Photo: RetailWire
Will retailers pass along or eat COVID-19 shipping surcharges?
It’s not unusual for United Parcel Service or FedEx to tack-on surcharges for retailers and consumer-direct brands shipping products during peak periods leading up to Christmas. Merchants do not, however, expect such charges in June. Of course, this June is unlike any June experienced by anyone ever.
UPS announced that it is adding a 30 cents per package surcharge to shipments from customers that exceed their average weekly volume in February by 25,000. An additional surcharge will be applied to oversized packages sent by companies that ship more than 500 packages a week. The nation’s largest parcel delivery service said that it has seen its mix of deliveries shift from around 50 percent going to individual households to around 70 percent since the coronavirus pandemic began in the U.S.
FedEx is also adding a surcharge of 30 cents to packages delivered to homes. The delivery service is applying the charge to customers who send 40,000 packages a week and whose volume is 120 percent higher or more than their average in February. Oversized items will also include an additional fee.
A FedEx company spokesperson told The Wall Street Journal, “As the impact of Covid-19 continues to generate a surge in residential deliveries and oversized items, the peak surcharges will help us manage the demand while maintaining strong levels of service for our customers.”
The addition of surcharges may add more margin pressure for retailers that have seen profits take a hit as a larger percentage of their overall sales have shifted from stores to online since the onset of the coronavirus crisis.
Retailers, quite frequently, have eaten shipping surcharges as a cost of doing business in the past with the rationalization that online sales quite often represented an incremental gain on top of also strong volume at physical locations. The current reality, however, is that some retailers are trying to build up store sales while occupancy limits and social distancing rules remain in place.
Discussion Questions
DISCUSSION QUESTIONS: How do you expect retailers to address coronavirus-related delivery surcharges being placed on them by UPS and FedEx? Do you think American consumers will accept higher product prices or delivery fees for online orders considering the circumstances?
Poll
BrainTrust
Dave Bruno
Director, Retail Market Insights, Aptos
Zel Bianco
President, founder and CEO Interactive Edge
Online sales already have thin margins and this won’t help. Some of the fees will be passed along to consumers, but some of it will impact retailers’ already embattled bottom-lines. I doubt that these additional charges are going to negatively impact online sales in the short-term or even at all – these extra fees will be like bank fees, nobody likes them, but we all pay.
The industry has to be open to a more equitable share of the cost for shipping. If not, what happens? Either the retailer ends up paying more and reduces the chances of making a realistic profit or the consumer ends of paying more, which with over 40 million Americans out of work will create a more dreaded result. The very Americans that can least afford these new shipping costs will end up having to go into stores and increase their chance of testing positive for COVID-19. UPS and FedEx will need to share the costs for all to win.
Prices will unfortunately be going up. The USDA expects beef and poultry prices to increase 1 percent to 2 percent this year, and pork up to 3 percent due to disruption in supply chains.
While there may be some relief to businesses from stimulus packages, the costs may ultimately be a consumer burden, which will cause further belt-tightening and more intentional purchasing.
Retailers will want to pass along surcharges, not least because many already struggle to make money online. However, in a highly competitive market where rivals use low-price delivery as a selling point and where consumers have been trained not to pay for fulfillment, the ability to increase prices will be very limited. As an alternative, I think a lot of retailers will try and drive cheaper collection from store options to protect margins.
Completely agree on lower delivery price points as a competitive advantage. However, driving cheaper store collection won’t be an alternative for most retailers. It all depends on category, and the sentiment of the retailers’ target consumer — some are conscious and willing to pay those extra delivery costs, while many are becoming more frugal in their spending. But if the latter does rings true for the retailer, then driving collection is indeed a smart way to protect margins.
Retailers need to make every transaction profitable and losing money on shipping is not an acceptable long-term strategy. If the surcharges are temporary, some retailers may absorb the costs or at least some of the cost. Long-term, retailers will need to pass on the costs to consumers and an extra 30-60 cents won’t be noticeable.
You are already seeing services that require employees to have a variety of COVID-19 gear. Food pricing is going up as well – I do not know how this will go on but this may become the norm and unfortunately customers are going to have to adjust or make alternative choices.
Oh, great. Another challenge for retail. Just what we needed. I must confess to being extremely naive to the inner workings of the logistics industry, but my initial reaction to these surcharges is exasperation. UPS and FedEx are seeing unprecedented revenues, with no end in sight. According to George’s report, it looks like most of the revenue increases are coming from retailers that are shipping more packages to nervous, cautious, and homebound consumers. So, instead of supporting their biggest customers in a time of deep crisis, the cash-rich shippers are punishing them with surcharges? It’s unconscionable. With 40 million people out of work, consumers have no capacity for higher fees or prices. Retailers will surely be forced to cover these additional costs.
And gas prices have never been lower, which must be one of the delivery companies’ major production costs as well. Go figure!
Argh! You’re right, Peter – now I am really aggravated with them!!! ;^)
Every year for over 20 years, UPS and FedEx have put through base rate hikes of around 5%. And last year, as gasoline prices collapsed, they actually had the gall to INCREASE fuel surcharges. Just like cable fees and airline fees, there’s no connection between cost and the actual service, just another way to pad profits (and keep the Teamsters placated).
