Dive Brief:
- FedEx and UPS continue to offer shipping discounts to attract more customers, which has helped lower delivery rates despite climbing fuel surcharges, according to the TD Cowen/AFS Freight Index released July 16.
- The ground parcel rate per package was 26.8% above the index's January 2018 baseline in Q2, a decline from 28.9% in the same quarter a year ago. Rates are expected to settle in at 25.7% above the baseline in Q3 as discounting activity continues.
- "Small- to medium-size shippers are seeing exceptional discounts that might typically be reserved for much larger customers," Micheal McDonagh, president of parcel for AFS, said in a news release.
Discounts keep ground parcel delivery costs in check
Dive Insight:
The index previously projected that Q2 rates would slightly increase year over year, but FedEx and UPS have subverted expectations by maintaining aggressive discounts to draw in small business volume.
"The ongoing pricing competition between FedEx and UPS is expected to extend beyond earlier projections, with negotiation activities in Q3 further diminishing the effects of the GRI," per an AFS Logistics Q3 index presentation. "Both carriers are more aggressive in discount offerings to small and medium customers while holding discounts for large customers steady."
Discounts are typically volume-based, with higher volumes leading to bigger savings, a structure that benefits larger shippers, AFS Logistics Chief Analytics Officer Mingshu Bates said in an interview. But in the current environment, smaller customers can secure pricing previously reserved for businesses twice their size. FedEx and UPS are willing to stomach these discounts since smaller businesses still provide significant upside for their bottom lines.
"It's a small price for the carriers to pay in order to gain that volume," Bates said. "I think that's really where they can still be offering discounts, but still be profitable."
While the delivery giants hope attracting smaller shippers will boost profitability, it won't be easy in a soft demand environment. UPS' U.S. average daily volume increased 0.7% year over year in Q2, but CFO Brian Dykes noted on an earnings call that small business volume was "down until June when it flipped positive."
Once FedEx and UPS volumes return to levels the carriers are happy with, shippers should be prepared for less generous discounts as the delivery giants focus more aggressively on per-package revenue, McDonagh said in an interview.
"We know what's going to happen, we just don't know when," McDonagh said.
Pricing power is in shippers' favor for now, but fuel surcharge increases in recent years have helped FedEx and UPS snatch additional revenue even amid the discounting spree, AFS Logistics said. For example, the express parcel rate per package reached 4.7% in Q2, up from 3.8% year over year, as carriers used surcharge hikes to offset lower rates.
"Parcel carriers find themselves in a contradictory cycle – frequently hiking surcharges to squeeze additional revenue from limited demand, but simultaneously deploying heavy discounting to compete for those modest volumes," AFS Logistics' news release said.
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