UPS Tries a New Twist on Surge Pricing — Update

As reported by Fox Business
Monday May 1, 2017

United Parcel Service Inc. wants to get paid for packages it never delivers.

The company is starting to ask major retailers to help pay for extra workers and surplus space on trucks when a retailer fails to ship as many packages as planned during peak periods, UPS executives say.

The new charges could also apply if a retailer’s forecast veers off course in other ways, such as if the sizes of boxes shipped are significantly mismatched from what was expected.

“If there are variations to the plan, let’s see what we can do, but we should be compensated accordingly,” said UPS Chief Executive David Abney in an interview. He said the charge isn’t meant to be punitive but one element of a broader negotiation with retailers over pricing during peak times.

UPS, like rival FedEx Corp., is grappling with the e-commerce boom, which is resulting in more business but rising costs to pick up, sort and deliver packages. The difficulties increase during the peak holiday season, when a greater percentage of deliveries are to homes and apartment buildings, which cost more for UPS to fulfill than to business addresses.

Both companies are looking for ways to recoup the billions they are investing to add capacity to their networks to handle the surge in online shopping. FedEx says it has dropped some retailers that refused recent price increases, and UPS has raised prices and invested in new routing systems and bigger storage facilities.

It faces skepticism, however, that it isn’t raising retailer prices as aggressively as FedEx. Mr. Abney has previously said that UPS could lose business if it doesn’t make such changes carefully, adding “You do that and at some point, you can have unused capacity.”

FedEx doesn’t plan to charge retail customers that fall short on promised package volumes, said its senior vice president for e-commerce Carl Asmus. “The last thing I’d ever want to do or say is I’m going to penalize a customer.”

Like UPS, FedEx sets prices for large customers on a case-by-case basis, with delivery rates varying based on the volume of packages and where they need to be shipped, among other factors. With its biggest retailer customers, the company starts the process of planning for the holiday rush in June, Mr. Asmus said.

FedEx might adjust pricing lower for companies that ship larger volumes but wouldn’t charge them for failing to meet their projections.

Delivery companies typically have multiyear contracts with top retailers laying out rates, discounts and other elements about how much it will cost to ship packages. But they still start up conversations around midyear to share data and perform an autopsy of the past holiday season and discuss how strategies and investments should change for the next peak period.

Retailers, for their part, have their own challenges. Online sales are coming at the expense of their brick-and-mortar operations in many cases, forcing them to close stores and cut costs wherever they can, and some of them lag behind newer players when it comes to e-commerce.

Retailers with physical locations are increasingly using them as places for customers to pick up online orders. Wal-Mart Stores Inc., for example, last month began offering discounts to customers who place orders for online-only merchandise and pick them up at stores.

Those efforts could potentially lower some of the package volume headed to residences if it is directed to stores instead — “which is great business for us,” said Alan Gershenhorn, UPS’s chief commercial officer, during a conference call with analysts last month.

UPS cautioned that conversations with retailers are just starting and it is still working to complete how the surge price will be implemented. “We will handle it on a customer by customer basis, we will look at our costs and that’s the way we’re going to address it,” Mr. Abney said.

As it is for retailers, the peak season is a critical stretch for UPS and FedEx. Last year, UPS said that daily delivery volume on 13 days in December swelled to 30 million packages, compared with 18 million on a normal nonpeak day.

Typically, the brunt of the surge comes from just a few dozen e-commerce retailers. FedEx Chief Executive Fred Smith has said no more that 50 customers are behind the bulk of the increase.

UPS is focusing the surcharge on the top shippers by volume during the winter holidays. The company will also seek to apply it to other events that cause volumes to swell, such as flower shipments during Valentine’s and Mother’s Day, and when new gadgets, videogames and books are released.

The extra business has posed a major challenge for the delivery companies. Investors are worried that the capital investments to keep up with the growth aren’t paying off quickly enough, especially during holidays.

“We believe that should be the company’s highest margin quarter, given the HR and logistics gymnastics UPS performs to execute for a handful of e-commerce shippers,” Stifel Nicolaus & Co. analyst David Ross said in a research note.

One challenge has been that forecasting sales has become increasingly challenging as shopping shifts online, oftentimes to competitors such as Amazon.com Inc. Many traditional chains, including Macy’s Inc. and Toys “R” Us Inc., struggled to predict their holiday sales last year.

“The problem for the shipper is that nobody is able to accurately forecast e-commerce because things are changing so rapidly,” said John Haber, CEO of supply-chain consultancy Spend Management Experts.

In 2015, UPS started imposing additional charges on shipments when retailers blew through their shipping estimates, driving up costs. But now, UPS is looking for protection on the downside too.

FedEx ran into such trouble this past holiday season. In March, the company said some of its largest retail customers that use its ground-shipping business fell short of their forecasts. That left FedEx confronting a burden from spending the company put toward extra staffing and trucks. Operating margins for FedEx’s ground segment declined from 12.6% to 11% in the quarter ended Feb. 28.

During March’s earnings call, FedEx Chief Marketing Officer Rajesh Subramaniam said the company is “looking at several pricing options to ensure that we get a reasonable return on investments that we are making.”

–Brian Baskin contributed to this article.

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Ken Wood is the founder of LJM Consultants. LJM helps clients negotiate “Best in Class” UPS/FedEx agreements. LJM was recently named the “best parcel auditing company in America” and was also inducted into Inc. Magazine’s Top 500/5000 fastest growing companies in America for 2013. To learn how LJM Consultants can help your company get the parcel contract you deserve, call 631-844-9500 or email kenwood@myLJM.com.