Fuel Price Hikes a Two-Prong Problem

Just as catalogers were reporting solid sales gains, skyrocketing gasoline prices have led to increased inbound freight and outbound shipping expenses.

And because the fuel hikes could put a dent in consumer spending, catalogers hesitate to pass their increased costs on to customers. Instead, many hope to reduce their freight and shipping costs — or they are reconciling themselves to losing margin.

The crimp in consumer spending notwithstanding, the price hikes deal a double blow to catalog marketers, getting them coming as well as going. And there’s no question that freight carriers and parcel couriers have responded to the gas prices with higher rates. At press time, United Parcel Service (UPS) was increasing its fuel surcharge rates for air and international shipments to 7.5% in July from 6% in June. Back in December, the fuel surcharge for both ground and air had been just 1.5%. FedEx in May increased its air fuel surcharge rates to 6% from 1.5% for ground delivery and 4% for air shipments. The courier was expected to reevaluate its surcharge July 4.

Both UPS and FedEx have recently changed their fuel surcharge rate structures, eliminating the surcharges for ground shipments and applying them only to air and international shipments.

“Zone skippers” such as Chicago-based R.R. Donnelley Logistics and Milwaukee-based Parcel Direct have also levied fuel surcharges, although those contacted would not provide exact figures. Many catalogers use zone skippers to drop-ship packages and catalogs into Postal Service bulk mail centers (BMCs), sectional center facilities (SCFs), or destination delivery units (DDUs — also known as local post offices) in order to obtain postal discounts.

Moreover, less-than-truckload carriers such as Yellow and Roadway — which catalogers typically use to receive goods from their suppliers — traditionally revise their rates in the summer, says Richmond, VA-based operations consultant Curt Barry. Look for additional fuel surcharges of up to 6% on less-than-truckload rates, Barry says.

Considering that inbound freight is usually part of the cost of goods on catalog P&L statements — and Barry estimates that most mailers spend 2%-4% of their gross sales on transporting goods from suppliers to their warehouses — fuel surcharges could take a big bite out of the bottom line.

Wellness products cataloger 1-800-Homeopathy is already feeling the effects of the increased fuel costs. Long Beach, CA-based Daylight Transport, one of the three freight carriers that Richford, VT-based 1-800-Homeopathy uses to ship products from its vendors, raised its fuel surcharge to 8% on June 5 from 7% on May 18 and 6% in early April. So far, says spokesperson Margot Murphy Moore, 1-800-Homeopathy doesn’t plan to increase its prices or its shipping and handling charges. The company will absorb the cost increases.

But catalogers may not be able to do that in the long term. “How long catalogers and e-commerce companies can hold on before they increase rates will depend on how much margin they have on S&H and how long fuel prices stay up,” Barry says. “If you have continuous increases, eventually you’ll have to pass those costs onto the consumer to protect your margins.”

Negotiating your freight rates

Before you reevaluate your product pricing and S&H rates, you should see if you can negotiate better terms with your freight and parcel carriers, advises Bill Wilson, president of Boyerstown, PA-based trucking services firm DM Transportation. If you can’t modify your current contracts, perhaps you can get better terms for your next contract. “Smart negotiation on rates is still the best plan of attack,” Wilson says.

“Nobody pays the base price,” says Doug Caldwell, vice president for Portland, OR-based freight consultancy AFMS. “Even if you’re a smaller cataloger, you should get at least a 20% discount.” And that discount should apply to the fuel surcharge as well as to the published shipment rate.

You might consider adopting a core carrier program that provides exclusivity to high-service carriers in return for reduced rates. And while you may not be able to win an across-the-board discount, flat C.O.D. charges and elimination of extra fees should be among your negotiating points, Caldwell says.

