FedEx, UPS rate rises are making online shopping more expensive

Shipping rates are going up faster than they have in nearly a decade, increasing pressure on merchants to raise prices or find other ways to offset higher costs.

FedEx Corp. on Monday said shipping rates would go up an average of 5.9% next year across most of its services, the first time in eight years that it or rival United Parcel Service Inc. has strayed above annual increases of 4.9%.

UPS is expected to release its rate increase for 2022 in the coming weeks. The two carriers have moved in lockstep with their annual price increases since at least 2010, according to Transportation Insight LLC, a supply-chain management and logistics firm.

The move away from a 4.9% annual increase shows how the pricing power has shifted to carriers like FedEx, UPS, and the U.S. Postal Service, which have seen demand for their shipping capacity and home delivery soar during the pandemic. The higher-than-normal rate hike also is a sign of inflation reverberating across the global supply chain.

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"The carriers are incredibly bullish and confident that they are holding all the cards and that they have the leverage to squeeze more margin out of their customers than ever before," said Trevor Outman, co-chief executive of Shipware LLC, a shipping consulting firm.

FedEx and UPS had dropped hints to shippers that the annual rate increase would be higher than before. Previously, some shippers would negotiate clauses into contracts that their annual rate increase would come in around 2.5% to 3%, half of the public rates. In recent weeks some large shippers have received contract renewals that would cap their annual increase at 5%, according to shipping consultants.

FedEx’s new rates will go into effect Jan. 3. They will rise an average of 5.9% for FedEx Express shipments in the U.S. and on FedEx’s Ground and Home Delivery service, which skew more heavily toward e-commerce shipments.

FedEx said the higher rates are due to the "challenging operating environment" and will allow the company to continue to invest in its network, including enhancing service, maintaining its fleet and technology innovations.

Online sellers have already had to cope with price increases during the pandemic. Shortly after lockdowns began last year, both FedEx and UPS approached several large shippers with new contracts that imposed double-digit cost increases through a combination of higher rates and fewer discounts. With capacity tight across all carriers, some either accepted the new terms or tried to switch their business to other carriers.

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FedEx and UPS also have added a series of surcharges and other higher fees for items like large packages throughout the pandemic that have further increased shipping costs.

Those include big surcharges during the holiday season, when some shippers could be hit with fees from $1.15 to $6.15 a package if their weekly shipping levels are a certain multiple higher than they were pre-pandemic. As recently as 2017, UPS’s holiday surcharges were just 27 cents on ground packages and rose up to 97 cents for some air shipments.

FedEx on Monday also said it would raise the fuel surcharge it applies to all shipments starting Nov. 1. The company said the tight labor market and shift in shipping volume have required more frequent changes to its network and repositioning of aircraft, vehicles, and other equipment, increasing its total fuel usage.

That follows a recent adjustment by UPS to its fuel surcharges that raised the cost for many shippers.

The higher rates come amid new focuses at the major carriers. UPS Chief Executive Carol Tomé is using a mantra of "better, not bigger" across the shipping giant to focus on more profitable shipments instead of shipping more packages. In doing so, larger shippers that have historically won bigger shipping discounts are seeing their rates rise, and UPS is filling its network with more small- and medium-size shippers that have higher profit margins.

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FedEx, meanwhile, is pivoting more into shipping e-commerce packages, even after severing ties with Amazon.com Inc. before the pandemic. It plans to spend $7.2 billion on capital expenditures to build out capacity to handle the added volume.

The combination of increased parcel rates, as well as cost pressure from labor and other supply-chain inflation, could lead retailers of all sizes who have counted on online sales for growth to re-evaluate some of their longstanding offerings, according to shipping consultants. Free shipping could go away or the threshold to avoid shipping fees could rise. Costs online and in store could diverge. Some merchants may elect to sell some large items only in-store.

"Something has to change," said Hannah Testani, CEO of Intelligent Audit, a freight audit, and analytics company. "It’s not feasible for anyone to have the built-in profitability to withstand these cost increases."

Some shippers are instituting fees to offset rising costs. The online sports merchandise retailer Fanatics Inc. recently added a $1.99 handling fee to help cover some of the warehousing and packaging costs. A Fanatics spokesman declined to comment.

Online sellers may have a hard time abandoning free shipping, though, especially since Amazon continues to set the floor on what shoppers want.

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"It’s a real dilemma," said John Haber, a president of parcel consulting at Transportation Insight, "because you have to compete with Amazon and Amazon is not going to stop offering free shipping."

Shippers can shift some packages to the U.S. Postal Service, which this year has already installed 61 of a planned 112 new machines to sort packages and improve on last year’s service.

Another strategy includes using more regional carriers like Lasership Inc., Lone Star Overnight Inc., and OnTrac. Since none of them have nationwide coverage, using them could include opening a distribution center closer to their region or have retailers truck packages into the states where regional carriers operate.