FedEx will change the way it charges to delivery parcels, in a move likely to increase the shipping costs for many online retailers.
The delivery service announced last week that, starting Jan. 1, 2015, it will use dimensional weight pricing—which bases rates on the cubic dimensions of the package—on all ground shipments. Previously, FedEx reserved that form of pricing for packages larger than 3 cubic feet.
“It’s probably the single largest increase I’ve ever seen,” says Jack Mitchell, president and CEO of Parcel Appraisal & Negotiations Group, a firm that negotiates shipping contracts on behalf of retailers and other shippers. “People who think it’s a modest increase are kidding themselves,” he says. The change will affect millions of packages and cost millions in additional shipping costs, he adds.
The rate increase will impact the most large, lightweight packages—such as a box of toilet paper or shoes—because the shipments are charged based on their size rather than their weight. For example, a pair of shoes weighing 2 pounds in a box that is 12 inches by 8 inches by 6 inches would be charged as 5 pounds using dimensional weight shipping.
FedEx is the second most-used carrier for e-retailers in the Internet Retailer Top 500, where 144 merchants list it as their primary carrier. 176 list UPS. The bigger impact could come if UPS transitions to dimensional weight shipping. UPS ground packages outnumber FedEx ground package by about two to one, Mitchell says, and for that reason, UPS has usually led the way for ground rate increases and FedEx has followed.
UPS declines to comment on the FedEx. “UPS reviews its pricing on an annual basis,” says a UPS spokesman. “This includes base rates and accessorials. 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.”
For e-retailers, the impact of the FedEx move will vary. Large e-retailers—like Amazon.com Inc., Staples Inc. and Walmart.com—have huge negotiating power with carriers, Mitchell says, and may be able to put off or avoid the increase. Even much smaller web retailers, such as Minimus LLC, negotiates rates directly with FedEx. For that reason, co-founder Paul Shrater doesn’t think the rate hike will affect his business—at least not on Jan. 1, 2015. Minimus, which sells travel-sized products and single-serving items, had an Internet Retailer-estimated $4.95 million in 2012 web sales.
Since its founding almost 10 years ago, Minimus has used FedEx, and Shrater says the growth in its shipping volume had allowed it to negotiate discounts that have negated any rate increases by FedEx. But smaller retailers, which pay less than about $500,000 to a carrier a year, Mitchell says, are not really in a position to negotiate. “The smaller retail guy is going to take the rate increase on the chin immediately,” he says. And, Mitchell adds, it might be months or even years before a retailer can accurately calculate how much more the new dimensional weight pricing is costing.
For most rate increases, retailers will pass the price of the rate increase on to the consumers, but this pricing model is more complicated, Mitchell says. “Retailers are not going to understand its impact,” he says. “They’re not going to be able to get their money back in the first year—or maybe in a couple years.”Favorite