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By May 21, 2014 News

Web Shoppers Beware: FedEx to Charge by Package Size

‘Dimensional’ Pricing to Jolt E-Commerce, Especially if UPS Follows Suit

By
Laura Stevens
May 7,

2014

12:09 p.m. ET

By one estimate, the new ‘dimensional weight pricing’ rates at FedEx could mean the price of shipping toilet paper—something light weight but large (and frequently bought online)—could rise more than 40% REUTERS

 

FedEx Corp. is raising prices on more than a third of its ground shipments, those bulky but light-weight packages carrying popular items like diapers, sweaters and shoes, in a surprise move expected to shake up the world of e-commerce.

Instead of charging by weight alone, all packages will now be priced according to size. The big question now is whether United Parcel Service will follow the pricing move. Many analysts think it will. The two companies have historically matched price increases rather than seize the chance for a competitive advantage.

If so, that would likely greatly affect bulky items like toilet paper and diapers, which many people have delivered on a regular basis, as well as Zappos.com shoes, which ship for free, including free returns. While it isn’t clear whether consumers or retailers would pay the extra shipping, the change would likely curtail current free and easy online shopping habits: Shoe shoppers are encouraged to buy multiple pairs, keep what fits and return the rest. Avid Web shoppers do the same with sweaters, dresses, and jackets (think J. Crew, Banana Republic, Loft, Macy’s).

Friday evening, at the bottom of an announcement mostly about higher fuel surcharges, FedEx added—in a little-noticed coda—that it planned to apply “dimensional weight pricing” to all ground shipments starting in January. Prior to this, only the biggest packages— measuring three cubic feet or more—were priced this way.

“The joy ride is over,” said Satish Jindel, president of ShipMatrix Inc., a developer of shipment-tracking and analysis software.

Under the new rate system the price of shipping a five-pound, 30-pack of double-roll toilet paper the shortest distance (between 0-150 miles) would increase 42%, according to Mr. Jindel.

The change in pricing would dramatically affect either online shoppers or retailers or both. Someone will have to swallow the estimated hundreds of millions of dollars in extra shipping costs. Shipping is already one of the biggest and most rapidly increasing costs for big online retailers, a factor cited in Amazon.com, Inc.’s recent testing of its own delivery service.

UPS said it reviews pricing on an annual basis. “We continually evaluate our policies to remain competitive in the industry. Our focus is on being fairly compensated for the value we provide to our customers,” a spokesman said.

Retailers would likely hesitate to increase what they charge for shipping. Surveys show that shoppers abandon their online purchases when they get to the “shopping cart” phase of the purchase and find the shipping fee too pricey. Instead, retailers may charge more for the merchandise to cover the cost.

Hardest hit by the change would be shipments of some of the often-replenished items consumers love most to buy on-line—increasingly by subscription—to avoid a trip to the store. Free or cheap shipping of large, light convenience items that include paper goods might be phased out altogether, analysts said, because they will become too expensive.

FedEx declined to provide estimates of how many packages might be affected or by how much. “The primary concern for us is that we want to make sure we’re getting an appropriate price for the value of service we’re providing,” said spokesman Jess Bunn.

Both Zappos and Diapers.com are owned by Amazon, which generally uses UPS’s ground service, among other delivery companies. Amazon’s popular Subscribe & Save program sends customers regularly depleted household items like paper towels, dog food and cereal, with free shipping.

Amazon couldn’t immediately be reached for comment.

For the delivery companies, it is about efficiency. Light-weight e-commerce orders take up a lot of room in the truck, and Amazon and other shippers don’t always match the box size to what is inside. A recent order through Amazon Prime, which includes free shipping, arrived in a box more than twice the size of the earbuds and paperback book inside. That cost UPS both truck space and fuel.

E-commerce retailers will be affected by differing degrees, depending on their ability to negotiate pricing with FedEx, analysts say. The biggest companies, like Wal-Mart Stores Inc., Walgreen Co. and Saks Fifth Avenue, will likely attempt to grandfather in current pricing rules when they renegotiate contracts. During a similar price increase in 2011, many retailers negotiated a phase-in of the new rules.

A spokesman for Wal-Mart Stores Inc., a large FedEx Ground customer, declined to share the terms of its specific agreement and said it has “a long-term, collaborative relationship with Fedex.” Wal-Mart’s global internet sales grew even faster than Amazon’s in 2013, rising 30% to $10 billion.

Smaller retailers will have less room for negotiation and so will be more likely to have to pass along the price increase in some way to customers.

Under FedEx Ground’s current pricing, a one-pound square package with 12-inch sides— which might hold several shirts—would be priced by weight and cost $6.24 to ship the shortest distance.

After the changes, FedEx will use the same calculation it uses for air shipments: the volume of the package divided by 166, a calculation based on the amount of space in the cargo area of a plane. This way, the same 12-inch box would be priced at $8.83, a 41% increase. If an item is heavier than its “dimensional weight,” the customer will be charged the higher amount.

Of the top 25 most common box sizes used by shippers, only the three smallest will now avoid this type of pricing, according to Shipware LLC, a shipping strategy consultant and auditor.

ShipMatrix, which analyzed data from hundreds of millions of packages shipped from more than 50,000 U.S. locations, found that about 32% of all ground packages will be affected by the price increase, and the majority of those weigh less than five pounds. Other analysts agreed that more than 30% of shipments would likely be affected.

“This is FedEx trying to figure out how to better manage their margins for the packages they already have,” said Travis Burt, a partner at Transportation Impact, LLC, which audits on behalf of shippers, as well as helping with negotiations.

UPS will follow suit within a few months, analysts believe.

“It’s almost a foregone conclusion,” said Rob Martinez, president of Shipware. “They have a history of hitting each other like prize fighters back and forth.”

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