UPS Holiday Surcharge Spike: Will It Backfire Amidst E-commerce Giants?
By Lisa Baertlein
LOS ANGELES (Multibagger) - UPS, the global leader in package delivery, has just revealed this year's holiday surcharges, introducing significant hikes that analysts believe could backfire.
2024 Holiday Delivery Squeeze
The 2024 holiday gift delivery season, from Thanksgiving to Christmas Eve, has only 17 operating days, compared to the usual 20 or more. This limited timeframe may push daily peak season volume to unprecedented levels, necessitating additional trucks, planes, and staff to ensure timely deliveries, UPS stated.
Revenue Recovery Strategy
UPS is increasing fees to counter a dip in revenue as budget retailers like Temu and Shein, offering low-margin, slower deliveries, become a larger part of the Atlanta-based company's business.
Market Reactions and Predictions
Analysts and industry consultants are skeptical about the robustness of seasonal demand to justify UPS's surcharges, suggesting that customers may seek alternatives.
"UPS is attempting to create a more favorable pricing environment," remarked Nate Skiver, founder of LPF Spend Management.
"We were surprised by the magnitude," said Scott Group, analyst at Wolfe Research, regarding the surcharges announced on July 23.
For the first time, UPS will apply a peak surcharge for commercial air shipments, including COVID vaccines, to free up cargo space and boost revenue. It will also reinstate a blanket per-package surcharge during the peak demand period.
Surcharge Details
UPS peak surcharges have risen by 10% or more from last year, according to shipping consultants. The surcharges range from about $1.50 per package for the most economical SurePost service to $8.25 for overnight air service, said consultant Satish Jindel.
Competitor Moves
FedEx usually aligns its seasonal shipping surcharges with UPS but has yet to reveal its holiday strategy. The U.S. Postal Service, with ample excess capacity, would not impose more than a 25-cent surcharge per package, Jindel added.
E-commerce Impact
Rapidly expanding e-commerce giants like Shein and PDD Holdings' Temu have overwhelmed the UPS network with low-cost shipments from China, impacting UPS's earnings in Q2 and leading executives to cut their 2024 margin forecast. Amazon, UPS's largest customer, is also exploring slower direct-to-consumer shipments from Chinese factories.
Market Dynamics
Market analysts suggest that current forces may hinder UPS's price hikes from taking effect. Retailers are offering early holiday deals, spreading demand more evenly across the season.
Jindel estimated that U.S. delivery firms will handle about 90 million parcels per day during the holiday season, against a capacity of 110 million parcels.
"When capacity exceeds demand significantly, people are less likely to accept peak surcharges," said Jindel, co-founder of the company that evolved into FedEx Ground.
Customer Leverage
Post-pandemic, customers of UPS, FedEx, and other delivery firms have gained leverage in price negotiations. Many couriers reduced peak surcharges last year when demand waned.
"Expect to see more shippers pushing back," said Jey Yokeley, chief revenue officer at TransImpact, a consultancy that helps clients manage shipping budgets.
Critical Period
UPS is implementing peak surcharges when retailers are hyper-focused on holiday sales, which can determine their annual financial outcomes, noted Tom Nightingale, CEO of AFS Logistics.
"These surcharges are timed to minimize resistance."
---
Simplified Analysis
What’s Happening?
UPS is raising its holiday season delivery charges significantly. This is because the peak season (Thanksgiving to Christmas Eve) has fewer operating days this year, creating a time crunch and raising delivery costs.
Why the Increase?
UPS wants to boost its revenue, which has dropped due to budget retailers like Temu and Shein opting for slower, cheaper deliveries.
Industry Reaction
Experts are skeptical if the increased charges will hold, as customers might look for alternatives. Competitors like FedEx and the U.S. Postal Service may offer lower surcharges, making them more attractive.
Impact of E-commerce
Giant e-commerce players like Shein, Temu, and Amazon are flooding UPS with low-cost deliveries from China, affecting UPS's profits.
Market Forces
The overall demand for holiday deliveries may not be enough to justify UPS’s price hikes. Retailers are spreading out holiday deals, which could flatten the peak demand.
Customer Power
Post-pandemic, customers have more negotiating power and may resist the higher surcharges, especially since some competitors might not follow suit.
Bottom Line
If you rely on UPS for holiday deliveries, expect to pay more. However, with competitors possibly offering cheaper rates, it may be worth exploring other shipping options to save costs during the holiday season.