Parcel carriers' recent investments in capacity may still not be enough for peak season, leading shippers to prepare for another challenging holiday period with limited space and higher costs.

During the 2021 holiday shipping season, delivery demand is expected to exceed capacity by 5 million pieces a day, UPS CEO Carol Tomé said on the company's Q2 earnings call Tuesday. The looming capacity crunch, fueled in part by the online shopping surge, and other challenges throughout the order-to-delivery process mean retailers not already gearing up for peak will have a bumpy holiday season, experts say.

"Retailers are going to have to order holiday shopping products now in order to get them onto the shelves by the time the season rolls around," said Eric Oak, a supply chain research analyst at S&P Global Market Intelligence, in a Q3 outlook for supply chains Monday.

The need to stock up for peak comes as many companies have waited to replenish their inventories until shipping costs fell from elevated levels, said Neel Jones Shah, global head of airfreight at Flexport, in a company webinar Tuesday. But the clock is ticking, ahead of major spending events like back-to-school shopping and Black Friday.

Shah said "intense demand" for air shipping will start in August, driven by a low inventory-to-sales ratio. The ratio was 1.09 in May, the most recent month available, down from 1.34 in May 2020, according to Census data.

"(Consumers are) ready to spend their money, but sometimes they're finding empty shelves, and this situation now over the coming months with back to school and lots of big events coming up could drive this ratio even lower, is our expectation," Shah said.

Oak said because of extended lead times, trendy holiday items that see an unexpected spike in demand will be harder to find "as stock levels were determined over the summer while these effects are happening." Hasbro, for example, is sourcing more products earlier and increasing the number of ocean carriers it’s working with to prepare for the holidays, said CFO Deborah Thomas on the company’s earnings call Monday.

Hasbro's efforts mirror a trend of companies turning to ocean shipping earlier than normal this year to meet peak season needs, pushing current ocean cargo demand up.

Volume caps, surcharges persist at major carriers

As shippers plan to deliver for the holidays, they face the added hurdle of volume caps from major parcel carriers FedEx and UPS.

Last year, UPS placed shipping limits on some of its largest customers on Cyber Monday, such as Nike and Gap, The Wall Street Journal reported. This year, carriers continue to be selective. Josh Mayer, managing partner at Summit Advisory Team, a supply chain consultancy, said on a ProShip webinar last week he recently received a text from a COO trying to decide what packages would make FedEx's trailer because the carrier wouldn't take all of them.

"If you’re in that seat, you’re not alone," Mayer said. "It's a really challenging environment right now."

Further straining shippers are the peak surcharges implemented by FedEx and UPS. Both carriers say the surcharges will allow them to better handle the increase in volume and provide higher levels of service.

"From a structural pricing perspective, we believe that peak surcharges are kind of the new normal and that we have to rely on our pricing to our costs," FedEx Chief Marketing Officer Brie Carere said on the company’s Q4 earnings call. "I think I've covered that in previous calls that we do anticipate every peak that there will be e-commerce surcharges."

Shippers still have room to negotiate

There is room for shippers to negotiate better rates, despite carriers' immense pricing power in the current market, said Mark Taylor, director of parcel consulting at enVista, on the ProShip webinar. This is mainly the case for shippers with a steadier flow of volume throughout the year, those with higher-yielding commercial volumes and small- and medium-sized businesses, he added.

Those are all appealing characteristics for FedEx and UPS. UPS' "better, not bigger" mindset is in full swing with less volume but higher margins, and FedEx has made clear it is in pursuit of more profitable volume from smaller e-commerce players after ending its major shipping contracts with Amazon.

"Within our pricing strategy, we continue to prioritize capacity for commercial and small and medium customer segments," Carere said.

But shippers are changing their strategies, too, increasingly moving more volume toward a mix of regional carriers to reduce the effects of surcharges and volume caps from the logistics duopoly.

"The No. 1 request that we’ve had over the last 12 months and one of the top reasons why we have more shippers adopt Proship is to onboard new carriers," said Clint Boaz, senior sales engineer at ProShip, on the webinar. "We’re constantly getting asked to add and enable new carriers for our customers."

It’s becoming more difficult to add new carriers as peak approaches, but businesses can still tweak how volume should be distributed between carriers, Boaz said. In other words, "you can still change the mix of the recipe and have a good result, but not necessarily add ingredients," he said.