Diversifying Delivery: Internet Retailer Magazine reprint

APRIL 2015 | WWW.INTERNETRETAILER.COM

iversifyingeliveryeliveryUPS and FedEx have dominated e-commerce parcel shipping, but an increasing array of alternatives are making pitches for e-retailers’ business.

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The buzz on beacons

E-retailers say the recent rate increases and the shift to dimensional weight fees that raise the cost of many ground shipments are not only increasing their bills, but making them harder to understand. “They almost purposely make their rate grids and contracts difficult to understand,” says Amin Harari, co-founder of health and beauty products e-retailer CleanBoutique.com and fulfillment company SM Operators LLC. “Every day there’s a new fee or excuse to upcharge you.”

Add in widespread delays late in the 2013 holiday season, and more web merchants are weighing alterna-tives. “Holiday 2013 was a huge issue and a tough season,” says Chris Halkyard, chief supply chain officer and general manager of distribution services for flash-sale e-retailer Gilt Groupe Inc. “It made people in my position think that not only would we like cheaper options, but also we’d like to take some of the pressure about capacity off and not have all our eggs in one basket.”

E-retailer leader Amazon.com Inc. is diversifying too, and where Amazon leads, others often follow. After the misses of the holiday 2013 season, Amazon said it would review the performance of delivery carriers. In 2014 Amazon began routing more parcels to the U.S. Postal Service as part of a 2013 deal that includes Sunday delivery and Amazon sorting packages in specialized

distribution centers to get the best rates from USPS. An Amazon spokeswoman says a single sortation center—it had 15 at last count—can process “tens of thousands” of customer packages daily.

As a result, some web retailers are turning to alternatives to the national carriers. Gilt, for example, at the end of February shifted “nearly all” of its ground shipping business—an average of 20,000 packages a day—from UPS to package consolidator and shipper Newgistics Inc., which carries packages through its ground network and hands off to the Postal Service for final delivery. Halkyard says that while it takes an average of about four days—1.5 more days than it took UPS to get consumers their pack-ages via ground shipping—consumers aren’t complaining and the savings will allow Gilt to offer more free shipping promotions and better discounts. “We see this switch improving our LTV,” he says, referring to the customer lifetime value metric that projects how much in all a customer will spend with a business.

The Postal Service, regional carriers and consolidators like Newgistics are lining up to

To say the least, many e-retailers are frustrated with the rate increases and laundry list of accessorial charges on the shipping bills they receive from UPS Inc. and FedEx Corp., the two national shipping companies employed most often by North American e-retailers to get web orders to consumers’ doorsteps.

iversifyingelivery

UPS and FedEx dominate e-commerce parcel shipping, but rate increases

have e-retailers looking at a growing array of alternatives.

BY PAUL DEMERY AND ALLISON ENRIGHT

Copyright 2015, Internet Retailer | Reprinted with permission of Vertical Web Media, LLC | 125 South Wacker Drive, Suite 2900, Chicago IL 60606, (312) 362-9529

serve discontented web retailers. And some con-sultants and retailers like Gilt say these options are worth considering. But shifting the delivery mix can be tricky, and some retailers fear that moving part of their business to alternatives could cost them volume discounts with the two big carriers, and instead are using the alterna-tives as leverage to negotiate better deals with UPS and FedEx.

Web retailers figure to have some clout. Business-to-consumer packages accounted

for 45% of UPS’ domestic package volume last year, and FedEx says it spent $1 billion during its fiscal 2014 to expand the capacity of its ground network in large part to accommodate e-commerce parcel growth. FedEx declined to comment for this story; UPS provided e-mailed responses to questions. On the question of how e-retailers are responding to dimensional weight pricing it said it is working with customers to lower their shipping costs and advising them on how to determine appropriate package size.

HOW MUCH SHIPPING FEES ARE UP VARIES by product and a retailer’s volume. But some say prices are up as much as 30%. That includes an average 4.9% annual rate hike, various residential and fuel cost surcharges, and the move to charging by a package’s physical

dimensions—dimensional weight pricing, as it’s called—rather than its actual weight.

