based on their shipping profile. The key for shippers is understanding as much as they can about their own freight profile.

USPS is the biggest player in last-mile, but its biggest customers are FedEx, UPS, and Amazon

When asked if the USPS is an important part of carrier mix, 54% said no and 46% yes. This is better than it appears, though, as the trend has increased significantly from prior Shipware surveys – up from only ~20% responding yes a few years ago.

USPS advantage?

No accessorial charges (simplified pricing). For most shippers, 20%-30% of overall spend is in the form of “add-ons,” such as oversize fees, peak surcharges, fuel surcharges, residential delivery, etc. Shippers hate that and say they want fewer surcharges even more than better pricing.

So, why do shippers not use USPS more?

1) Pricing is simply not competitive – especially for significant shippers after factoring in discounts and incentives.

2) Hard to do business with them. Also, the perception gap is significant. The service is OK, but 64% said it is significantly worse than FedEx/UPS, and only 9% said the service is the same or better.

 

David G. Ross, CFA | (786) 257-2413 | dross@stifel.com

Bruce Chan | (786) 257-2411 | chanb@stifel.com

Austin Remey | (786) 257-2409 | remeya@stifel.com

Stifel Equity Trading Desk | (800) 424-8870

Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

All relevant disclosures and certifications appear on pages 3 – 5 of this report.

 

Investment conclusions

Of the two public U.S. parcel giants, we favor the shares of Hold-rated FedEx over those of Hold-rated UPS at current levels, due primarily to:

1) SmartPost’s DIM change in January 2018,

2) FedEx’s multi-year operating profit improvement program, 3) the UPS Teamsters negotiation in 1H18, and 4) continued positive global trade growth.

Conference call replay info (available until 12/1/17) – dial-in # (800) 332-6854, passcode 193572 Prices are as of the close, November 17, 2017.

 

Important Disclosures and Certifications

I, David G. Ross, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, David G. Ross, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Our European Policy for Managing Research Conflicts of Interest is available at www.stifel.com.

 

FedEx Corporation (FDX) as of November 17, 2017 (in USD)

For a price chart with our ratings and target price changes for FDX go to http://stifel2.bluematrix.com/sellside/Disclosures.action?ticker=FDX

 

United Parcel Service, Inc. (UPS) as of November 17, 2017 (in USD)

For a price chart with our ratings and target price changes for UPS go to http://stifel2.bluematrix.com/sellside/Disclosures.action?ticker=UPS

The rating and target price history for FedEx Corporation and United Parcel Service, Inc. and its securities prior to February 25, 2015, on the above price chart reflects the research analyst’s views under a different rating system than currently utilized at Stifel. For a description of the investment rating system previously utilized go to.www.stifel.com.

Stifel or an affiliate expects to receive or intends to seek compensation for investment banking services from FedEx Corporation and United Parcel Service, Inc. in the next 3 months.
Stifel or an affiliate is a market maker or liquidity provider in the securities of FedEx Corporation and United Parcel Service, Inc..

The equity research analyst(s) responsible for the preparation of this report receive(s) compensation based on various factors, including Stifel’s overall revenue, which includes investment banking revenue.

Our investment rating system is three tiered, defined as follows:

BUY -We expect a total return of greater than 10% over the next 12 months with total return equal to the percentage price change plus dividend yield.

HOLD -We expect a total return between -5% and 10% over the next 12 months with total return equal to the percentage price change plus dividend yield.

SELL -We expect a total return below -5% over the next 12 months with total return equal to the percentage price change plus dividend yield.

Occasionally, we use the ancillary rating of SUSPENDED (SU) to indicate a long-term suspension in rating and/or target price, and/or coverage due to applicable regulations or Stifel policies. SUSPENDED indicates the analyst is unable to determine a “reasonable basis” for rating/target price or estimates due to lack of publicly available information or the inability to quantify the publicly available information provided by the company and it is unknown when the outlook will be clarified. SUSPENDED may also be used when an analyst has left the firm.

Of the securities we rate, 49% are rated Buy, 38% are rated Hold, 2% are rated Sell and 11% are rated Suspended.

Within the last 12 months, Stifel or an affiliate has provided investment banking services for 20%, 8%, 0% and 10% of the companies whose shares are rated Buy, Hold, Sell and Suspended, respectively.

