FedEx Corp. said late Friday it will change the way it prices its ground parcel services, a move that consultants warned will result in the most dramatic rate adjustments for parcel delivery in decades.
Under the plan, FedEx Ground, Memphis-based FedEx's ground parcel unit, will, effective Jan. 1, impose dimensional weight pricing on packages measuring 3 cubic feet or less, which is believed to comprise most FedEx Ground shipments. Dimensional weight pricing—known in the trade as "dim weight" pricing—sets the transportation price based on package "volume," or the amount of space a package takes up in a truck in relation to its actual weight.
In 2007, FedEx and its chief rival, Atlanta-based UPS Inc., began using a "volumetric divisor" to calculate dimensional pricing on air and ground shipments of more than 3 cubic feet. First, a parcel's cube is calculated by multiplying its length, width, and height. Then the cube is divided by the volumetric divisor to get the dimensional weight. In 2007, the divisor was set at 194, but both companies reduced it to 166 in January 2011. By applying the lower divisor, the carriers effectively imposed a significant rate increase on many customers. The changes yielded the carriers hundreds of millions of dollars in incremental revenue.
Until Fedex's announcement last week, parcels measuring less than 3 cubic feet were exempt from dimensional pricing. How UPS, which handles about 12 million daily ground packages, or roughly three times the number of daily ground parcels as FedEx Ground, reacts to the new policies at its rival is an open question. Besides the similar changes made in 2011 to their volumetric pricing strategies, the two have worked to impose restrictions on their customers' use of parcel consultants. UPS officials were not available for comment.
Currently, FedEx Ground shipments that "cube out" below the 3-cubic foot threshold are priced based on their actual weight. Thus, the rate for a 5-pound parcel that cubes out below 3 cubic feet is set at the delivery price for a 5-pound shipment.
Jerry Hempstead, who spent decades at top U.S. positions at the old Airborne Express and then DHL Express before establishing an Orlando, Fla.-based parcel consultancy bearing his name, used an example of a 1-cubic-foot box that comes in at 1,728 cubic inches. Dividing 1,728 into 166 would yield dimensional pricing at about 11 pounds. Shippers generally pay the greater of either the actual or dimensional weight amounts.
Bumping up against the 3-cubic-foot threshold—which would mean stacking two similar-sized boxes on top of the first— would yield 5,184 cubic inches, Hempstead said. Using the divisor of 166, this would result in dimensional weight pricing equivalent to a 36-pound shipment, even though the actual weight of the parcel could be far less.
Calling this "the mother of all rate increases if it sticks," Hempstead said the move would result in hundreds of millions of dollars in additional revenue for FedEx Ground and, by extension, its parent without any change in the unit's operations or its value proposition.
"This is horrible news for shippers," he said in an email. "Hopefully they have language in their contracts to mitigate or postpone this pain."
Rob Martinez, president and CEO of Shipware LLC, a San Diego-based parcel consultancy, called the effect of the change "enormous." According to the Shipware database, which Martinez said comprises hundreds of shippers and millions of packages, 76.9 percent of business-to-business (B2B) shipments and 77.9 percent of business-to-consumer (B2C) shipments weigh less than 20 pounds, the range seen as most vulnerable to FedEx Ground's pricing change.
In addition, only seven of the top 25 box configurations sold in the U.S. exceed the 3-cubic-foot threshold, Martinez said. That means 18 of the top 25 box sizes now would be exposed to the new policy.
Jess Bunn, a FedEx spokesman, said the move aligns FedEx Ground's dimensional weight pricing with its policies at the larger FedEx Express unit, which manages its air express and international operations. Applying dimensional pricing to all packages will "provide a more simplified, consistent experience to our customers," Bunn said in an email.
FedEx announced the pricing change seven months in advance because it "believed this was the most effective way to give customers adequate notice," Bunn said.
Because shipments cube out before they weigh out, carriers want to ensure that they are optimizing all the available space aboard their delivery conveyances. A bulky, lightweight shipment can easily take up a disproportionate amount of space on a truck, yet it may be charged a noncompensatory rate because its actual weight is relatively low.
At this point, shipper remedies may be limited. FedEx could take the intervening seven months to negotiate some relief for their customers. And there is always the possibility that UPS may not follow suit, though consultants say that's unlikely given the two carriers' near-monopoly in B2B traffic and very strong position in the B2C space. For UPS, the lure of a potentially massive revenue surge from implementing a similar increase could outweigh the benefits of additional business from aggrieved FedEx shippers, according to analysts.
FedEx Ground has reported significant growth in recent years as cost-conscious businesses continue to trade down to less-expensive surface transportation and away from air freight. As part of a major companywide reorganization announced in 2012, FedEx will expand the unit's capacity so it could handle 45 percent more shipments by its 2018 fiscal year.