FedEx Rate Changes to Hit Ecommerce Shippers Hard

The recently announced rate changes from FedEx reflect both the continual cat-and-mouse game with main rival UPS, as well as a bigger hit on ecommerce shippers as carriers look to recover the higher cost of moving more and more online orders, analysts and experts say.

Of particular significance is FedEx lowering the dimensional weight (DIM) divisor from 166 to 139 as of Jan. 2, effectively bumping up the weight and price of parcels. While UPS did not take a similar action when it announced its general rate increase of 4.9% earlier this month, it did leave the door open to further rate changes by the end of the year.

Shipping consultant Jerry Hempstead used an example to illustrate the impact of FedEx’s new DIM rule. Under the current 166 divisor, a 12 inch by 12 inch by 12 inch package is charged based on the greater of its actual weight or the DIM calculation of 10.4 lbs., rounded up to 11 lbs. Using the new 139 divisor, the package is charged based on the greater of the actual weight or 12.4 lbs., rounded up to 13 lbs., a cost increase of 18% based on the rate tables.

Of course the vast majority of ecommerce shipments weigh much less than 13 lbs. or even 11 lbs. meaning they get hit with the bigger DIM weight. This jump is compounded by the fuel surcharge, which is weight based.

“Many shippers redesigned their packaging when FedEx changed the divisor from 194 to 166 in 2010,” Hempstead said. “Now they’re faced with this again but it applies to far more shipments because so many of them are small, and ecommerce transactions tend to be over-packed.”

Based on Hempstead’s calculations, the new FedEx DIM divisor will hit every package larger than 8 inches by 8 inches by 8 inches, bumping up the billable weight and thus the charge.

While FedEx said its change to weekly adjustments in fuel surcharges to weekly adjustments starting in 2017 is meant to more closely align costs with market prices at time of shipment, Hempstead saw it as another way to gain revenue.

“I don’t believe fuel can drop much lower, so my take is (this change) is meant to capitalize on the increase sooner,” he said.

“FedEx is picking up its marbles and moving into a different sandbox,” said Rob Martinez, CEO of Shipware. “It’s the first in a very long time that the (general rate increases) don’t match. And it’s not just the rates but also the fuel surcharges, accessorial fees and the DIM factor are different. Those four components make it a very different beast when you look at it.”

The playing out of the rate changes show the ongoing gamesmanship between the major players, Martinez said. In 2015, FedEx for the first time in years announced its GRI before UPS, flexing its muscles and attempting to signal its leadership to the market. UPS then matched FedEx’s increases.

“This year UPS, in a game of poker, announced its increases six weeks earlier than ever, saying, ‘these are our rate increases, we’re the market leader,’ ” Martinez said. “FedEx has now snubbed them, saying ‘take what you want, these are our rate increases.’ ”

Martinez added the FedEx changes, especially the new DIM factor, show it is “doubling down” on ecommerce shipping, which will lead to an improvement in revenue based on the smaller, less dense packages that make up the vast majority of online orders.

He said neither carrier provides rated package dimensions for every shipment. While FedEx tends to provide greater dimensional data in its invoicing, UPS only provides dimensions for those packages in which dimensional rating was applied. So shippers will only have visibility into additional packages getting hit with FedEx’s lower DIM divisor if they have been capturing dimensional information themselves via a scanning tool.

Tim Sailor, owner of Navigo Consulting Group, said he believed FedEx was lowering its DIM divisor in order to increase its margins on larger, non-machineable shipments that can’t flow thorough their sortation systems.

“The lowering of the DIM is the last shoe to drop after FedEx increasing its additional handling charges and the lowering of the (extreme length charge) threshold from 60 inches to packages over 48 inches in length (as of June 1),” Sailor said. “For anyone without a custom divisor, they will take a big increase. I would also look to SmartPost (FedEx’s last-mile service, handled by the U.S. Postal Service) to begin charging DIM weight.”

Effective January 2, FedEx Freight’s extreme length surcharge will increase from $85 to $150 and will be applied to shipments with dimensions of 12 feet, down from 15 feet or greater.

Mike O’Brien is Senior Editor of Multichannel Merchant

Partner Content

The Gift of Wow: Preparing your store for the holiday season - Netsuite
Being prepared for the holiday rush used to mean stocking shelves and making sure your associates were ready for the long hours. But the digital revolution has changed everything, most importantly, customer expectations. Retailers with a physical store presence should be asking themselves—what am I doing to wow the customer?
3 Critical Components to Achieving the Perfect Order - NetSuite
Explore the 3 critical components to delivering the perfect order.
Streamlining Unified Commerce Complexity - NetSuite
Explore how consolidating multiple systems through a cloud-based commerce platform provides a seamless experience for both you, and your customer.
Strategies for Maximizing Mobile Point-of-Sale Technology - NetSuite
Learn the top five innovative ways to utilize your mobile POS technology to drive customer engagement, increase sales and elevate your brand.