New US parcel surcharges may hasten predicted end of free shipping

Not for the first time the parcel market appears like a battleground to expand or shrink margins, and predictions of an end to free delivery may get a boost from a new round of surcharges by FedEx and UPS in their home market.

This month they are introducing delivery surcharges in 82 postal codes, although they already apply to many zipcodes in the US – for the most part areas with lower population density, which affect yields for the parcel carriers.

Now the integrators are extending the surcharges to more densely populated regions, with many of the zipcodes affected in major urban population centres, including New York, Boston, Chicago, Los Angeles and San Francisco.

Depending on mode (air or ground), and residential vs commercial delivery, the surcharges range from $3.95 to $5.85, but can be higher in areas categorised as ‘extended’ or ‘remote’.

UPS implemented its surcharge on Monday, and FedEx is set to follow suit a week later.

According to one report, the integrators have now extended the delivery surcharge to cover more than half of all zipcodes in the US.

With the additional surcharge on sectors where they see higher yields owing to better traffic density, FedEx and UPS stand to enjoy a nice boost to their bottom lines. While they are engaged in huge cost reduction efforts, the pair are increasingly using accessorial charges to raise yields.

As the latest TD Cowen/AFS Freight Index (published yesterday) points out, they have raised fuel surcharges more than once and boosted demand surcharges since the announcement of their general rate increase for 2024. Historically, updates of accessorial charges were communicated with annual price changes, but now shippers are faced with price fluctuations at other times in the year.

Given the higher density and volume of shipments to the new areas where delivery surcharges apply, shippers are bound to see a significantly stronger increase in costs than those with lower population density. They may be able to mitigate this by consolidating shipments or encouraging customers to collect parcels from less-expensive commercial points, but the associated tweaks to their system may raise internal costs.

According to the TD Cowen/AFS Index, in the express parcel segment the combined effect of the general annual rate increase, fuel surcharge adjustments, a shift to more premium services and higher average billed weight more than offset carrier discounting, resulting in a significant net increase in cost per package in in the first quarter, jumping from 0.9% above the January 2018 baseline in Q4 23, to 3.9%.

The upward push on pricing from parcel carriers is playing out in an environment where observers have speculated about the demise of the free shipping concept. This has been predicted many times over the past few years, but some analysts argue that this time it may happen.

In November, retail research firm First Insight suggested one-third of consumers were willing to spend at least $10 for shipping.

“The days of high consumer expectation for free and fast shipping may be in the rear-view mirror, and retailers may no longer have to automatically offer free shipping simply to remain competitive,” commented First Insight CEO Greg Petro.

Consumers appear to have swallowed the emergence of charges for product returns.

But Rick Watson, founder and CEO of e-commerce consulting firm RMW, has misgivings. From an affordability point of view for merchants, free shipping should not be around any more, but sellers are afraid of how much business they could lose if they ceased to offer it, he said.

He pointed to a recent survey by PYMNTS and Adobe, which found that 66% of consumers considered free shipping key to customer loyalty.

“Retailers must figure out a way to subsidise free shipping if they want to grow,” he commented, adding that the best strategy toward that end may be loyalty programmes.

“Consumers are still willing to pay for loyalty, at least when there is a wide assortment and fast delivery involved.”

This suggests free shipping will likely survive a few more predictions of its imminent demise, but the pressure on shippers from rising fulfilment costs may force a growing number of them out of the game.