As if Amazon.com (NASDAQ: AMZN) doesn't already dominate the Christmas shopping season, UPS (NYSE: UPS) is helping to drive even more customers to it at the expense of smaller retailers. The package delivery leader is imposing new surcharges on delivery during two key periods of the holiday season: the Black Friday start of Christmas gift buying and the week before Christmas itself.
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While UPS was first to make the move to hike fees, and FedEx (NYSE: FDX) has yet to announce its plans, it is expected that Big Brown's rival will follow suit. The companies typically follow one another when it comes to raising rates.
Beating the Christmas rush
On the surface, the higher UPS fees are negligible and certainly understandable. The carrier announced last month that between November 19 and December 2, it was imposing a $0.27 surcharge on residential ground deliveries with another per-piece peak surcharge getting added between December 17 and December 23. Other forms of delivery such as next-day air, second-day air, or third-day select won't have a surcharge added around Black Friday, but they will get one for the week before Christmas, with fees ranging from $0.81 per piece to $0.91 per piece.
Not that the additional fees aren't warranted. As e-commerce has grown to comprise ever greater percentages of Christmas shopping, let alone non-holiday times, the carriers have come under greater pressure during the peak periods to get the orders delivered on time.
Four years ago, UPS suffered an infamous collapse in on-time delivery performance as it was overwhelmed by last-minute demand for Christmas gifts as retailers made outlandish promises for last-minute shoppers. Amazon ended up giving out $20 gift certificates and refunding shipping costs to mollify irate customers. Both UPS and FedEx ended up hiking shipping rates, changing how they calculate rates for packages, hiring thousands of temporary seasonal employees -- last year, it hired about 95,000 temporary workers -- and investing hundreds of millions in infrastructure improvements.
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Yet the debacle also convinced Amazon.com that it needed to take greater responsibility for its own deliveries, and it now has its own fleet of aircraft and delivery trucks, though the national carriers still play a large role in package delivery.
But it is Amazon that could benefit the most by this holiday rush surcharge, even though it, too, will be paying the higher fees.
Amazon.com owns the online shopping world at Christmas. Last year, it accounted for 44% of all the e-commerce sales made during the last two weeks of the holidays, and 38% of total Christmas sales. It already accounts for half of all e-commerce sales made, holiday or otherwise, and analysts say it could soon drive as much as 80% of all online sales.
Holiday e-commerce sales hit record levels last year, with so-called Cyber Monday sales surging 12% from the year-ago period to hit $3.45 billion, blowing past analyst expectations of just $3.36 billion. Adobe Digital Insights notes it was the first time ever online sales exceeded $3 billion for the day, "and the first day ever to drive over $1 billion in mobile revenue."
The second-day air surcharge of $0.97 per piece that UPS is imposing -- the highest of the surcharges -- seems specifically targeted at Amazon because of its Prime membership program and its two-day delivery guarantee. Yet, because of Amazon's size and scope, it has the financial wherewithal to absorb the fee increases, whereas small and medium-sized businesses trying to compete with the e-commerce king do not.
If they absorb the fees, these smaller rivals risk their profitability; if they pass them on to customers, they risk losing sales. Finding shipping alternatives might not be easy, particularly if the competition follows suit. With its own air and ground fleets handling a greater percentage of deliveries, the impact on Amazon will be mitigated.
One Amazon competitor likely not hurt is Wal-Mart (NYSE: WMT), which could be a big winner from the increase as well. The surcharges only apply to residential deliveries, so those orders shipped to stores can avoid the fees. Wal-Mart has been pushing its free ship-to-store option heavily for the past few years, and it could get a bigger shove this year as shoppers seek to save money.
Another distortion that might occur is that it will push retailers to advertise even earlier in the year to be able to book sales before the surcharges go into effect. While the boundaries are already being pushed further back as retailers scramble for every dollar they can get, it really only serves to pull sales forward as opposed to expanding the opportunity.
Amazon.com has done a significant amount of preparation to ensure all sales and profits stay within its ecosystem, and although it could pay a bit more because of the UPS surcharges, it may find even more sales coming its way as they inadvertently push even more customers to it.
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