How Retailers Can Mitigate the Impact of New Shipping Surcharges

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Featured in SupplyChainBrain.

E-commerce sales were steadily increasing before 2020, but they absolutely exploded in the wake of COVID-19 and social distancing. For example, online consumer spending increased by 44% between 2019 and 2020, while online sales grew from 15.8% to 21.3% of total retail sales. Although this uptick is great news for retailers on the surface, new shipping costs are eating into some of that revenue. Because e-commerce sales show no signs of slowing down, retailers must find a better way to balance shipping surcharges and overage costs.

Increase in Sales, Increase in Shipping Resources

The rapid increase in e-commerce sales places pressure on shipping and logistics companies, which now operate beyond their normal capacity. They attempt to process the influx of parcels with existing — and sometimes inadequate — infrastructure. Without enough sorting facilities, delivery vans, or personnel, the companies are working hard to meet both consumer and retailer expectations regarding delivery times. In fact, according to ShipMatrix, on-time delivery rates for the 2020 holiday season — the busiest time of year for shipping companies — were slightly better for UPS and FedEx, compared to 2019.

Achieving that goal requires hiring temporary holiday workers — more than 100,000 in the case of UPS last year. But in January 2021, parcel volume remained high even as those temporary workers’ contracts ended. Companies, such as UPS and FedEx, have had to make a choice: scale up and hire more permanent employees, or scale back and accept fewer packages.

And Increase in Shipping Surcharges

In what seems to be an effort to do both, these shipping giants have initiated a series of surcharges. It’s the shipping companies’ way of not only bringing in more revenue to increase capacity, but also slowing down the influx of parcels by weeding out retailers who refuse to pay surcharges. Before 2020, retailers could ship a certain number of product units before overage charges kicked in from logistics partners. However, with the e-commerce boom resulting from COVID-19, retailers pushed through those quota barriers, leading to higher shipping surcharges.

According to UPS, any customer who shipped more than 25,000 domestic parcels in a one-week period starting in February 2020 must pay an extra $0.30 per parcel. Any customer who shipped more than 1,000 parcels, or 10 parcels that required additional handling or met the definition of a “large package” during that same time period, is subject to additional surcharges per package: a $3.00 “additional handing” surcharge and a $31.45 “large package” surcharge.

FedEx, on the other hand, has increased all shipping costs regardless of the number of packages being shipped by a single retailer.

How Surcharges and Shipping Capacity Affect Retailers

On the one hand, retailers can pay the surcharge and pass it on to consumers by increasing their shipping and handling fees. But for companies that have made free shipping an integral part of their value proposition and brand identity, this is impossible to do. They must eat the costs of the surcharges or find alternative delivery solutions, like Dolly.

Plus there’s also the risk that shipping problems could reflect poorly on retailers. Whether a hurried delivery driver leaves a package on the driveway instead of the front porch, or an overwhelmed sorting facility loses a package entirely, numerous shipping-related scenarios can lead to unhappy customers. Those customers may voice their complaints in the form of 1-star reviews on the retailer’s site, rather than blaming the shipping companies. At a time when online reviews impact up to 90% of consumers’ shopping habits, this isn’t a risk retailers can take. It’s important to not only find carriers that are not only fast and affordable, but also trustworthy and capable of embodying your brand values.

How Modal Diversification Can Balance Shipping Costs

Diversification offers stability. As a retailer, you already know the importance of working with more than one supplier, for example, or of cross-training employees. When your go-to supplier or star employee isn’t available, you already have a back-up ready to step in. So why rely on just one or two shipping companies or modes of transport?

Instead, know when to use UPS, when to use FedEx, and when to use last-mile shipping services like Dolly. For example, if you have not shipped enough parcels to qualify for UPS’s surcharges, be sure to stay under the 25,000 parcel quota. Even exceeding this quota one time could cause your shipping costs to increase. Always calculate the cost difference of using FedEx versus UPS or the United States Postal Service to ensure you’re choosing the most cost-effective solution.

For local deliveries, take advantage of Dolly, which leverages a network of Helpers to transport packages from your retail store or distribution center to the buyer’s front door. By partnering with Dolly’s Helpers, you can offer same-day delivery, sometimes in as little as 90 minutes.

The good news is, it is possible to get a better handle on extra costs. You can avoid quota surcharges for additional shipping activities by seeking assistance from knowledgeable industry partners, and through employment of additional creative methods.