With the continued growth of E-commerce, you would think this would be a huge profit opportunity for UPS and FedEx and that this growing business segment could help to stabilize or reduce 5%+ annual carrier rate increases.  Many of the stock “buy ratings” for these two mega carriers are rooted in E-commerce related potential and growth.  The fact is, the growth of E-commerce shipments and resulting residential deliveries are soaking up the carrier’s profits and are in part, driving those annual price increases being announced right now.  Let me take a minute to explain:

  • Delivery stops in a designated geographic area and packages per delivery: In the shipping industry, density drives efficiency and lower operating costs.  That is why the carriers are in love with business deliveries….multiple stops and packages delivered in a small geographic area.  E-commerce shipments are almost exclusively delivered to a residence…one package going to one residence with the delivery addresses spread out far apart from each other.  This is what is driving the increased cost of residential and rural zip surcharges. The surcharges for a rural residential shipment can be more that the cost of base transportation.
  • E-commerce shipments tend to be larger and lighter than business shipments: This means the carriers are putting fewer shipments on a trailer going from Buffalo to Boston which increases the cost of moving packages in their line-haul networks.   Larger e-commerce shipments are not sorted as efficiently as smaller business shipments and are more prone to damage as they lack the density of a heavier business shipment.  Again, these circumstances drive added cost.
  • New trucks, drivers and sort facilities: The growth of these less than desirable e-commerce shipments means the carriers have to buy more trucks, hire more drivers and build more sort facilities to handle all these new e-commerce shipments with less than desirable shipment metrics. FedEx is spending over $2 Billion dollars this year alone on just adding capacity to their ground network.
  • The residential delivery is a nightmare: Most residential deliveries are released, meaning a signature is not required. Released shipments result in a multitude of follow-up problems that drive added cost. False claims are made for non-delivery and theft of released shipments is a growing problem.  For shipments that do require a signature, most residential recipients are not home during the day and this requires a costly 2nd delivery attempt.  These issues specific to residential deliveries result in additional customer service follow-up which also drives higher costs.

Even with all the added cost related to an e-commerce residential delivery, the E-commerce industry still proclaims “free delivery” across their websites.  Let’s get real as there is no free delivery for a residential delivery…it just costs too much to deliver these ugly shipments.   In my next post, I will explain the changes taking place in the shipping industry in order to support the continued growth of E-commerce residential deliveries.