Shippers face new normal in parcel rate increases, consultants say

Parcel shippers should prepare for a new normal in the size of general rate increases (GRIs) as well as a different approach to rate adjustments led by more pricing based on planned surges in delivery demand, executives of a parcel consulting firm said Wednesday.

Within the past two weeks, FedEx Corp. (NYSE: FDX) and UPS Inc. (NYSE: UPS) announced GRIs of 5.9% for 2024. The increases are below 2023’s record increase of 6.9% but above the 4.9% rate increases that were the historical norm prior to the pandemic. The first 5.9% GRI increase was in 2022.

Shippers should expect future GRIs to range between 5.9% and 6.9%, and not revert to the pre-COVID level of rate hikes, said Kenneth Moyer, executive vice president of supply chain strategies for LJM Group, a consultancy with about 1,500 shipper clients. Including accessorial charges, fees for services beyond the basic pickup and delivery, many shippers’ rate increases will exceed 10% unless they can negotiate them down or out of their respective contracts.

According to LJM, accessorials account for, on average, 30% to 40% of a typical customer’s parcel spend, well above pre-COVID levels.

In what Moyer described as potentially the most important parcel pricing shift of the past decade, FedEx and UPS will target specific holidays, such as Valentine’s Day and Mother’s Day, for rate increases and will deepen their implementation of “surge” or “dynamic” pricing based on days of the week and shipper behavior, LJM said. For example, the carriers may push for higher rates on Mondays because, for many shippers, that is their heaviest shipping day, Moyer said.

The moves are part of an evolution to year-round rate and surcharge increases, instead of the hikes being confined to the traditional peak delivery season.

The 2024 GRIs are designed to strike a balance between carriers’ efforts to generate profitable growth and the understanding that they could not err on the high side given a low-demand environment and increasing competition from regional carriers, the U.S. Postal Service and Amazon.com Inc. (NASDAQ: AMZN), among others, Moyer said at the Parcel Forum in Nashville, Tennessee. Still, both carriers want to mold shipper behavior, he said, and part of that attitude adjustment is to put customers on notice that there has been a secular shift in the GRI range.

FedEx raised its GRI in late August, earlier than anyone can remember. It was part of a strategy to put immediate pressure on UPS in the wake of its five-year contract with the Teamsters union, which is expected to raise labor costs by 10% in the first year. UPS, in the midst of trying to recapture volumes lost mostly to FedEx in the weeks and months leading up to the late July agreement, had to move quickly to counter FedEx’s move. UPS wanted to push for a higher GRI but felt it couldn’t if it wanted to win back volumes from its rival, Moyer said.

It is estimated that UPS lost about 5% of its domestic average daily volume, almost exclusively to FedEx, due to shipper concerns over a possible strike by the Teamsters, according to consultancy ShipMatrix Inc. ShipMatrix said about 1 million parcels were diverted daily to FedEx in the days and weeks leading up to the agreement. ShipMatrix forecast that half of those diverted volumes would remain with FedEx because its rates were lower than those of UPS.

FedEx has already published a detailed breakdown of its 2024 GRIs, with rates fluctuating depending on product type, shipment weight and distance traveled. UPS has yet to publish its detailed breakdown, but it is expected to be similar to that of FedEx.

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