UPS and FedEx Customers Regain Advantage in Delivery Price Battle – Reuters

By Lisa Baertlein

LOS ANGELES (Reuters) – For the first time in over four years, U.S. retailers and other delivery clients are successfully securing discounts from United Parcel Service (UPS) and FedEx, as indicated by industry data and interviews with professionals who specialize in shipping price negotiations.

This marks a significant shift from 2021 and early 2022, when UPS and FedEx, buoyed by a surge in online shopping during the pandemic, were hesitant to grant discounts and prioritized their most profitable customers. Now, these carriers are struggling to fill their trucks as demand decreases.

Excluding the U.S. Postal Service and Amazon, UPS and FedEx account for nearly 50% of the U.S. doorstep delivery market, generating a combined annual revenue of $191 billion. These companies have implemented annual general rate increases exceeding 30% from 2019 to 2024 and frequently match each other’s pricing. "They must compete for every package at this moment, which creates advantageous conditions for shippers," noted Kenneth Moyer, a partner at LJM Consultants and a former UPS pricing negotiator.

The current state of low demand has produced a “very juicy” environment where customers can obtain significant savings, according to Deyman Doolittle, co-founder of ShipSigma, a consulting firm that focuses on reducing shipping costs.

Without revealing specifics, the consultants highlighted that rates for ground delivery services, favored by online retailers, dropped below 2022 levels in the second quarter and are expected to continue declining throughout the third quarter, according to industry indices. If this drop is confirmed, it would be the first recorded decline since the index began tracking year-over-year data in January 2019.

FedEx recently stated that it manages customer rates strategically based on various factors, including volume and shipment type. Similarly, UPS has asserted that it is not solely relying on discounts to recover business lost during recent team negotiations, emphasizing its focus on negotiating prices that encourage high-margin customers while avoiding costly deliveries.

This shift in strategy has enabled some online retailers to reduce costs, potentially allowing them to lower prices for consumers as well. For example, department store Macy’s and fashion rental company Rent the Runway, both UPS clients, reported to investors that they were achieving savings from newly negotiated delivery agreements, including a 50 basis point decrease in costs for Macy’s during the second quarter.

The rapid change in bargaining dynamics has been notable, with Moyer noting that his consultancy recently secured $6.8 million in savings for a UPS client that had previously faced a denied request for a $500,000 discount earlier this year.

While discounts vary among customers, shippers are generally experiencing around 8% to 12% in savings compared to previous agreements, as stated by Mark Taylor, a senior director at Korber Supply Chain. These reductions resemble pre-pandemic discount levels, and while they do not completely offset prior price increases, returning to this level of discounting "feels like a windfall," Taylor remarked, drawing from his experience as a former FedEx Ground project manager.

SUPPLY AND DEMAND IMBALANCE

A significant imbalance between supply and demand is posing additional challenges for carrier profitability. Combined, UPS, FedEx, the U.S. Postal Service, and Amazon have the capacity to deliver over 110 million packages daily; however, their customers are currently sending only about 70 million packages each day, marking the largest disparity in three decades, according to Satish Jindel, president of the delivery consultancy ShipMatrix.

Forecasts for the third quarter indicate ground delivery rates may decrease by 0.55% per package compared to the previous year. While this reduction may appear minor for smaller companies, it could lead to substantial savings for larger clients, according to Micheal McDonagh, president of parcel services at AFS Logistics.

Discounts are also increasing for express air delivery rates, which are anticipated to decline by 1.5% from the second quarter while rising 1.9% compared to the previous year.

FedEx faced a steeper downturn in demand than UPS and began offering discounts more promptly and aggressively. Meanwhile, UPS was preparing to secure business ahead of the expiration of its contract with about 340,000 Teamsters-represented workers. The company has been under pressure to regain the 1.2 million packages per day that customers redirected to FedEx, the Postal Service, and regional competitors in anticipation of a potential strike.

FedEx claims it can maintain the additional 400,000 packages per day it acquired during UPS negotiations without reducing prices, but experts express skepticism, especially as UPS offers to cover early termination fees for clients that switched to FedEx.

As Jey Yokeley, vice president of sales for negotiating advisory firm TransImpact, remarks, "Due to UPS’s aggressive actions, FedEx is also willing to do whatever it takes to secure business."