Web-only retailer BabyAge.com Inc. found that dimen-sional pricing resulted in one of its hottest products—the Today’s Mom pregnancy pillow—shipping as an 18-pound package, nearly double its actual 10-pound weight, founder and CEO Jack Kiefer says. Even smaller packages were getting hit hard, he adds. “If you take the DIM weight factor and other standard rate increases and residential surcharges, it got to the point where we were looking at it costing $9 to ship a 1-pound package across the street.”

BabyAge reacted to the rate changes by shifting much of its volume away from FedEx’s consumer-focused Home Delivery service. Kiefer says he’s received overtures from the USPS promising attractive rates, but he isn’t ready to leave FedEx. Instead, he shifted about 60% of BabyAge’s shipping to FedEx SmartPost, up from about 2% last year. The SmartPost service provides bargain rates compared with FedEx Home Delivery and Ground services, he says.

At Ampére Creations, a retailer and wholesaler of hand-bags and backpacks, UPS and FedEx fees are up about 20% for a typical package. Daniel Chen, director of marketing and sales, says he’s now shipping “about 99%” of online consumer orders with USPS, while continuing to use UPS mostly for shipments to wholesale customers.

UPS will work with retailers to devise the best mix of shipment routes, packaging and rates, particularly for high-volume destinations and package types, says Jolynn Khamky, director of fulfillment and head of shipping and


« 25APRIL 2015 | WWW.INTERNETRETAILER.COM

all that out isn’t easy, they add.Many retailers are testing USPS, but worry

about losing favorable contract terms they’ve negotiated with the two big carriers, says Todd Benge, managing partner at shipping consul-tancy BirdDog Solutions Inc. “It’s not that you want to be misleading to UPS or FedEx, but this is your business, and shipping is one of the few areas where the vendor tries to be in control of everything. But retailers need to experiment and form a vision of how to position their national carrier contract so as not to hinder their capabil-ity to be flexible in their network.”

THERE’S NO QUESTION USPS IS MAKING A FORCEFUL PLAY TO capture more parcel volume from e-retailers—its shipping and packages segment is the only part of USPS

where volume is growing. Parcel shipping accounted for 20.2% of operating revenue for the year ended Sept. 30, up from 18.7% in 2013 and 17.8% in 2012. It proposed last summer to cut the shipping fee for light- and middle-weight parcels shipped using its Priority Mail service, which led UPS and FedEx to file complaints with the Postal Regulatory Commission (PRC), the government entity that

oversees and must approve Postal Service rate changes. FedEx, in its filing, stated: “What USPS is proposing is an aggressive push to gain market share in the fast-growing business of e-commerce distribution services. ... Price reductions of such magnitude will substantially affect competing service providers and the market as a whole.”

Both FedEx and UPS argue in PRC filings that USPS is using revenue generated

through its so-called “market dominant” products and services, such as first class

and standard mail, to subsidize the new

logistics operations at JackThreads, a web-only retailer of men’s apparel that mainly ships via UPS. Khamky says most JackThreads parcels are 10 pounds or less, and one option that avoids the dimensional weight penalty is to ship some products in soft packages instead of boxes. But she fears customers might object. “We ask ourselves, ‘If I were a customer, would I get upset if I received this gift in a soft package?’ or ‘Would clothing get wrinkled if it didn’t ship in a box?’”

Part of USPS’ appeal for e-retailers is that it doesn’t use dimensional weight in its pricing and charges extra fees in only a few circumstances, such as sending to an Army Post Office address or to Alaska. “There are no surprises when you get your invoice. It is nice to know what you are getting and paying,” Harari says. He ships about half of his volume through Newgistics, 10% with USPS and the remaining 40% split between UPS and FedEx.

But retailers have to keep their customers in mind before making a move. In Ampére’s case, the consumers who account for a small, though quickly growing, part of its total business appear happy with USPS delivery. But on the wholesale side, Chen notes, many customers insist on either UPS or FedEx because of their reputations for reliability and because they pro-vide tracking information, which USPS has not provided reliably in the past.

