by James Brumley | May 9, 2014 10:43 am
Truth be told, it should come as no real surprise that FedEx (FDX) is about to make a considerable change to the way it charges for ground shipping of larger packages.
When ground delivery first debuted and e-commerce was still relatively uncommon, the size and shape of shipped packages were relatively irrelevant in terms of the cost to operate a delivery truck. As Amazon (AMZN) and other e-tailing has proliferated and spurred huge demand for delivery services, though, ground-delivery trucks from FDX as well as UPS (UPS) are increasingly full.
Now, space — not weight — is money.
To nip a small problem in the bud before it became a big problem for the value of FedEx stock, the delivery company will now measure the dimensions of a box in addition to weighing it to determine the price it charges to ship that parcel.
Anything roughly the size of a breadbox or bigger could cost anywhere from 8% to as much as 37% more, according to data compiled by the Wall Street Journal. Counterintuitively, it’s the lighter items like diapers and toilet paper that will see the biggest bump in shipping costs.
Industry experts believe this new pricing paradigm will only impact about a third of the packages FDX currently ships by ground, with no changes planned for its air freight rates. Ergo, the impact on FedEx stock should theoretically be minimal.
The matter isn’t as simple for everyone else involved.
Only one company drives a big chunk of that third of FedEx’s ground-shipping business: Amazon, which really doesn’t need a rate hike right now.
However, it’s possible the impact might be less than feared. See, although FedEx Ground’s shipping price schedule is public information freely available to anyone who looks for it, that may or may not be the price that Amazon pays. Because it’s such a big customer, AMZN enjoys lower freight rates than smaller shippers or consumers would pay. While Amazon’s cost certainly will be higher than it is now, those rates still should be lower than the new price schedule would suggest.
Simultaneously, Amazon might find a way on its own to minimize the shipping price hike.
While it’s been the butt of many jokes, the packaging decisions made in some of Amazon’s fulfillment centers are no laughing matter. For instance, AMZN has packed a small, consumer electronics battery in a box big enough to hold a bed pillow. That’s insane, and costly for companies like FedEx that currently only charge by weight.
But now, with real money on the line, odds are good that Amazon stock owners will finally demand a revamp of its packing procedures rather than simply giving the idea lip service.
That being said, shipping expenses are one of the company’s fastest-growing costs, and it’s still not clear whether the value of Amazon stock will survive another round of shipping-cost increases without slipping into the red.
As for smaller retailers that need to ship but don’t have the leverage of size that Amazon enjoys, life will become even more difficult.
They’ll either (1) charge more for merchandise to offset higher costs, (2) raise shipping costs for customers and risk losing business, or (3) brace for a combination of choices 1 and 2.
One effort that all retailers are expected to make is pushing for more items in an order to stuff the box full. And in some cases, it’s possible that retailers will no longer ship certain items if doing so leads to a loss.
Whatever the impact, there’s no way retailers that ship goods to customers are going to not feel a tighter pinch now.
Of course, FedEx’s higher shipping rates will impact its competitors as well … namely, UPS.
Industry analysts are relatively certain UPS will increase its shipping rates, following FedEx’s lead. It might not match the rate hike dollar-for-dollar. Indeed, it would be unwise to do so, as becoming the more cost-effective alternative should lead to more volume and scale for UPS and prove to be a boon for the price of UPS stock.
But history and logic do suggest UPS will announce a rate hike of its own in the foreseeable future. That can only help revenue and margins for the alternative delivery service, provided its prices only rise modestly.
Incredibly enough, it might well be the price of FedEx stock.
While higher prices will allow FDX to save what many estimate should be measured in hundreds of millions of dollars (though nowhere even close to a billion dollars) per year, that’s a relatively small piece of the $1 to $2 billion that FedEx typically books in profits on an annual basis.
And as sensitive as consumers and corporations alike are to costs right now, even a small bump in expenses is apt to be poorly received.
A large bump in shipping costs could lead to an outright revolt in the form of finding an alternative source of delivery.
It’s not just UPS and the post office that could see a little more delivery business thrown their way, either. Seeing the writing on the wall, Amazon itself has played with doing its own deliveries in select U.S. markets. It’s only a trial program, and hasn’t gone particularly well thus far. It would be years before the company could wean itself from third-party shippers, and it would likely never be able to handle all deliveries from coast to coast.
AMZN is certainly apt to be a little more motivated to make it work now, however.
While FedEx has almost adopted a cavalier “like it or lump it” attitude regarding its own shipping rate increase, that contempt might put the final nail in the coffin of a decision that will already put a great deal of pressure on the company and FedEx stock.
Amazon stock isn’t exactly sitting pretty here, either. If its own delivery service had some scale or it had its packaging techniques under control, it might be a different story. But with margins being painfully thin already, though, there’s no real “winning” for Amazon.
UPS stock owners, however, should be thrilled by the fact that their company’s key competitor flinched and a huge e-commerce company might need to do make some price comparisons soon.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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