(Bloomberg) --
Subscription-based pet care company DoggieLawn gets a steady flow of orders all year round, so it doesn’t see a year-end bump in sales. But the Los Angeles-based grass pad-maker can’t escape the steep climb in holiday shipping costs.
“It’s our biggest line item,” Natalie Youn, the startup’s founder, said in an interview. “Nothing comes even close to it.”
Retailers face the grim reality of surcharges in this season of giving, even after above-inflation increases in shipping costs in recent years. Higher fees being levied by FedEx Corp. and United Parcel Service Inc. are nothing new for peak delivery times, but shipping agents say the frequency and size of add-on hikes this year are unprecedented.
Baseline rates at both carriers will have been jacked up to levels in excess of inflation in four of the past five years, including a planned rate hike for 2025. That will bring the cumulative price increase to nearly 33% since 2021, according to Mingshu Bates, chief analytics officer at AFS Logistics, a third-party logistics firm. And that’s before special fuel surcharges, rural address premiums and fees for oddly shaped packages — additional costs that can run all year long.
Delivery surcharges have been around for years — and many aren’t holiday-specific — but the higher-than-ever cost of shipping is grating on inflation-weary gift-givers and retailers. While individual customers aren’t directly subject to all fees, rising costs often filter down.
The parcel industry has been under pressure from weaker shipping demand since a fall from pandemic highs. Shipment volumes are expected to be sluggish for a second straight year, due in part to Black Friday falling late in November and earlier holiday sales at retailers.
Kevin Donnelly, chief operating officer of sustainable-luggage brand Paravel, doesn’t have a problem paying UPS’ additional peak-season demand fee. But he does take issue being charged for them closer to Halloween than to Christmas. “Guess what, it’s not peak season,” he said in early November.
Peak-season surcharges were introduced widely in 2017 and were initially in place for about 34 days. But since then, their duration has grown longer. This year, the period covers about 111 days, or nearly one-third of the year.
The extended surcharge time frame reflects an elongated holiday shopping season set by retailers, who are offering sales events earlier in the year, Christina Meek, FedEx global media relations manager, said in an email.
Paul Yaussy, senior consultant at logistics firm Shipware, says that since he joined the company in 2021 he’s seen extra charges jump from about 20% of what a customer spends on shipping to as much as 50% in 2024. “The carriers never turned down an opportunity to generate more revenue per package,” he said.
The top package delivery firms say they’re raising tolls to make up for cost issues and slower demand impacting their own bottom lines. FedEx shares are up 20% this year, due in part to that tighter focus on profit margins, though that still trails the broader market. UPS, which has been wrangling with high labor costs, is down 14% for the year but on the rebound from four-year lows in August.
“We have recently implemented significant new pricing actions relating to both demand and fuel surcharges, which will benefit us in the coming quarters,” Raj Subramaniam, FedEx’s CEO, told investors in September.
It’s not just holiday surcharges. UPS recently added a 2% fee on certain credit card transactions and additional costs for imports from China. And both carriers have tacked on extra handling fees for bulkier packages that don’t do well on conveyor belts. Like guitars.
“Even within a 100-mile radius, it’s going to cost $140” to ship a guitar, said Benjamin Richey, a salesman at Nashville-based music store Gruhn Guitars. “We just had a customer from Hawaii who wanted to ship back home and that cost $300,” he said.
Between rate increases and fuel surcharges, UPS implemented the largest year-to-year price increase in about 25 years, Barclays analyst Brandon Oglenski noted recently. “UPS appears to be positioning for outsized contribution from surcharges this year," he wrote. As of September, Barclays estimated FedEx hiked fuel surcharges by a cumulative 275 basis points, the largest annual increase in at least 20 years.
“We routinely adjust pricing to align with the cost to serve our customers, enabling the company to provide industry-leading on-time performance and reliability,” Glenn Zaccara, vice president of communications at UPS, said in an email. The Atlanta-based company doesn’t discuss pricing strategies outside of earnings calls, Zaccara said.
FedEx’s revenue per package is expected to grow 4.6% in its current fiscal year after a modest increase last year, according to estimates compiled by Bloomberg. At UPS, analysts expect a 1.9% growth in per-package yield in 2025 after a drop this year.
Both carriers dole out plenty of discounts to customers, often based on volume and other factors. Some frequent shippers say they don’t meet the thresholds for such price breaks, which leaves many facing the unpleasant choice between passing along elevated holiday fees to customers or taking the financial hit themselves.
DoggieLawn’s founder says her company winds up simply absorbing the higher fees to avoid extra charges for loyal subscribers. “It's not seasonal, but we're still hit with those charges," Youn said. “So it ends up eating into our margins."
©2024 Bloomberg L.P.