UPS' Entry Could Raise Interest In Flat-Rate Parcel Shipping
In a complex parcel shipping world, simple is good. Hence the concept of a shipper cramming 50 or 70 pounds of stuff into a box and paying one rate no matter its contents, its origin or its destination.
So it was in 2004 when the U.S. Postal Service (USPS), 13 years after launching flat-rate pricing for its envelopes, expanded the program to cover boxes shipped via its Priority Mail one- to three-day delivery service. In 2013, FedEx Corp. (NYSE: FDX) followed suit with its "OneRate" flat-rate pricing program.
One company had always been conspicuous by its absence — until late September. Under the radar, UPS Inc. (NYSE: UPS) brought its own program, called "Simple Rate," into the game. Typically, FedEx and UPS do everything almost in unison. In this case, however, six years elapsed between the respective rollouts.
For UPS, already managing a dramatically changing parcel landscape fueled by e-commerce, the challenge lay in bringing a product to market that could satisfy the delivery demands of large business-to-consumer shippers and pricing the product so it was competitive with the USPS' low-cost offering, which neither FedEx or UPS could achieve. For example, USPS charges $17.60 for a large flat-rate box tendered under contracts with high-volume shippers and $19.95 for the same box tendered at a postal counter or online, according to information on its website.
The typical flat-rate shipper wants two- to three-day transit times nationwide, one set price depending on the box dimensions and the freedom to use its own packaging, said Melissa Runge, vice president of analytical solutions at transport consultancy Spend Management Experts.
UPS spent time watching how FedEx executed its flat-rate program and decided to do things differently. FedEx structured its product around three geographic tiers, which according to some experts, added complexity to what should have been a simple process. It required shippers to use its packaging rather than their own, which prevented customers from branding their own shipments and robbed them of packaging flexibility, experts said. FedEx also failed to discount its prices to larger customers, thus falling short of matching USPS' rates, said Runge.
UPS decided, like USPS before it, to charge one rate regardless of destination. UPS also allows customers to use their own packaging.
Because of its terms, the FedEx product has not gained significant traction since it was introduced, Runge said in an Oct. 17 interview. FedEx did not respond to requests for comment.
FedEx offers the flat-rate program as an Express product with one- to three-day transit times. It does not make the product available through its ground program. UPS offers second-day deliveries by air, three-day deliveries by a variety of options and traditional ground service with transit times that can run five days or more depending on the length of haul.
USPS promotes its service as available for one- to three-day deliveries. USPS will accept up to 70 pounds, while FedEx and UPS max out at 50 pounds. UPS touts its new offering as virtually free of accessorials, the extra charges imposed by carriers on top of the basic line-haul operation. It offers Saturday deliveries, with Sunday deliveries coming in early 2020, according to Steve Gaut, a company spokesman
Matthew White, a strategist for consultancy IDrive, said UPS was shrewd in setting package sizes and prices by the cubic inch, with its tables ranging from the "extra small" at 1 to 100 cubic inches, to the "extra large" at between 1,051 and 1,728 cubic inches. This will give shippers more latitude in packaging options as well as in stuffing the box, White said. UPS' largest box is nearly twice the cube of USPS' largest box and 20% more than FedEx's largest.
Regardless of any superiority in its offering's terms and conditions, UPS may still need to discount the product in order to pry high-volume customers away from USPS, Runge said. The challenge FedEx has faced, and which UPS will likely face, is that customers' time-in-transit demands often require the companies to fly the boxes, thus adding a higher level of cost that puts them at a price disadvantage to USPS.
Flat-rate shipments are typically made up of small, low-weight and low-value items with shipping profiles dictated by the demands of business-to-consumer e-commerce. Large, non-retail accounts comprise about 70% of the business, according to estimates from the consultancy The Colography Group Inc.
Runge said she wouldn't be surprised if FedEx, after examining the UPS offering, revamps the OneRate program to eliminate the geographic tiers, allow flexibility in customer packaging options and get more aggressive on the discounting front.
Based on FedEx and UPS published rates, FedEx is around 10% cheaper on smaller packages, but UPS is substantially cheaper on larger packages going to farther zones, according to White. For example, FedEx charges $11.50 for an "extra small" box delivered in three days, while UPS charges $12.95 for the same shipment, according to White. For the largest available box with the same transit time, UPS charges $37.95, while FedEx charges $46.75, White said.
After negotiations, there is little price "daylight" between the two carriers, Whte said. "The most significant differences are found in the terms and conditions, where UPS truly shines," he said.
In the e-commerce era, there is heightened awareness of and interest in flat-rate pricing. For many shippers, it may be a great deal. For carriers, however, the risk is gaining market share at the cost of margins, which are already razor thin given the nature of the products being shipped. White said his company represents a high-volume cosmetics retailer with high-value, small and light shipments that has switched to the FedEx OneRate product. The customer is delighted with the program, but FedEx is most certainly making less on their shipments, White noted. "This is just one example of a perilous environment for the carrier," he said.
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