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According to the National Retail Federation, 43 percent of people started doing their holiday shopping in October, leading the NRF to forecast a year-over-year spending increase of 3-4 percent.
Although when asked, 55 percent of adults said they prefer gift cards, that is still a lot of small parcels that have to be shipped in the next 60 days. Ironically, carriers like FedEx and UPS are anticipating a weaker holiday shipping season this year, and although they are offering discounts and rolling back increases, they are still charging peak season surcharges.
Usually demand for parcel services goes up during the holidays. This year that is still expected to happen, just not as much as in years past. UPS and FedEx bracing for a weak holiday season.
Steve Howard, Director of World Parcel Alliance, recently said in an interview that shipping volumes are down by 25 percent overall, and some freight ships from China are being canceled because they aren’t full.
Rates are plunging worldwide, including container ship rates to transport freight across the Pacific Ocean or from Asia to Europe. Demand for overnight plane deliveries has fallen as consumers pull back and ground delivery has accelerated. Even the recent shortage of truck drivers has subsided, making it possible for capacity to meet and even exceed demand.
In 2022, carriers delivered an average of 90 million parcels daily during the holiday season, but according to ShipMatrix, that number is expected to drop to 82 million this year. Sellers of goods like clothing, electronics and other consumer goods are seeing demand cool as shoppers cut back or shift spending to travel and services. For example, sales of Taylor Swift tickets – almost $600 Million worth – serve as an exclamation point on statements about consumer willingness to spend – but for experiences, not goods.
Decreasing Revenue and Increasing Capacity
Peak season for small parcel shipping is late October through mid-January, so we’ve already entered that window. Carriers like UPS, FedEx, and the USPS have to be experts at forecasting demand… and they are not convinced that this is going to be a strong year for them.
Revenue in the second quarter fell almost 11 percent from a year earlier to $22.1 Billion, and UPS’ average daily package volume in the U.S. fell 11.5 percent to $17.3 Million in Q3.
Huge numbers notwithstanding, there is a lot of margin pressure on carriers. Some of that is from customers shifting to less expensive, and less profitable, ground-based delivery. Even though air-based services are faster and more expensive, they are also more profitable for carriers. Amazon, UPS’ biggest customer, is making decisions in line with that trend.
Thanks in no small part to the surge in demand during the pandemic, all of the major carriers currently have unfilled capacity.
UPS, FedEx, USPS, and Amazon have the combined ability to deliver more than 110 million parcels per day, but customers are only sending through about 70 million daily packages for delivery. That is the biggest capacity-demand imbalance in three decades.
We can’t separate non-holiday issues from this particular challenge. The demand reduction hit FedEx sooner and harder than UPS, perhaps in part because UPS had already lost everyone they were going to lose in advance of their contract negotiations with the Teamsters.
Amazon Shipping is just now back online after taking a pause during the pandemic. They have added capacity for 2 million parcels a day, adding yet more capacity.
Studying Holiday Surcharges
Satish Jindel, President and Principal Consultant at SJ Consulting (a service group affiliated with ShipMatrix) expects 1.75 million packages a day during the peak season to be subject to peak surcharges. That is about half as many as last year.
Interestingly, Amazon Shipping was the first to unveil its holiday surcharges this year even though this is only the second year they have had any holiday surcharge at all.
The carriers do understand that no one wants to be surcharged. FedEx won’t use the word “peak” in their messaging, but rather “demand surcharges.” As FedEx EVP and Chief Customer Officer Brie Carere explained, “The vast majority of our customers actually do not pay a peak surcharge because their volume just doesn’t flex up enough to qualify for the peak surcharge.”
Customers that qualify for surcharges have either exceeded an established weekly volume threshold, had a significant number of large and/or heavy packages, or are relatively new with their carrier.
But not all carriers are charging peak season fees. The U.S. Postal Service announced back in September that they will not add a holiday surcharge this year. Last year those fees ranged from 25 cents to $6.50 per package, and their new Ground Advantage program offers shippers a cost-effective offering, potentially taking more volume away from alternative carriers.
Delivery for Procurement?
Negotiating leverage has shifted back to shippers, and procurement needs to take note.
Some businesses that have met with UPS and FedEx sales reps say the shippers are “extending discounts and withdrawing penalties on early renegotiation requests,” according to the Wall Street Journal.
Companies that regularly deliver large orders to consumer and business customers are seeing parcel shipping discounts of between 10 percent and 40 percent right now, according to an article in The Street. Shippers generally are reaping savings of around 8-12 percent from their previous agreements.
But what goes up must come down… that is true in procurement and the supply chain and should be kept in mind here.
The opportunity to save on small parcel (even short term) is tempting for cost-conscious businesses. It will test the balance between expense management and shipper-supplier relationships. Conditions can be expected to swing back, and carriers can be expected to remember how procurement conducted themselves when the advantage was theirs.
Savvy shippers know better than to abandon strategies that emphasize solid relationships, communication, and collaboration with carriers. In many cases, that carrier is the only direct point of contact between a company and its customers. Customer experience isn’t just something procurement talks about – they should be mindful about how they deliver it as well.
Black Friday is just two weeks away. Who will be right about this year’s holiday spending season? Will it be weak from a parcel standpoint but strong from a spending standpoint?
Fortunately, by the time the Christmas merchandise is going on sale, they’ll be moving in the Valentine’s Day goods, and we’ll get to start the process all over again.
