News / Parcel carriers act firm, but succumb to pressure for discounts

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Parcel delivery pricing in the US is weakening at a time when a surge in business should be pushing it up, but the integrators are facing a combination of headwinds.

Until the end of last month FedEx and UPS signalled to investors and customers that they would be standing firm on their peak season surcharges, arguing they were necessary for the investment required to keep up service levels.

Behind the scenes, though, they were fighting a retreating battle against pressure from customers for discounts. Citing industry data and information from several industry professionals, Reuters reported on Tuesday that shippers were “easily winning discounts” from the pair for the first time in over four years.

According to the TD Cowen/AFS Ground Parcel Freight Index, ground delivery rates for services used by online merchants slipped below 2022 levels during the second quarter, and are estimated to have been down throughout the third quarter.

John Haber, chief strategy officer of Transportation Insight, remarked that the parcel carriers had been under strong pressure to lower pricing. Statements that they would hold the line as customers were embracing their superior service levels may sound good to investors, but they are at loggerheads with the market situation, which ultimately dictates rate developments, he added.

The outlook for the peak season is not bullish. According to Deloitte, holiday sales are expected to show the lowest growth in five years. In response to market predictions and elevated labour costs, US retailers are adding 410,000 seasonal workers this year – the lowest number since 2008. Last year, 519,400 were recruited in Q4, which was 26% lower than in 2021.

While demand is not expected to show much growth, capacity and network fluidity look reassuring. A report by project44 indicates that the on-time rate for last-mile deliveries reached 85.1% in August, the highest level since the outbreak of Covid. Hence, shippers are not concerned about capacity.

In this situation, competition for business among carriers has intensified. The US Postal Service announced that it would not levy a peak season surcharge this year, an effort to grab a larger slice of the parcel business.

At the same time, the presence of smaller parcel carriers has grown. Shipper frustration with surcharges and cherry picking by the integrators over the past two years has helped their ascent in the market. And concerns about a strike at UPS added to shippers’ efforts to diversify their carrier base.

“Five years ago, large shippers may have used one or two carriers, now they use five to ten carriers,” said Mr Haber.

At the same time, large shippers have changed their approach to some of their final-mile deliveries. Within a certain radius from their distribution centres they have taken to using local courier firms, which has translated into significant cost savings, he said. They may now pay $3 for a parcel, which would cost upwards of $8 at the integrators.

Finally, there is some pricing pressure coming from the integrators themselves, as UPS is trying to regain business lost to competitors during contract negotiations with the Teamsters union.

Mr Haber explained: “They lost a bunch of volume because of people’s fears of a Teamsters strike, and they’re now trying to recover as much of this as possible. But people don’t give it to you just because you’re UPS and they like your brand. And, as the economy is kind of soft, UPS has to offer attractive pricing.”

Now there is a snowball effect in play on parcel rates. Large retailers like Macy’s have reported in their recent earnings presentations that they have managed to reduce their transport costs, signalling to the market that they managed to gain pricing concessions from the large parcel carriers; so now other shippers are nudging the carriers for discounts, Mr Haber observed.

The convergence of these factors has eroded the integrators’ earlier stance on pricing, he added: “If you want to have enough business to cover your fixed costs, and the market is kind of weak, it’s hard to stay firm on the pricing.”

The cost question is looming large for FedEx and UPS. The latter is facing significantly higher costs after the concessions to labour in the recent round of contract negotiations, while FedEx has made most of its recent gains from cost cuts rather than from growing its business, and expects this to continue into 2024.

Maintaining yields will be difficult. Mr Haber said the parcel carriers – like those in other segments – raised their pricing drastically during the pandemic and the ensuing surge in traffic. Rates in ocean freight and trucking, as well as airfreight, have fallen sharply over the past year, but so far they have remained high in the parcel segment.

“Now it’s trickling down on parcel pricing. Now we’re seeing a delayed drop in parcel rates,” he said.