FedEx and UPS rate increases recently took effect while fuel prices, a key cost for shippers, are at record lows. Crude oil broke $50 a barrel, the lowest in nearly six years. So what else is driving changes in shipping prices?
The answer, in short, likely includes the Amazon effect.
U.S. trucking tonnage is at record highs, reflecting a pickup in retail sales, factory output and the broader economy. Few trucks are idle, which basically means businesses are hauling a lot of stuff at the moment, and space on pallets, on which goods and shipping containers are placed, is a hot commodity.
Before the brave world of online sales, truckers and shippers simply worried about the weight of things. Imagine tonnage and pounds as related to tractors, toys and apparel, hauled across the country. Then consumers through websites — both small and large, including Amazon.com — began ordering lots of things for doorstep delivery. Online shoppers have goods from flat screen TVs to boxes of laundry detergent shipped.
Along the way, partly induced by minimum purchase requirements to qualify for free shipping (think Amazon Prime accounts), shoppers began indulging in small add-on items, say, a pack of razors to a tube of lipstick. Why not? It’s free shipping! But tiny products including everything from dime-size ear buds to a jar of eye cream under one ounce — wrapped in bubble wrap, then encased in giant boxes — has consequences. There’s a ripple effect to the broad transportation sector, the environment and ultimately consumers.
“Some of these carriers are basically shipping around air.”
Whether a driver is hauling a super heavy piece of machinery or a feather-light box filled with rolls of paper towels bought in bulk, carrier costs including driver wages fuel remain the same.
“Some of these carriers are basically shipping around air,” says Christoph Stehmann, president of Ecommerce and Shipping Solutions. “If the carrier only charged by weight, they would be losing money,” he said.
Charging for actual weight and dimensional weight, which takes into account the width and height of each box, now is an industrywide practice.
Fuel prices and shipping rates
FedEx shipping rate changes began Monday, and UPS rate changes kicked in on Dec. 29. UPS initially announced a general rate increase in October last year.
It’s worth noting both rate changes are in effect as fuel prices are at record lows. The national average for diesel is at a four-year low, around $3.09 a gallon, the lowest since October 2010, according to AAA data.
The U.S. average for regular gasoline is the lowest in roughly five years at about $2.19 a gallon, the lowest since May 2009.
A spokesman for the Federal Trade Commission said the FTC doesn’t comment on specific business practices or price increases.
A UPS spokeswoman said fuel prices are only one factor in UPS pricing, and that dimensional weight pricing is designed to encourage shippers to package goods efficiently and reduce excess packaging materials and overall package sizes.
“Fuel is only one input to UPS pricing,” said Susan Rosenberg, a spokeswoman for UPS. “UPS rates are competitive and built around value from more service options, consistent reliability and technology that drives information that helps customers balance service and cost,” said Rosenberg, in an email to CNBC.com.
“FedEx makes decisions about shipping rates based on economic conditions, market conditions and the value of the service that we provide,” said Jess Bunn, a FedEx spokeswoman. “We believe the shipping-rate changes we announced last year and that went into effect Jan. 5 are appropriate. They allow us to continue to invest in the value we provide to our customers,” said Bunn, in an email to CNBC.com.
Wanted: Trucking capacity
Expect to hear more about dimensional weight, as more shoppers migrate online and transportation capacity overall remains tight.
The American Trucking Associations’ for-hire truck tonnage Index jumped 3.5 percent in November last year, the latest monthly figures available. In November, the index equaled 136.8, the highest on record. The tonnage increase reflects an improved economy and, in some regions, a shortage of drivers.
Read More Inside the shortage of truck drivers
In the end, those most affected by higher shipping rates include small business owners, who are being forced to re-evaluate their shipping strategy.
Impact to small businesses
Six months ago, small business owner Morris Saintsing pre-empted higher rates at FedEx and UPS by shifting the bulk of his shipping needs to the U.S. Postal Service. The post office factors in package dimensions, but Saintsing said post office prices overall were cheaper.
Saintsing’s company, Bamboosa, offers baby clothes, accessories and a “lap log,” which props up a tablet. Based in Andrews, South Carolina, all of Bamboosa’s items are “Made in the USA,” and all of their sales are online.
For any business in the e-commerce space, a savvy shipping strategy is essential. As an example, Saintsing said that using a box that’s shorter by two inches can save two bucks. Multiply that by hundreds of orders, and the savings add up.
“Just decreasing the cubic size a little bit can make a significant change in rates,” he said.