The high cost of delivering eCommerce packages is rearing its ugly head this holiday season.
With online sales expect to reach $392.5 billion this year, according to research firm eMarketer, shippers and retailers are facing increased pressure and costs to get orders out the door and delivered on time.
Despite the steady increase in prices, the margins for shippers have dropped drastically, Reuters reported on Thursday (Dec. 15). It costs delivery companies three times as more to deliver packages to homes versus business addresses, but retailers can’t pass along the costs since in many cases free shipping is being offered.
One solution being used to address the problem is the introduction of new, space-saving packages that allows delivery trucks to hold more cargo, which cuts costs for retailers and can improve the margins for shippers.
UPS told Reuters that up to 60 percent of the requests it handles are for smaller packages that can cut the shipping rates.
“In most cases, we are able to get retailers a better rate,” Quint Marini, head of UPS’ package laboratory, explained, adding that the average rate of reduction is about 20 percent.
UPS and FedEx have also raised package rates by between 4.9 percent and 5.9 percent annually since 2009 in an effort to counter rising costs. The companies have employed other cost-cutting methods, such as delivering batches of packages that can be picked up by customers at urban retailers.
“Amazon has forced everybody into free shipping,” John Haber, head of logistics consultancy Spend Management Experts, told Reuters.
Amine Khechfe, cofounder of shipping services provider Endicia, said retailers are squeezed.
“They’ve got the pressures of free shipping, which isn’t really free, and their costs are going up,” he added.
Software developer ShipMatrix analyzed millions of packages and found that on-time delivery rates for UPS ground fell to 96.3 percent last week, while FedEx Ground’s hit 96.9 percent, even when adjusted for weather and other unavoidable delays.
Usually, on-time delivery rates average between 98 percent and 99 percent during the rest of the year.
“If their supply chain is already starting to get clogged, the issue could compound on itself, and we could experience a situation where people aren’t getting their packages for Christmas,” Brandon Staton of logistics consultancy Transportation Impact told the Wall Street Journal.
“Until this trend shows any sort of stabilization, the carriers — I don’t care how good they are — are going to have a tough time trying to figure out where to allocate their resources in order to keep up with demand,” he said.