By Paul Ziobro
Online orders poured into Foot Locker Inc. in March, propping up
business after the coronavirus pandemic forced the sneaker seller
to close nearly all of its 3,000-plus stores.
By the end of June, Foot Locker had received notice from its
longtime carrier, United Parcel Service Inc., that it would face a
hefty rate increase on some of its shipping contracts, people
familiar with the matter said.
Executives balked and are exploring moving that business to
FedEx Corp. or other carriers, a person familiar with the matter
said. A Foot Locker spokeswoman declined to comment.
The pandemic has created a moment of reckoning for e-commerce,
as carriers like FedEx and UPS grapple with a surge in online
shopping that has pushed their networks to capacity. That has also
given the delivery firms a window to charge higher rates as
retailers need their services more than ever.
They are starting to exercise that pricing power, with UPS
hitting some large shippers with price increases in the
double-digit percent range in recent weeks and FedEx following
suit, according to logistics executives including shippers,
consultants and carriers. Some of the increases have come
mid-contract, these people said, while other increases have been
made during renewals.
"With the surge of demand for parcel shipments, it's shifted to
a carrier market," said Hannah Testani, chief operating officer of
Intelligence Audit, a freight audit and analytics company. "With
such few carriers that can truly move national shipments, the
carriers have almost unlimited pricing power."
The increases are creating a quandary for retailers who have
relied on online shopping to salvage business as stores temporarily
closed and many shoppers became reluctant to venture out. Merchants
that don't want to absorb the added cost can raise shipping prices,
eliminate free shipping or raise prices of goods sold online.
A UPS spokesman declined to comment ahead of the company's
quarterly earnings report Thursday. In April, Kate Gutmann, UPS
chief sales officer, said the company generally aims to keep price
increases between 2% and 3% but that it is addressing pricing
changes "on a customer by customer basis."
A FedEx spokeswoman said the company has "extremely high demand
for capacity" as it nears the peak shipping season ahead of the
holidays. "We are taking several steps to manage our network, and
this includes working with our customers to find solutions during
this challenging time," she added.
Online sellers have already had to contend with limits and fees
imposed during the pandemic. FedEx limited the amount that some
retailers such as Kohl's Corp. and Bed Bath and Beyond Inc. could
ship from stores. Both carriers have also imposed extra fees when
shippers mail large packages, or use one of their lower-priced
services where the U.S. Postal Service delivers the packages to
homes.
The shift has disrupted some longstanding practices in rate
negotiations. With capacity at a premium, shippers have little room
to play the carriers off each other to win discounts and other
concessions, the logistics executives said.
Some consultants say UPS has been willing to let customers ship
with other carriers rather than fighting for every last piece of
business as has historically been the norm.
The economics of delivering packages have fundamentally changed.
FedEx and UPS had long relied on the more profitable deliveries of
multiple large packages to businesses to subsidize deliveries to
homes, where packages are generally lighter and routes require more
stops and further travel. Residential deliveries on average are
three times more costly to deliver than those to businesses,
according to Trevor Outman, co-chief executive of shipping
consulting firm Shipware LLC.
In recent years, both companies delivered a little more than
half of their packages to residences. During the pandemic, home
deliveries have soared to more than 70% of deliveries, the
companies said. Shippers whose delivery needs have deviated during
the pandemic, either from higher volume or a shift in where it
goes, are getting closer scrutiny from the delivery companies,
logistics executives said. At its peak, Foot Locker said it
processed 200,000 orders daily, eight times more than it would have
on its busiest day in recent years.
In cases where shippers have locked in good rates, carriers are
putting stricter limits on capacity, a logistics executive said.
"The better rates you have, the less capacity you're going to get
these days," the executive said.
It is a starkly different competitive environment than the one
FedEx and UPS were operating in at the beginning of the year, when
both were fighting for business to fill their networks.
Pre-pandemic, FedEx was focused on boosting volume to replace
business it lost from cutting ties with Amazon.com Inc., while UPS
was taking on more of Amazon's business.
"They were squeezed for pricing and now they are getting a
chance to balance the scale," said Satish Jindel of SJ Consulting
Group Inc., a parcel-industry research firm.
Last month, FedEx's chief marketing officer, Brie Carere, said
she expected a shift in pricing because of the dynamics shaping the
market. "We believe that e-commerce will remain elevated as a
percentage of retail and that obviously capacity is a finite
commodity in the market," Ms. Carere said on the company's earnings
call.
Some consultants said they were advising their clients to
explore moving their business to regional carriers as a way to
extract more favorable rates from FedEx and UPS. But some shippers
say they have been told by smaller carriers that they won't have
enough capacity until next year.
Write to Paul Ziobro at Paul.Ziobro@wsj.com
(END) Dow Jones Newswires
July 29, 2020 08:58 ET (12:58 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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