Parcel carrier peak season surcharges are nothing new, but 2020 has been “the year of the surcharge”, as COVID-19 supply chain disruptions beginning in March initiated a wave of carrier surcharges that has not yet peaked.
In August, the major parcel carriers (FedEx, UPS, and the USPS) announced unprecedented peak season surcharges, and shippers of all sizes and types are likely to be impacted during the most crucial retail period of the year.
Understanding these surcharges and the potential impact to the bottom line is no easy task. Once understood, taking steps to mitigate the impact is even more daunting. Keep reading for my thoughts on how to tackle both this holiday season.
UPS Peak Surcharges
Similar to 2019, peak surcharges will apply to large packages and packages which require additional handling. Unlike in 2019, UPS will assess peak surcharges for SurePost and all residential packages.
“Peak” surcharges are no longer limited to the traditionally high-volume holiday periods, as we learned in May of this year, and UPS has continued this trend by extending peak surcharges to January 16, 2021 – nearly two weeks longer than in 2019.
Each surcharge is triggered by volume thresholds.
- Additional Handling Service, Large Package Surcharge and Over Maximum
- Apply to customers who ship more than 1,000 total packages in any week during the Peak Period or customers who ship more than 10 packages combined of the three surcharge types.
- Upon meeting the threshold, the surcharge applies for the remainder of the Peak Period.
- Residential Delivery
- 25,000 packages shipped in any week (combined Air/Ground Residential and SurePost) during the peak period initiates the volume increase calculation (once met, surcharges apply for the entire peak period).
- Charges (summarized in Figure 2 below) are determined by the percentage increase in volume compared to the average weekly volume for each service level for February 2020, with one exception.
- If a shipper’s average weekly volume in September is less than 80% of February’s average, UPS will use the September volume as the calculation baseline.
- UPS SurePost
- In addition to the peak surcharge issued ($1-$3), UPS will increase SurePost base rates by $0.24, effective on October 18 (same as USPS described later). However, no end date was announced for this rate increase, which alludes to this being a permanent rate increase, not a temporary peak surcharge.
It’s clear that the surcharges are designed to penalize high-volume residential and large package shippers, while effectively influencing the volume accepted into UPS’s network. For shippers which meet these criteria, the increased expense will have a material impact on Q4 margins.
FedEx Peak Surcharges
Like UPS, FedEx is issuing surcharges aimed at large/bulky profile shippers, with Oversize ($52.50) and Additional Handling ($4.90) surcharges effective October 5 through January 17.
FedEx will also charge high volume shippers a peak Residential Delivery Charge, effective November 2 through January 17, containing package volume thresholds which trigger the surcharges. Surcharge amounts are variable by ship date range and what FedEx is calling a “Peaking Factor”, which involves a calculation of percentage volume increase over lower-volume periods. The Residential charge ranges from $1-$4 on Ground packages and $2-$5 on Express packages.
FedEx will add the Peak Surcharge for shippers who ship more than 35,000 packages per week (residential and commercial) during two defined peak periods. FedEx will divide the weekly volume for each peak period by the average weekly volume from February 3 through March 1 to determine the Peaking Factor Which ranges from <110% to >500%. The higher the Peaking Factor, the higher the surcharge.
Figure 4 below summarizes the FedEx Peak Residential Charge amounts and criteria.
Consistent with pricing actions in June, FedEx will assess a peak surcharge on every SmartPost package. The $0.40 ‘Temporary Charge’ issued on June 8 runs through November 1 and will be replaced with a $1 per package charge for the majority of the peak period (Nov 2- Nov 29, Dec 7- Jan 17), and a $2 per package charge during what is normally the highest volume week of the year for eCommerce shippers (Nov 30 – Dec 6).
It’s clear that FedEx intends to maximize revenue on SmartPost packages as it completes the integration of SmartPost into the FedEx Ground/Home Delivery network, narrowing the pricing gap between the two services via hefty SmartPost surcharges.
Assessing the Impact of UPS and FedEx Surcharges
To illustrate the potential impact of UPS and FedEx peak surcharges, let’s compare two distinct shipper profiles and how the surcharges impact each in the below table.
In the case of the high-volume apparel shipper (left), residential surcharges are applied by UPS and FedEx as the weekly peak volume of 125K packages exceeds both carriers’ thresholds, resulting in $1.2M incremental expense.
However, the impact of UPS SurePost surcharges, compared to FedEx SmartPost, is significantly higher at $1.95M (vs $1.056M for SmartPost).
The total impact of the surcharges from both carriers is shocking as this shipper would incur a per package increase of $1.58 (19.3%) with UPS and $1.13 (13.8%) with FedEx.
High-volume shippers are not the only ones that could suffer double-digit increases as illustrated by the home goods shipper example (right). In this case, peak weekly volume of 16.5K remains below the residential threshold, however, the large/bulky package profile results in significant peak surcharge expense.
With just 3% of peak volume being assessed an oversize charge, the result is $396K and $415K of increased expense from UPS and FedEx, respectively. The differentiating factor is postal workshare surcharges, where FedEx assesses a $1-$2 per package charge on every SmartPost package, totaling $53.6K, whereas no UPS SurePost charges apply since the weekly volume is below the 25K threshold.