So instead of turning to USPS as a primary carrier for wholesale shipments, Ampére is seeking a better deal from UPS. “Our B2B customers are still 100% committed to UPS, FedEx and other carriers, and we are expecting our B2B business to grow, so we are working with UPS to renegotiate our rates,” Chen says.

As retailers and other shippers consider alternatives, however, they have to consider what they may lose in the form of volume discounts from UPS and FedEx. Figuring

MOVING MAILIn January the Postal Service issued a request for

information about the design and production of 180,000 vehicles to replace its aging fl eet. A key design requirement in the RFI was to make the vehicles bigger so they can better accommodate packages. Those vehicles are equivalent to about 75% of USPS’ delivery fl eet.

CARGO SPACECurrent fl eet: 121 cubic feetProposed fl eet: 155 cubic feet minimum28% more storage

“It’s not that you want to be mislead-ing to UPS or FedEx, but this is your business, and shipping is one of the few areas where the vendor tries to be in control of everything. But retailers need to experiment and form a vision of how to position their national carrier contract so as not to hinder their capa-bility to be flexible in their network,” says Todd Benge, managing partner at BirdDog Solutions Inc.

26 » DIVERSIFYING DELIVERY

have scanning guns,” says Dave Sabot, president of CheapHumidors.com, an e-retailer of smoking accessories. “Now, they are not as good as FedEx or UPS, but they are scanning it several times through their system and there is more accountability for that package.” CheapHumidors ships most of its lighter-weight packages via USPS, and heavier items via FedEx. But with the improvements at USPS, he’s also moving some of his FedEx shipping volume to that company’s more economical SmartPost service, which ships a package through FedEx’s network but hands off to the Postal Service for final delivery. Sabot says FedEx SmartPost is cheaper than USPS for heavier packages traveling longer distances.

WHEN CONSIDERING ITS SHIFT TO NEWGISTICS, which has USPS making final delivery, Gilt’s Halkyard says he called an old Air Force buddy who is now a mail carrier in El Paso, Texas, and asked him if the tracking improve-ments were as good as he was hearing. “He said, ‘I’ve got this scanner in my hand right now and I have to scan everything,’” Halkyard says. “He said at the start of every shift [management] highlights anybody who’s not scanning and that every carrier is held fully accountable.”

Consumer electronics e-retailer Newegg Inc. too is looking to incorporate USPS more into its shipping mix, and is actively negotiating a customized program with the Postal Service, says Kunal Thakkar, senior vice president of operations. “The network improvements they have done in the last few years make it far more superior than it used to be,” he says of USPS. “The brand perception is starting to change as more consumers see their orders get delivered by them.” Thakkar says Newegg ships about 75% of its volume

pricing in “competitive products,” the category parcel shipments fall into. These segments are supposed to be accounted for separately, and revenue generated in one isn’t supposed to sub-sidize the other. UPS and FedEx demanded the PRC make USPS show how it is accounting for these, but the PRC approved the rate changes and they went into effect in September. “Evidence of cross-subsidization is pervasive, as the Postal Service is increasing rates on monopoly mail products, while at the same time decreasing services,” says Bala Ganesh, UPS retail director, in an e-mailed statement to Internet Retailer. “Conversely, they are keeping parcel rates steady, even lowering rates for certain customers that use UPS products, while increasing small parcel service delivery standards.”

Gary Reblin, vice president of new product and innovation at the Postal Service, says the price changes are intended to offer more competitive pricing and build on Priority Mail’s popularity. “We are a vital business partner for small and large businesses and lowering shipping prices will save them money and improve their bottom line,” he says. “With our affordable shipping options, we hope to attract new business customers and become their preferred delivery service.” He provided further comment on affordability: “As two global shipping companies make changes to their pricing models in 2015—resulting in higher costs to the customer—it’s more important than ever to make sure you’re not paying more than you should be for your shipping needs.”

USPS is doing more than changing its rates to position itself for more parcel volume. It is currently taking bids to replace its aging fleet of 180,000 mail trucks. A key design requirement in its bid request is to design the vehicles with at least 28% more cargo space to accommodate more parcel volume.