Additional Disclosures

Please visit the Research Page at www.stifel.com for the current research disclosures and respective target price methodology applicable to the companies mentioned in this publication that are within Stifel’s coverage universe. For a discussion of risks to target price please see our stand-alone company reports and notes for all stocks.

The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Stifel, or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. Past performance should not and cannot be viewed as an indicator of future performance.

As a multi-disciplined financial services firm, Stifel regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agent in private transactions.

Affiliate Disclosures

“Stifel”, includes Stifel Nicolaus & Company (“SNC”), a US broker-dealer registered with the United States Securities and Exchange Commission and the Financial Industry National Regulatory Authority and Stifel Nicolaus Europe Limited (“SNEL”), which is authorized and regulated by the Financial Conduct Authority (“FCA”), (FRN 190412) and is a member of the London Stock Exchange.

Registration of non-US Analysts: Any non-US research analyst employed by SNEL contributing to this report is not registered/qualified as a research analyst with FINRA and is not an associated person of the US broker-dealer and therefore may not be subject to FINRA Rule 2241 or NYSE Rule 472 restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account.

Country Specific and Jurisdictional Disclosures

United States: Research produced and distributed by SNEL is distributed by SNEL to “Major US Institutional Investors” as defined in Rule 15a-6 under the US Securities Exchange Act of 1934, as amended. SNC may also distribute research prepared by SNEL directly to US clients, including US clients that are not Major US Institutional Investors. In these instances, SNC accepts responsibility for the content. SNEL is a non-US broker-dealer and accordingly, any transaction by a US client in the securities discussed in the document must be effected by SNC. US clients wishing to place an order should contact their SNC representative.

Canadian Distribution: Research produced by SNEL is distributed in Canada by SNC in reliance on the international dealer exemption. This material is intended for use only by professional or institutional investors. None of the investments or investment services mentioned or described herein is available to other persons or to anyone in Canada who is not a “permitted client” as defined under applicable Canadian securities law.

UK and European Economic Area (EEA): This report is distributed in the EEA by SNEL, which is authorized and regulated in the United Kingdom by the FCA. In these instances, SNEL accepts responsibility for the content. Research produced by SNEL is not intended for use by and should not be made available to non-professional clients.

The complete preceding 12-month recommendations history related to recommendation(s) in this research report is available at https:// stifel2.bluematrix.com/sellside/MAR.action

Brunei: This document has not been delivered to, registered with or approved by the Brunei Darussalam Registrar of Companies, Registrar of International Business Companies, the Brunei Darussalam Ministry of Finance or the Autoriti Monetari Brunei Darussalam. This document and the information contained within will not be registered with any relevant Brunei Authorities under the relevant securities laws of Brunei Darussalam. The interests in the document have not been and will not be offered, transferred, delivered or sold in or from any part of Brunei Darussalam. This document and the information contained within is strictly private and confidential and is being distributed to a limited number of accredited investors, expert investors and institutional investors under the Securities Markets Order, 2013 (“Relevant Persons”) upon their request and confirmation that they fully understand that neither the document nor the information contained within have been approved or licensed by or registered with the Brunei Darussalam Registrar of Companies, Registrar of International Business Companies, the Brunei Darussalam Ministry of Finance, the Autoriti Monetari Brunei Darussalam or any other relevant governmental agencies within Brunei Darussalam. This document and the information contained within must not be acted on or relied on by persons who are not Relevant Persons. Any investment or investment activity to which the document or information contained within is only available to, and will be engaged in only with Relevant Persons.

In jurisdictions where Stifel is not already licensed or registered to trade securities, transactions will only be affected in accordance with local securities legislation which will vary from jurisdiction to jurisdiction and may require that a transaction is carried out in accordance with applicable exemptions from registration and licensing requirements. Non-US customers wishing to effect transactions should contact a representative of the Stifel entity in their regional jurisdiction except where governing law permits otherwise. US customers wishing to effect transactions should contact their US salesperson.

The recommendation contained in this report was produced at 20 November 2017 09:25EST and disseminated at 20 November 2017 09:25EST.

Additional Information Is Available Upon Request

© 2017 Stifel. This report is produced for the use of Stifel customers and may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose without the prior consent of Stifel. Stifel, Nicolaus & Company, Incorporated, One South Street, Baltimore, MD 21202.

Shipware

Author Shipware

More posts by Shipware