The result for this small-medium size shipper is over $500K of incremental expense, which is an increase of approximately $2 per package, and at least a 16.5% per package increase over non-peak costs.
USPS Peak Surcharges
The USPS is also seeking to generate revenue via peak surcharges, as it filed a request with the Postal Regulatory Commission (PRC) on August 14th for a temporary rate increase, effective October 18 – December 27. The rate increase applies to Commercial products only (not Retail), however, there is no volume criteria and increased rates apply to all packages shipped during the peak period.
There are two important details shippers should take note of with USPS peak surcharges. First, the two services used by many small-medium eCommerce shippers, First Class Package (FCP) and Priority Mail (PM), are both affected, incurring increased rates of $0.25 and $0.40 per package, respectively. To put this into perspective, the 8 oz, zone 5 FCP rate increases 7.6% from $3.31 to $3.56. The $0.40 increase for PM, while still material, would only be a 4.6% increase for a 2 lb, zone 5 package.
Second, those shippers who do not ship directly with the USPS, and perhaps do not expect to be affected by the USPS rate increase, may not completely escape the impact. The services shaded in blue, Parcel Select, are used by carriers who offer postal workshare services (e.g. FedEx SmartPost, UPS SurePost/Mail Innovations, DHL eCommerce, Pitney Bowes, etc.) which are used by many medium-large eCommerce shippers. The increased Parcel Select rates will result in a rate increase (variable by carrier/service) and/or surcharge for shippers who use these postal workshare services.
Alternate Carrier Peak Surcharges
Although complete details have not been released publicly, additional carriers such as DHL eCommerce and Pitney Bowes have also issued peak surcharges. The DHL eCommerce surcharge has been reported as being similar to the USPS Parcel Select increase, in the $0.25-$0.30 per package range. On September 3rd, Pitney Bowes announced a per package pricing adjustment “not to exceed” $1.50. Both carriers rely on the USPS for all domestic package delivery services.
eCommerce Shippers Hit the Hardest
While the Oversize/Large Package charges are incredibly expensive on a per occurrence basis, for many shippers, packages which fit these criteria are a small percentage of volume.
Conversely, there is no escaping peak surcharges for eCommerce shippers, as residential deliveries will be assessed peak surcharges in almost all cases. Figure 6 below provides a carrier comparison view of the highest impact peak surcharges beginning in October.
5 Ways to Mitigate the Impact of Peak Surcharges
Let’s face it, no shipper will be completely insulated from peak surcharges. There are, however, steps which can be taken to limit the impact and protect Q4 margins. Shippers should consider the below mitigation strategies and implement the ones which best fit their business.
- Shift Volume Out of Peak Surcharge Periods: This is easier said than done, as customers may still shop according to their habits and preferences, but executing a plan to pull demand forward into October may reduce surcharge exposure for high-volume shippers. This concept is gaining momentum quickly, as Amazon, The Home Depot, Target, and Walmart have all announced periods with deep discounts between October 11-15, and many other retailers have indicated an earlier start to holiday promotions. For USPS shippers (as well as DHL eCommerce), one way to squeeze more revenue into Q4 could be to offer deep promotions just before Christmas, with a customer incentive to receive deliveries after Christmas. Process the order backlog December 28-30 and avoid USPS surcharges (ending on December 27).
- Utilize Non-residential Delivery Options: For retailers with a store presence, BOPIS is now table stakes and BOPAC (Buy Online Pickup at Curb) is following close behind. Implementing and/or expanding these programs will reduce parcel volume and may offer customers safe, convenient shopping options closer to Christmas. Additionally, orders can be shipped to retail locations for pickup or directed to collection points via FedEx Delivery Manager or UPS My Choice, thus reducing residential delivery volume.
- Shift Volume Between Carriers/Services: For shippers with a multi-carrier program, volume can be re-allocated across carriers to remain below surcharge volume thresholds and/or minimize surcharge expense by incorporating peak surcharges into TMS rate shopping logic.
- Share the Expense Burden With Customers: This option may not be very popular but given the circumstances it should be considered. This does not necessarily mean issuing an additional shipping charge, or even increasing all shipping rates. Options include a higher free shipping threshold, resulting in more shipping revenue, or temporarily increasing shipping rates for options supported by services with the highest peak surcharge impact.
- Negotiate With Carriers: While this may be the most challenging parcel pricing environment we have seen, shippers still must attempt to negotiate peak surcharges. An effective way to do so is to use a data driven approach, focusing on the favorable characteristics of a shipper’s parcel volume. Areas of focus may be low peak volume spikes (relative to non-peak), high origin volume density, or material commercial volume. Shippers can present the data to carriers in a way which illustrates the value of their account, thus reducing the carriers’ justification for maintaining these punitive charges.
It remains to be seen if carriers will issue additional surcharges in January, but until then, shippers will be challenged to manage surcharge complexity and expense during what is sure to be a stressful peak season.