Shipping experts and e-retailers who are using USPS say it has also gotten better at tracking packages. Tracking parcels as recently as two or three years ago was more haphazard, they say, with packages sometimes being scanned when received by USPS, sometimes at local post offices and sometimes upon delivery. Often there was a lag between when a scan happened and when that information was uploaded so the customer could see it. That’s no longer the case.

“The Postal Service has really ramped up its technology and all the carriers now

Eastern Connection: Conn., Del., D.C., Ind., Ky., Maine, Mass., Md., Mich., N.H., N.J., N.Y., Ohio, Pa., R.I., Vt., W. Va.OnTrac: Ariz., Calif., Colo., Idaho, Nev., Ore., Utah, Wash.

Spee-Dee Delivery Service Inc.: Ill., Iowa, Minn., Mo., Neb., N.D., S.D., Wis.LSO (Lone Star Overnight): Ark., La., N.M., Okla., TexasPitt Ohio: Ky., Mich., Ohio, Pa., W.V.

LaserShip: Conn., Del., D.C., Fla., Ga., Maine, Mass., Md., N.C., N.H., N.J., N.Y., Pa., R.I., S.C., Va., Vt., W. Va.



with most of those charges focused on SurePost and other residential delivery services. The aim is to turn around last year’s decline in net income, which sank 30.6%, to $3.032 billion from $4.372 billion in 2013.

FedEx doesn’t break out operating income or profit margin figures for SmartPost, but the margin on SmartPost has historically been tighter than on the overall operations of FedEx Ground, which includes SmartPost and Home Delivery, industry analysts say. FedEx does say, however, that SmartPost revenue has been squeezed in recent years as USPS has raised its charges. FedEx reported a 6% year-over-year increase in SmartPost revenue last year, to $983 million from $926 million, but said revenue per package, or “yield,” increased less than 1% to $1.78 from $1.77 in 2013, and declined 1.7% from $1.81 in 2012.

Staying with UPS or FedEx and choosing a more economical shipping option like SurePost or SmartPost means an e-retailer can use a cheaper shipping method and still count those shipments toward their overall FedEx and UPS shipping volumes, says Kenneth Moyer, vice president of supply chain strategies for LJM Consultants. That, he says, can ensure a retailer still qualifies for high-volume rate discounts those two carriers typically offer. Any savings from moving some volume to a lower-cost carrier can be eaten up quickly if a retailer loses a volume discount, Moyer says.

And while UPS and FedEx readily negotiate, that’s not the case with the Postal Service, which by and large can’t negotiate off published rates and is mired by government bureaucracy, e-retailers say. “We have [Postal Service] reps who service our account when needed, but they don’t reach out to us as much as we might reach out to them,” Sabot of CheapHumidors.com says. But he has quarterly meetings with his FedEx rep.

At Gilt, Halkyard tried to work directly with USPS when it was considering shipping alter-natives, but it was slow going, especially when dealing with officials in Washington. Ultimately, Gilt decided to go with Newgistics, which he calls a “nice intermediary.” The retailer lets the vendor manage terms with USPS.

AS SOME E-RETAILERS REVIEW THEIR SHIPPING MIX, they’re finding new carrier options. Pitt Ohio, a traditionally regional carrier with its deepest footprint covering West Virginia, Pennsylvania, Ohio, Michigan and

with UPS and FedEx and 25% through a mix of DHL, USPS, regional carrier OnTrac and others.

“USPS is getting aggressive in the e-commerce space,” says Todd Everett, chief operations officer at Newgistics, and more reliably handles last-mile delivery than in the past. “They recognize the parcel business and servicing the e-commerce market is a critical part of their business.”

The USPS service Newgistics uses for last-mile delivery is called Parcel Select; it’s the same service UPS uses for SurePost and FedEx for SmartPost, their last-mile services via USPS. Parcel Select’s growing volume is indicative of e-retailers’ desire for cost savings. From October to December, USPS delivered 515.92 million Parcel Select packages, up 24.1% from 415.61 million a year earlier, generating $908 million in revenue. Although UPS does not break out SurePost volume in units, it says SurePost volume increased more than 45% last year, and accounted for approximately half of the overall 12% growth in its U.S. domestic shipping volume. At FedEx, SmartPost volume grew 6% during fiscal 2014.

