In last month’s article, “UPS Holiday Preparedness to Cost Merchants Next Season,” we reported that UPS planned to introduce new peak holiday shipping rates. The news came as the company gave investors advance warning that it had experienced a disappointing fourth quarter and would seek ways to recoup some of the higher costs of meeting peak holiday demand.
In its earnings call with analysts on Tuesday, UPS explained how it would try to capture some of those costs, revealing it would implement “peak residential surcharges that are differentiated from our nonpeak time of year on a customer segmented basis.” UPS also revealed it had experienced a 12% increase in both Cyber Monday and Peak Day deliveries in the recent holiday shopping period.
It’s important to realize that most UPS shippers already pay residential delivery surcharges. For example, shippers pay an additional $3.10 to deliver a standard UPS Ground package to a residential address, according to the UPS website. The company also charges a fee for pickup requests made at a residential address.
While UPS executives weren’t specific, clearly they were referring to surcharges for their largest ecommerce customers who put enormous strain on its network during the holiday shopping season, as evidenced by the disaster of the 2013 holiday season when it failed to deliver all orders before Christmas Day.
UPS invested heavily to avoid another fiasco, but the expenses of implementing peak plans designed to provide high quality service for volume surges negatively impacted operating profit, the company explained.
UPS CEO David Abney said Tuesday, “what you’re hearing today is that we absolutely will charge our customers more for the extra costs that we have in peak and that we absolutely are pushing our foot down harder from a revenue management side.”
The company’s CFO Kurt Kuehn explained the unique nature of online holiday shopping patterns: “I think the big issue is just that the demand has become much more spiky at the very beginning of peak and at the very end. And so forecast aside, the shape of demand around the cyber weekend and then the weekend before Christmas was the big spikes and there just wasn’t as much needed in that flat period.”
However, Abney said the company did get better at customer collaboration and forecasting for peak periods.
We asked UPS for more information about the new charges and whether they would apply only to large merchants, but did not receive a response by press time.
By making the peak surcharge apply to residential deliveries, it helps UPS target online retail orders and ensures its Business-to-Business customers won’t be impacted by the surcharge.
Kevon Hills, StellaService VP of Research, said retailers may consider changing their strategies as a result of the new surcharges. Some retailers could consider ending free shipping offers, which Hill said had become an important piece of the ecommerce marketing mix. “We could also see retailers raise the free shipping minimum, which would require consumers to spend more in order to save,” he said.
UPS revealed that U.S. domestic fourth-quarter revenue climbed 7.5% to $10 billion. Daily package volume increased 6.6% with Deferred Air and Ground up 11% and 7.1%, respectively.
Some additional factoids released by UPS:
- UPS delivered 1.3 billion packages during the fourth quarter, an increase of 8.1% over the same period last year.
- For calendar year 2014, the company completed delivery of 4.6 billion packages, up 6.8% over 2013.
- UPS delivered 572 million packages worldwide in December.
- Peak Day scheduled deliveries exceeded 35 million packages, more than 100% above an average day.