FedEx to slap dimensional pricing on packages handled in concert with USPS

FedEx Corp. said that, effective late January, it will apply so-called dimensional pricing—rates based on a package's dimensions instead of its weight--to its "SmartPost" service, in which FedEx parcels are inducted deep into the U.S. Postal Service's (USPS's) vast infrastructure for last-mile deliveries.

Separately, Memphis-based FedEx said it will apply a 2.5-percent surcharge on all shipments that are billed to a third party that is neither the shipper nor the consignee. The action would mostly hit large e-tailers with steep shipping discounts that instruct third parties like fulfillment houses and so-called drop-ship vendors to use the e-tailers' account numbers when the e-tailer discounts are greater than the third party's price breaks.

The moves, disclosed late Monday, follow the lead of rival UPS Inc., which imposed both measures in 2015 and 2016, respectively. FedEx also announced on Monday a series of rate increases for 2018 that will push up list prices by 4.9 percent across the company's three main service lines. The rate increases take effect Jan. 1. The other charges, known in the transport trade as "accessorials" because they are considered separate from a carrier's basic line-haul service, go into effect Jan. 22, FedEx said in its online service guide.

On average, SmartPost handled more than 2.5 million packages per day in FedEx's 2018 fiscal first quarter, according to data from SJ Consulting. Not surprisingly, FedEx's 2017 fiscal third quarter, which included the holiday period, showed the highest demand for the service, according to SJ data. FedEx's fiscal year runs from June 1 through the following May 31.

Several attendees at the annual Parcel Forum in Nashville this week said they were not surprised that Memphis-based FedEx plans to impose dimensional pricing on SmartPost packages, because UPS, which has a similar service called "SurePost," has reaped tens, if not hundreds of millions, of dollars of additional revenue through the pricing measure. FedEx was "tired of leaving money on the table and watching UPS take it," said one attendee. Another said that shippers were lucky the change would not take effect until after the pre-holiday peak shipping season.

Under the carriers' dimensional pricing formulas, packages are priced by the higher of either their dimensions or their actual weight. A package's dimensions are calculated by multiplying its length, width, and height in cubic inches, and then dividing the total by a set number, either 139 or 166. For example, a parcel measuring 3 cubic feet—or 5,184 cubic inches—and divided by 166 would yield a dimensional weight equal to a 31-pound shipment, even though its actual weight could be much less.

Except for UPS shipments measuring less than 1 cubic foot—where the divisor is set at 166—both carriers use 139 as the divisor, thus making it that much more expensive to ship bulky items with large dimensions. E-commerce shipments—which compose much of the traffic tendered under the carriers' postal services—are generally lightweight, but are getting bulkier as more goods are sold online. FedEx and UPS already impose dimensional pricing on U.S. air and ground deliveries, as well as on international services.

The companies say dimensional pricing is necessary to properly compensate them for handling lightweight and bulky packages that occupy disproportionate amounts of space aboard an aircraft or ground vehicle. As e-commerce volumes continue to grow, the companies have said they handle a larger proportion of packages with those characteristics, and can no longer price all of them at their actual weight.

The FedEx and UPS last-mile services operate in conjunction with USPS' "Parcel Select" program, which connects local post offices to residential and commercial addresses for local package deliveries. USPS, which is required by law to serve every U.S. address, picks up and delivers at 156 million addresses.

USPS prices the Parcel Select service incrementally, and its low prices have made it very popular with shippers. FedEx and UPS have migrated to it because it enables them to broaden their delivery coverage without the expense of deploying drivers and delivery vehicles to stop at countless residential addresses. However, FedEx, UPS, and Seattle-based Amazon.com Inc., the three largest users of the service, have been mapping plans to more efficiently handle their own last-mile shipments because of the segment's rapid growth. USPS acknowledged in a regulatory filing earlier this year that such measures could divert business from Parcel Select.

USPS, for its part, does not impose dimensional pricing under Parcel Select.

Rob Martinez, CEO of consultancy Shipware LLC, said between 70 and 80 percent of SmartPost packages would be eligible for dimensional pricing. However, Martinez said that FedEx and large users of the service will negotiate concessions in one form or another to avoid most of the pain associated with the pricing scheme. Jerry Hempstead, who runs a consultancy bearing his name, said shippers that have SmartPost discounts and that ship packages weighing less than 10 pounds will still get a better deal with SmartPost than with other FedEx delivery products. The vast majority of SmartPost shipments fall under that weight threshold, Hempstead estimates.

The SmartPost and third-party billing charges are part of a slew of FedEx accessorials announced late Monday. Hempstead said the new dimensional-weight charge, along with the other accessorials, represent a "bold new world of pricing." Being publicly traded companies, FedEx and UPS "have to deliver top-line and bottom-line growth, so each year there are surprises that sting shippers," he said.

Given that the two have a duopoly on U.S. business-to-business parcel traffic, and a strong, albeit not fully dominant, footprint in the business-to-consumer segment, "there is little a shipper can do," Hempstead said