FedEx Says Size Matters As All Ground Packages Will Now Be Priced According to Size

May 8 -- FedEx Corp.  is changing the way it charges to ship bulky packages, jolting e-commerce companies with price increases for delivering items as diverse as diapers, shoes and paper towels.

Instead of charging by weight alone, all ground packages will now be priced according to size. In effect, that will mean a price increase on more than a third of its U.S. ground shipments.

The big question now is whether United Parcel Service Inc.  will follow the pricing move. Many analysts think it will. The two companies have historically matched price increases rather than seize the chance for a competitive advantage.

If so, that would likely greatly affect bulky but lighter-weight items like toilet paper and diapers, which many people have delivered on a regular basis, as well as Zappos.com shoes, which ship for free, including free returns. Indeed, shoe shoppers are encouraged to buy multiple pairs, keep what fits and return the rest. Avid Web shoppers do the same with sweaters, dresses, and jackets at retailers like J. Crew, Banana Republic, and Macy's.

Last Friday evening, at the bottom of a FedEx announcement mostly about higher fuel surcharges, the company added—in a little-noticed coda—that it planned to apply "dimensional weight pricing" to all ground shipments starting in January. Prior to this, only the biggest ground packages—measuring three cubic feet or more—were priced this way, with customers charged the higher amount by either volume or weight. All air express packages are already priced by size plus weight.

"The joy ride is over," said Satish Jindel, president of ShipMatrix Inc., a developer of shipment-tracking and analysis software.

Under the new rate system, the price of shipping an eight-pound, 32-pack of toilet paper between 601 and 1,000 miles would increase 37% to $13.81.

The change in pricing could dramatically affect either online shoppers or retailers or both. Someone will have to swallow the estimated hundreds of millions of dollars in extra shipping costs.

Shipping is already one of the biggest and most rapidly increasing costs for big online retailers, a factor cited in Amazon.com, AMZN +0.41% Inc.'s recent testing of its own delivery service.

UPS said it reviews pricing on an annual basis. "We continually evaluate our policies to remain competitive in the industry. Our focus is on being fairly compensated for the value we provide to our customers," a spokesman said.

Retailers would likely hesitate to increase what they charge for shipping.

Surveys show that shoppers abandon their online purchases at checkout when they see a big shipping fee. Instead, retailers may charge more for the merchandise.

Hardest hit by the change would be shipments of some of the often-replenished items increasingly bought online—sometimes by subscription—to avoid a trip to the store.

FedEx declined to estimate how many packages might be affected or by how much.

"The primary concern for us is that we want to make sure we're getting an appropriate price for the value of service we're providing," said spokesman Jess Bunn.

Both Zappos and Diapers.com are owned by Amazon, which generally uses UPS's ground service, among other delivery companies. Amazon's popular Subscribe & Save program sends customers regularly depleted household items like paper towels, dog food and cereal, with free shipping.

Amazon and Zappos didn't respond to requests for comment.

For the delivery companies, it comes down to efficiency. Lightweight e-commerce orders take up a lot of room in the truck, and Amazon and other shippers don't always match the box size to what is inside.

The biggest companies, like Wal-Mart Stores Inc.,  Walgreen Co. and Saks Fifth Avenue, will likely attempt to grandfather in current pricing rules when they renegotiate contracts.

Wal-Mart, a large FedEx Ground customer, declined to share the terms of its specific agreement and said it has "a long-term, collaborative relationship with Fedex." Wal-Mart's global internet sales grew even faster than Amazon's in 2013, rising 30% to $10 billion.

Smaller retailers will have less room for negotiation and so will be more likely to have to pass along the price increase in some way to customers.

Bill Ashton, vice president of operations for Modnique.com, which sells apparel, shoes and handbags online, estimates that the shift to dimensional pricing will work out to a 30% increase on many items shipped by smaller retailers.

Retailers currently have more incentive to stuff as many items into a box as possible because they receive price breaks on weight. While a four-pound box costs more than a two pound box, it doesn't cost twice as much.

Companies like Zappos use elaborate algorithms to determine exactly how many items should ship in a box to minimize the cost.

Higher shipping costs may not deter online retailers from selling diapers and toilet paper in bulk because those recurring purchases keep shoppers coming back to their websites, increasing the chances they will buy other things, too.

UPS will follow suit within a few months, analysts believe.

"It's almost a foregone conclusion," said Rob Martinez, president of Shipware, a shipping strategy consultant and auditor.

"They have a history of hitting each other like prize fighters back and forth."

Laura Stevens       www.online.wsj.com/news