FedEx Ground’s switch to dimensional pricing causes shippers to exercise options.
For new parents, placing multiple orders of diapers through online retailers is an easy way to stock up on an essential item.
But for the carriers who bring the product to those consumers’ doorstep, the boom in online retail has lead to an increase in lightweight, oversized boxes, along with a drop in margins.
To address this trend, FedEx Ground announced last month that it would begin applying dimensional pricing on all ground shipments by next January, charging large package shippers based on size of the shipments rather than on actual weights.
FedEx Express already charges by dimensional weight, and any ground shipments that measure more than three cubic feet are subject to this pricing metric, so the company line is that this move is bringing all package sizing under one standard pricing strategy.
Under the new FedEx Ground pricing scheme, each shipment will be subject to a calculation to find its dimensional weight — what the package would actually weigh under full density — in comparison to its actual weight, and the shipper
would be charged the higher of the two figures, explained Jaris Briski, general manager of integrated parcel solutions at GENCO.
For example, Briski said, a shipper with a shipment of five pounds that is put into a box that is 17 cubic inches would end up paying the dimensional weight. Using FedEx’s dimensional factor in the calculation, the shipper ends up paying the rate for a 30-pound package.
“That could increase the landed cost on that package by 50 percent or more,” he said. Shippers will pay significantly more to ship the same goods, and Briski recommended they go through an analysis of their shipping habits to understand how much FedEx’s pricing change ultimately costs them. “The analysis is where you get into the necessary details to understand what the impact to your business is,” he said
Briski said in the short term, shippers might escape dimensional pricing by working with smaller, regional carriers. These providers, he said, will see FedEx’s shift to full dimensional pricing as a way to differentiate themselves even though they face the same cost pressures and are in the same predicament — lighter boxes that generate less money taking up a larger amount of space in their trucks. In the longer term, however, the shift toward dimensional pricing might include these carriers as well, he said.
Kevin Sterling, a senior equity research analyst with BB&T Capital Markets, said FedEx’s move toward dimensional pricing for all its ground packages was anticipated, or should have at least been foreseen, by shippers. Everyone is talking about this story so much not because of the shippers who are used to dealing with FedEx, he said, but because of the impact on consumers and the residual effects for online shopping.
“The average consumer may think twice now about placing an online order for paper towels or diapers,” he said.
With the old way of pricing, Sterling said smaller, denser packages had been subsidizing the larger, lighter ones. Carriers weren’t being compensated fairly for shipping these light items, he said, and FedEx Ground’s move appeared inevitable. According to BB&T’s analysis, the new pricing will generate a $180 million operating-income boost for FedEx each year.
UPS, Sterling said, will likely follow FedEx’s lead; the integrator will similarly want to protect its margins. He also believes UPS will make the pricing switch by January because the two package giants tend to move in tandem when it comes to pricing changes. BB&T’s prediction for a UPS operating-income rise stands at more than $350 million annually.
“UPS has not specifically stated they will follow, but history tells you they will,” he said. “I believe it is a matter of when, not if, UPS will implement dimensional weight pricing on all ground packages.”
In a white paper, Rob Martinez, president and chief executive officer of Shipware, wrote UPS will bring its policies in line with those of FedEx.
“FedEx and UPS have a long history of matching one another’s pricing strategies. General rate increases — especially for ground shipments — have matched over the years,” he stated. “Accessorial and special handling charges are practically identical. UPS Standard rates match the FedEx published rates to the penny.”
Martinez suggested shippers should contact FedEx to amend their contracts.
“Keep in mind that you have a lot more negotiating leverage now than you will if and when UPS matches the FedEx Ground dimensional policy,” he warned.
Sterling said larger shippers may already be contacting UPS, anticipating a change and seeing what can be done to mitigate a price increase and to negotiate contract changes. Concerning FedEx, shippers see this seven-month window until January as a time to analyze current contracts and make adjustments, he said.
“I would have to believe those discussions are already happening,” he added. “I imagine larger shippers will try to stair-step the increases into their contracts, so they do not all occur at once on Jan. 1.”
Large shippers of packages may not be impacted as much by FedEx’s pricing, GENCO’s Briski said, but the vast majority will. He explained shippers should look at their options for reducing packaging to decrease the size of their parcels, reconsidering shipping policies as they apply to the customer, raising the threshold on free shipping, for example, or going to FedEx to renegotiate their pricing agreement. Briski also stressed shippers must stay fresh on the analysis, running it on a monthly basis, to make sure they are being charged the correct rates.
“A carrier would not knowingly mischarge you, but mistakes can happen,” he said. “It’s not a simple calculation, so making sure this is done correctly through an audit process is what we’re recommending.”
Some shippers may even start looking to other carriers. One of those alternatives may be the U.S. Postal Service. Briski said USPS officials see FedEx’s announcement as a way for them to gain some market share by staying the course. Shippers also should consider multiple carrier options, he added, to make sure they’re getting the best value.
“A simple, ‘Oh, we’re always going to use Carrier A irrespective of anything else,’ could work,” he said. “Is it optimal? I guess that will be based on the analysis of the shipper.”
This article was published in the June 2014 issue of American Shipper.