THERE WERE 9.6% MORE PARCELS SHIPPED THROUGH PRIORITY MAIL— the class of mail for which the Postal Service cut rates—from October to December. While not an apples-to-apples comparison, UPS, which reports package volume as a daily average, saw its domestic daily volume during the same period grow at 6.6%.

In its Q4 earnings call, UPS said that increase didn’t produce enough revenue growth to justify its added spending on improving holiday season service, characteriz-ing the network as “underutilized.” Throughout 2014, UPS hired 100,000 temporary workers and spent $500 million on network improvements to prevent the widespread delays that marred the prior holiday season. UPS says those improvements worked and it met its delivery commitments; a survey by customer service tracking firm StellaService Inc. also shows missed deliveries were less of a problem during holiday 2014. But going forward, UPS CEO David Abney said the company will implement surcharges during peak periods, like the holiday season,


28 » DIVERSIFYING DELIVERY

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1.800.464.3137 www.birddog.comThe Parcel Experts

northeastern Kentucky, for example, says it’s getting more inquiries from e-retail shippers than ever before. “In the fourth quarter we received about five bids, and from some large-name shippers,” says Chuck Hammel, director of ground. Pitt Ohio hasn’t closed yet on any of those deals, he says. But it’s developing a national option, through its US Cargo division, which works with other regional carriers to enable shipping and delivery coast to coast.

Inquiries are up too at Lone Star Overnight (LSO), says CEO Rick Jones. LSO delivers primarily in the South and Southwest through its ground and air network. He says the tenor of inquiries has shifted from a few years ago—when most focused solely on the cost savings shippers could get—to one that’s now a mix of savings and how flexible LSO can be to meet shippers’ needs, such as picking up packages at 2 a.m. and delivering the same day. LSO is working to improve its visibility with e-retail shippers; it recently integrated with ShipStation so e-retailers using that vendor’s ship-ping software can more easily see how LSO could service their shipments.

Benge says regional carriers are worth looking into for some deliveries because they can be competitive with national carriers on price and speed within their service areas, although some retailers are uncertain about trying a carrier they are less familiar with. “For e-retailers there tends to be a lot of apprehension about regional carriers. They don’t know them if they’re not themselves in that part of the country, and there’s not a lot data for them to refer to,” he says.

Newegg has tested using several regional carriers, Thakkar says, but only OnTrac provided the mix of cost savings, speed and met customers’ expectations enough for Newegg to com-mit some parcel volume to it. Newegg has used OnTrac for ground shipping to select ZIP codes in eight Western states for three years. “They maintain their costs to be very compet-

itive and delivery is a little faster than the national carriers in specific ZIP codes,” he says, with 90% to 95% delivered in one day. Newegg is also part of a pilot OnTrac is running as it develops its own last-mile option handing off to USPS. That service is aimed directly at e-retailers shipping a minimum of 500 packages a day into OnTrac’s service area. “It’s easier to customize a shipping program with the

regionals; and they have the ability to make it happen faster than national carriers,” Thakkar says.

Whichever carrier mix e-retailers choose to pursue, they have numbers to crunch and questions to consider. But now, more than ever, alternatives are available.

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The shipping carrier mix of Top 500 e-retailers, over time

2009 2011 2013

UPS 111 145 176

FedEx 79 123 144

USPS 61 90 105Source: Internet Retailer’s Top500Guide.com. Retailers are asked to share who their primary carriers are; many retailers report using multiple carriers. Some do not provide carrier information.

Top 500 e-retailers, over time

Newegg has tested using several regional carriers, Thakkar says, but only OnTrac provided the mix of cost savings, speed

2013

176

144

105

“For e-retailers there tends to be a lot of apprehension about regional carriers. They don’t know them if they’re not themselves in that part of the country, and there’s not a lot data for them to refer to,” says Benge.