Very good point Peter! It is very counter intuitive. Maybe when Amazon transportation services starts to eat into UPS and FedEx business, they will be forced to have more competitive prices.
Retailers that do not offer free shipping will have less problem adding the surcharge – either by increasing the thresholds for free shipping or tweaking the shipping rate bands. For those that offer free shipping without any constraints, it may be bit more complex. Brands may be able to mark up prices, but multi-brand retailers will have to play with discounts. Overall, if the average order value is $30, this represents a 1 percent increase. It may not be insignificant, but it can be managed one way or the other.
This feels to me like the postage stamp increase discussions we used to have. But 30 or 40 cents here is really not a big deal in relation to the convenience. It’s all about the convenience that consumers desire, and I believe it will be rarely complained about.
I believe that many consumers would accept the charge if it was clearly stated on the bill – “COVID-19 related expense” or something like that. It just becomes part of what to assume you will pay – no different than the fee that Doordash or Grubhub adds for delivery of food.
Pass along they will without a doubt. That may be in the form of minimum order size, bundling promotions, increasing margins, or any other way to minimize a the chance of a profitless transaction. The real challenge is that the consumer in summer of 2020 is not the same as in January 2020 and retailers are fighting to survive as they fix their balance sheets and supply chains at the same time. Rising costs will be passed on to reluctant consumers that are reprioritizing spending on a reduced budget. Not a great situation to be in.
There is a very thin line between the cost of margin protection and the danger of being seen as exploiting a crisis. So if delivery services add a surcharge and retailers than add their own surcharge — in whatever form — on top of that the consumer, who in many cases faces economic challenges of their own like seeing their job go away, isn’t likely to forgive or forget when/if things ever stabilize. Will consumers accept it? What choice to they have? Will they understand it? That’s the real question.
The whole process, the whole game of retail just got more expensive. And given the profitability of retail overall pre-pandemic, the old fee structure is not sustainable. It was never really workable, much less sustainable. “Free” was never free. And any fees that were charged never really covered the whole transaction, especially when you take returns and the attending handling costs into consideration. Something had to give, and now with post-pandemic costs something will. Retailers have jumped through hoops to acquire and retain customers as the pandemic unfolded. Some customers have fallen in love with the newfound conveniences of delivery, BOPIS and BOPAC. Other customers can’t wait to get back into the mall. The accelerated shift to e-commerce will find a new point of equilibrium, but so will the fee structure of that new retail model.
Since everything else in retail is changing right now, I’d add 75 cents onto every order as a delivery surcharge pass through, but note that half is being contributed to a (local) charity — like a food bank. At some point costs and price to the customer have to reflect reality. I think customers, if informed, will pay a “fair” price. I haven’t exactly been filling my car with gas going to the mall these days. If everyone jumped in it could work.
This is on top of the rate hike across carriers in late 2019. The carriers execute this every year with a small rate hike. The coronavirus-induced, mid-year increase is a response to the increased orders that are being placed. Retailers will continue doing what they’ve been doing – either eating up the cost themselves to offer free shipping or passing it to the customer in the form of increased product prices, added shipping fees, or increased minimum free shipping thresholds. The slight increase will not be noticeable, especially for customers already paying large fees and tips to last-mile delivery firms like Instacart et. al. The smartest retailers will continue optimization of packaging and shipping options to lower overall costs to ship. The expectations of free shipping from the consumer will continue.
A set of larger retailers will look toward building their own delivery operations (Walmart, Amazon) and I wouldn’t be surprised if a consortium of retailers invested in a carrier solution to reduce costs across the board.
Why is the surcharge being added? Because of volume? Did you not plan to have volume increase? Because of timing? Change pricing so that quicker delivery times pay more. Increasing the price for delivering a package with a longer delivery time makes no sense.
Retailers need to pass along these surcharges. Let’s face it. Direct to consumer shipping and selling at mass market size is unprofitable.
Unfortunately, Amazon’s investor supported undercutting of retail has raised expectations among consumers that ship-to-home is cheap — when it’s not. If retailers want to emerge from the pandemic healthy (and consumers WANT them to emerge healthy), then they need to obey economics and pass along the surcharges.
It boggles my mind that somehow we are giving companies free rein to lose massive amounts of money as long as they are getting new customers. For a healthy retail economy, we need to charge what it costs.
Another thought: The only way to establish a healthy retail market coming out of the pandemic is to establish an honest one. And that means honesty about costs as well as honesty about retailers having serious value they offer customers.
30 cents … yeah that’ll break the bank! The whole “free shipping”…issue?…fiasco? I’m not sure what term best describes it, is such a mess this hardly seems of consequence.
Suffice it to say, as long as market leaders are willing to eat shipping/handling costs — or at least appear to, since it seems likely many consumers fail to look at total cost — “passing on” will be as dead as the term suggests.
Thin margins can’t take on additional retail costs. Yet these issues are so dependent on retail categories and the willingness of the consumer to pay for them. I’d like to believe that the consumer is more willing to pay for shipping in these times. Delivery to the home is a luxury, and awareness of COVID-19’s impact on the industry, coupled with the rise of the eco-conscious consumer, could indeed pave the way for willingness to pay higher delivery fees as long as the retailer is transparent about where these costs are going.