What’s more, says Barry, “there may be some benefits to catalog and e-commerce companies to switch over to UPS hundredweight or FedEx multiweight for inbound shipments.” Hundredweight or multiweight is a common classification for inbound shipments weighing 200 lbs. or less. If your shipments from suppliers qualify for this classification, Barry says, your cost per pound may be lower, in part because you don’t pay for transporting pallets, which can weigh as much as 40 lbs. each.

Pump up your prices

Some catalogers have already decided that they can’t afford not to pass along their increased costs. Fred Bell, president of Huntingburg, IN-based home decor cataloger Touch of Class, was at press time planning to increase prices in its fall catalog to compensate for the higher fuel costs. “When our cost of goods increase, we build that into our pricing,” Bell says.

But covering rising expenses isn’t simply a matter of implementing across-the-board price increases, notes Gina Valentino, vice president/general manager of Shawnee Mission, KS-based catalog consultancy J. Schmid & Associates. You have to analyze your margins by merchandise category, separating imports from domestic goods and branded products from private-label items. If you have private-label goods that carry a higher margin than name brands, for instance, you have more leeway to raise prices on your line, Valentino says.

Rather than raise the prices of its products, Wakefield, VA-based food cataloger Virginia Diner will increase its shipping and handling charges this fall, most likely by about 5%, says president Christine Epperson. “We’re in a deficit until then,” she says.

But as difficult as raising product prices can be, increasing what you charge for S&H can be even tougher. Consumers tend to be more accepting of modest product price increases, which occur among retailers as well as direct marketers, than they are of increased S&H rates, because they don’t fully understand what shipping and handling entails.

Setting S&H rates requires careful consideration as well as documentation, Barry says. You have to determine which costs you want to cover. Direct costs include labor and common carrier costs; indirect costs include returns processing and general and administrative costs. The more indirect the costs, the more trouble you’ll have explaining them to you customers. Barry also advises posting such increases on your Website and on the order form of your catalog. (For more on S&H pricing, see “Shipping and Handling Under Scrutiny” in the January issue of Catalog Age.)

Watching and waiting

Many catalogers are taking the wait-and-see approach with the gas price situation. “I don’t see a way to pass the costs on to our customers,” says Chris Bradley, president of Portland, ME-based bedding cataloger Cuddledown of Maine. Economically speaking, “times are still very fragile, so it’s hard to raise S&H charges.”

Daryle Scott, president of Jacksonville, FL-based Venus Swimwear, also plans to keep prices flat. “We’ll ride it out,” says Scott, whose company produces the WinterSilks catalog as well as the eponymous swimsuit title. Relative to postage or paper increases, “fuel surcharges aren’t a big deal,” Scott says. “But if you tell me that paper and postage are going up, I’m going to have a very different answer.” (Paper prices are indeed expected to increase; see “Coated-Paper Price Hikes Will Stick This Time,” page 9.)

Given the long catalog production lead times, Boca Raton, FL-based women’s apparel mailer Boston Proper doesn’t want to raise prices only to find that costs have decreased by the time books are in customers’ homes, says president Michael Tiernan.“It’s hard to predict where the cost of gasoline is headed four or five months from now,” he says. Boston Proper will reevaluate pricing much as it does other parts of its business periodically, he adds. “This might be a blip on the radar screen.”

But DM Transportation’s Wilson is less sanguine. “Eventually the costs will come down,” he says, “but so far there is no pressure by the market to do so.”

Virginia Diner’s Epperson is also pessimistic. “We’re going to have to carry these increases through the holiday season,” she says.

The Consumer Effect

As of June 7, the average price of gasoline was up 37% from the previous year, to $2.03 a gallon from $1.49 a gallon, according to the U.S. Department of Energy. This increase at the pump means less disposable income for consumers, which could translate to fewer dollars spent with catalogers and retailers. Among the consumers surveyed May by the Washington-based trade association National Retail Federation (NRF), 32% planned to trim or halt travel and vacation plans. Twenty-one percent said they’d be spending less on clothing than they’d originally planned, and 14% expected to hold back on major purchases of cars, televisions, furniture, and the like.
MDF

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