United Parcel Service Inc. UPS +7.57% plans to impose hefty fees on large shippers during the holiday season, reflecting the added complexity and cost of an expected crush of online orders amid the coronavirus pandemic.
The fees will test the ability of large retailers such as Amazon.com Inc. and Target Corp. TGT +1.83% to offset costs during a holiday season when they will likely be more reliant on online orders, with shoppers skittish about crowded stores.
UPS on Friday said the fees could total as much as $3 a package for ground shipments and other lower-priced shipping options and up to $4 a package for air shipments bound for residences.
That is significantly higher than the last time UPS instituted additional fees during a peak holiday season, in 2018. Surcharges then reached 28 cents on ground shipments and up to 99 cents for some air shipments.
The newly planned fees come as UPS as well as rival FedEx Corp. try to offset significantly higher costs from the influx of packages flowing through their network.
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They have already imposed additional fees on large shippers, and have raised prices on some customers by double-digit rates.
Shares of both companies got a boost Friday. Investors have been hoping delivery firms could squeeze higher prices out of customers after years of investments to expand and modernize their delivery systems.
Shares in UPS rose 3.6% in early trading to $150.77, while FedEx shares jumped 2.7% to $176.82.
In an internal document circulated before the surcharges were disclosed, UPS told its sales team that the fees would offset higher costs to hire new workers and to secure additional air, truck and rail capacity.
“These surcharges help protect our network and ensure UPS is compensated appropriately for additional costs incurred to maintain our high-quality service,” according to the document, which was viewed by The Wall Street Journal.
The new charges come after UPS’s new chief executive, Carol Tomé, recently said the company would take a more aggressive approach to raising prices on large retailers to manage capacity.
“While retailers may squawk at price increases that come their way, large retailers have a way to spread that across and nobody knows,” Ms. Tomé, who previously served as chief financial officer at Home Depot Inc., said on the company’s earnings call last week.
Shipping consultants expected the holiday surcharges to be steeper than before, but were surprised by how high UPS is going.
“This is devastating to retailers,” said John Haber, CEO of the supply chain consultant Spend Management Experts Inc. “It’s getting to a point where I’m starting to consider it gouging.”
A FedEx spokeswoman didn’t have an immediate comment. Company executives have said that they are evaluating plans for added fees during the peak season. “This is part of the new normal,” FedEx Chief Marketing Officer Brie Carere said in late June.
In the past, the company hasn’t imposed surcharges on residential deliveries during the holidays and instead worked closely with shippers to manage expected shipping volume during the busiest times. It has charged more during peak periods for bulky parcels.
UPS said its surcharges will apply from mid-November until mid-January. They are designed to apply only to customers who ship more than 25,000 packages a week, with the fees rising based on how much higher the weekly shipping volume is compared to the customer’s average weekly shipping from volume in February. That month is seen as a baseline because it was before the pandemic upended buying and shipping patterns.
The starting fees are $1 for ground shipments and $2 for air. The company said it would also include surcharges of $5 on shipments that require additional handling and $50 for large items.
A UPS spokesman said the surcharges reflect the available capacity to handle and ship packages.
UPS is encouraging customers to adjust their operations to avoid the brunt of the fees. According to the internal document, some of those steps include shifting promotions during the holiday season so volume doesn’t spike too much during the busiest times such as around Thanksgiving, and enticing shoppers to pick up orders in stores or to have packages delivered to access points like dry cleaners, drugstores or other local businesses.
“These strategies help UPS decrease disruptions to our network, maintain a steadier stream of volume throughout peak season and may alleviate financial effects of the surcharges for our customers,” according to the document.