Is That $30 Billion UPS Deal Just One Big Rate Hike?
UPS will spend $30 billion on the new deal it reached with the Teamsters, and that higher cost will eventually come out of shippers’ and shoppers’ pockets.
America’s biggest courier company finished last year by authorizing its largest-ever General Rate Increase (GRI). This UPS rate rose 6.9 percent despite recession concerns, when inflation was still 6.5 percent. To start the new year, chief rival FedEx followed suit with a 6.9 percent rate hike as well.
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The hikes represent historic highs for UPS and FedEx. Both companies raised GRI 5.9 percent in 2022, and 4.9 percent each year from 2012-2021.
That begs the question: how much will rates rise next year?
Andy Polk, senior vice president of the Footwear Distributors and Retailers of America (FDRA), wondered as much when commenting on the Teamsters’ labor victory earlier this week.
“One thing we will need to look at is how the new pay terms may raise shipping costs for shoe companies,” Polk told Sourcing Journal. “Margins for shoe companies are extremely tight and this may cause more pressure.”
Given that customers may have pulled their business from UPS as part of strike contingency plans, the parcel giant may have to proceed with caution when asking clients to pay more, according to Tommy Storch, a transportation procurement expert at Insight Sourcing Group.
“They’re going have to thread a very fine line to say, ‘How much can we pass on to our customers?’” Storch told Sourcing Journal. “The customers will probably then pass this on to the American consumer. How do they still stay competitive with FedEx? FedEx took some of their volume these last couple of weeks and months.”
When factoring in fuel increases and other charges, Storch expects rate hikes in the 6.9 percent to 8 percent range in the wake of the new UPS-Teamster deal. He sees FedEx matching the UPS rate too.
Storch said UPS will likely get more creative in how it raises fees like delivery area surcharges as it attempts to bring back business it lost to rivals. These fees are applied to deliveries and pickups outside a carrier’s standard shipping area.
“They’re going to find ways to make up the margin that might not be as clear,” Storch said. “UPS and FedEx are both very good at that.”
Shippers preparing for higher rates must understand their inventory allocation to better negotiate shipping discounts.
“FedEx and UPS will typically tell a retailer that ships 10,000 shipments from one location weekly, ‘We’ll allow you to go up to 12,000, but beyond that we can’t do any more,’” Storch said. “It’s then up to that shipper to understand, how many other DCs do they have? Do they have other carriers they can use? If they’re expecting 15,000 shipments, do they start running sales earlier?”
Jeremy Tancredi, a partner in the operations excellence practice at consulting firm West Monroe, agreed that rates are going to go up “no matter what,” tut the current labor market will factor into that rate growth.
“We’ve seen freight costs go down across the logistics industry, but the one thing that hasn’t improved is labor availability,” Tancredi told Sourcing Journal. “A labor shortage is continuing to drive costs up, due to the lack of delivery drivers and things of that nature. Now everybody else in the industry is looking at what UPS drivers get paid, raising their hand and asking, ‘Why not? Why don’t we get in something similar?’ Just by default, you’ll start to see rates increase down the line across the industry.”
Shipping costs aren’t the only hikes as delivery giants try to insulate themselves against higher prices.
On July 9, the U.S. Postal Service (USPS) raised the price of first-class stamps from 63 cents to 66 cents. This is the third time in a year that these “Forever” stamps saw price hikes. In July 2022, the rates jumped from 58 cents to 60 cents, before increasing again to 63 cents in January 2023.
Unlike UPS and FedEx, the USPS price increase comes as the government agency aims to reverse the losses it has seen for more than 15 years. In the second quarter, net losses reached $1.8 billion.
