Retailers and shippers feel the pinch of free delivery costs

With FedEx and UPS unable to replicate the revenue model of Amazon.com’s $99 a year Prime membership model, shippers and retailers are feeling the squeeze.

In an unassuming building located in Addison, Chicago, engineers from United Parcel Service Inc. have been sweating it out, trying to design a rather vexing issue of designing cost effective packages for e-commerce.

As per market research firm eMarketer, online retail sales are expected to reach $392.5 billion this year with U.S. consumers now demanding free shipping on most packages. Retailers and shippers are feeling squeezed.

Despite a steady increase in prices, the margin of shippers have seen either stagnation or have fallen. With retailers offering online consumers to compete against one another, they are unable to pass the shipper’s additional costs onto consumers.

The ideal solution for both, retailers and shippers, is to design space-saving packaging that can not only be densely packed in delivery trucks, which, in turn, can cut the cost for retailers and boost margins of the shipper.

United Parcel Service says nearly 60% of all requests handled by it are for small packages.

“In most cases we are able to get retailers a better rate,” says Quint Marini, who runs the lab. On average, the rate reduction is nearly 20%.

Even FedEx has a similar facility in Memphis.

Engineers run packages through a gauntlet of tests, including one which simulates the jolts of a delivery truck traversing on a bumpy road. Weights are attached on boxes, and if the load is too much, the box collapses spilling the weights onto the floor.

“If the box can’t hold the weights, we’ll have to fail this one,” said Jonathon McWherter, a UPS engineer conducting the test.

These tests are important, since e-commerce shipments have accounted for 46% of UPS’s total volume, last year. UPS expects this figure to rise to 51% in 2019.

To counter costs, both FedEx and UPS have levied surcharges on retailers for rural deliveries and residential addresses.

As per SJ Consulting Group, rates for a 5-pound (2.3-kg) box, which typically travels up to 1,400 miles (2250 km) by FedEx Home Delivery or UPS Ground have nearly doubled since 2006, to $14.18.

Despite the doubling of shipping rates, profit margins at both FedEx and UPS have stagnated or declined in recent years. This can be partly attributed to both companies sinking in billions of dollars to handle rising volumes,

Both companies have sought new ways to cut costs, including dropping batches of packages for urban retailers, where customers can retrieve them at their own convenience.

Having explored that avenue, both companies are now focusing on streamlining the packaging. They have also started charging a fee for ‘dimensional weight’: surcharge for boxes that take up more room in relation to their weight.

Both companies have been hemmed in by Amazon.com – which offers free shipping to customers once they join its $99 annual fee Amazon Prime membership program.

Neither FedEx nor UPS have been able to replicate this revenue stream from Amazon.com.

“Amazon has forced everybody into free shipping,” said John Haber, head of logistics consultancy Spend Management Experts.

“They’ve got the pressures of free shipping, which isn’t really free, and their costs are going up,” said Amine Khechfe, co-founder of Endicia, which provides shipping services to e-commerce companies.

Retailers are feeling increasingly squeezed.

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