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

Amazon, in Threat to UPS, Tries Its Own Deliveries

April 24 -- The future of Amazon.com Inc. is hiding in plain sight in a San Francisco parking lot.

Adjacent to recently closed Candlestick Park, Amazon is testing its own delivery network for the "last mile," the final leg of a package's journey to consumers' doorsteps. Trucks loaded with Amazon packages and driven by Amazon-supervised contractors leave for addresses around San Francisco. Similar efforts are under way in Los Angeles and New York.

Delivering its own packages will give Amazon, stung by Christmas shipping delays, more control over the shopping experience. It can also help contain shipping expenses, which have grown as a percentage of sales each year since 2009, according to securities filings.

On Thursday, Amazon reported another quarter of skimpy profit even as sales increased 23% to $19.74 billion. Shipping costs rose 31%, and it also spent on cloud computing and new initiatives. The company reported a first-quarter profit of $108 million, compared with $82 million a year earlier.

The new delivery efforts will get Amazon closer to a holy grail of e-commerce: Delivering goods the same day they are purchased, offering shoppers one less reason to go to physical stores. With its own trucks, Amazon could offer deliveries late at night, or at more specific times.

The move is a shot across the bow of United Parcel Service Inc., FedEx Corp. and the U.S. Postal Service, which now deliver the majority of Amazon packages. It is also a challenge to Wal-Mart Stores Inc., eBay Inc. and Google Inc., each of which is testing deliveries.

Ultimately, a delivery network could transform Amazon from an online retailer into a full-service logistics company that delivers packages for others, according to former Amazon executives. They caution that any such effort likely is years away.

Delivery is a big step in Amazon's ambitions. The largest U.S. Internet retailer has branched into original video programming, set-top boxes for streaming video, and soon, smartphones, among other things.

It is unclear that Amazon will achieve its goals. UPS, founded in 1907, has a head start of more than a century. Industry observers say it will be difficult for Amazon to match the efficiency of UPS or FedEx in more than a handful of U.S. markets, simply because it will be delivering fewer packages over a wider area.

Amazon quietly began rolling out the delivery network in the U.S. late last year, in packages labeled "AMZL" and "AMZN_US." Customer-service representatives and former employees say those codes designate Amazon's in-house delivery network. Customers who have received the packages said they appear to use a different tracking process, with no links to an outside shipper.

Next up for Amazon is Treasure Island, a man-made spit of land in San Francisco Bay. Amazon is reviewing a lease for a site on the island to house trailers and delivery trucks, according to a person familiar with the matter. From there, Amazon would dispatch trucks into San Francisco, likely late at night and early in the morning when traffic is lighter and fewer island residents would be disturbed, this person said.

Amazon offered a peek at the delivery network in a recent job posting on its website. "Amazon is growing at a faster speed than UPS and FedEx, who are responsible for shipping the majority of our packages," the posting reads. "At this rate Amazon cannot continue to rely solely on the solutions provided through traditional logistics providers. To do so will limit our growth, increase costs and impede innovation in delivery capabilities." "Last Mile is the solution to this. It is a program which is going to revolutionize how shipments are delivered to millions of customers."

As a prelude to the U.S. moves, Amazon has been testing a delivery network in the U.K. "We've created our own fast, last-mile delivery networks in the U.K., where commercial carriers couldn't support our peak volumes," Chief Executive Jeff Bezos said in his annual letter to shareholders earlier this month. "There is more invention to come."

Typically using small couriers, Amazon delivers packages under the "Amazon Logistics" moniker and recently acquired an option to invest in Yodel, a U.K.-based parcel-delivery service. Dave Clark, Amazon's vice president for world-wide operations, said in November that Amazon would use its own trucks to make Sunday deliveries in London.

At San Francisco's Candlestick Park, formerly home to the NFL's 49ers, Ryder trucks are scattered around the parking lot, amid rows of bright green AmazonFresh trucks for Amazon's same-day grocery-delivery service. Trailers arrive each morning, and their contents are transferred to vans or trucks for deliveries in and around San Francisco, said one person familiar with the operation.

The precise logistics between Amazon's "last mile" hubs couldn't be learned. Even if Amazon takes over home deliveries, it will be difficult for the company to cut the major shipping carriers out of the process entirely. Amazon still relies on them to move goods around elsewhere in its supply chain.

Planning for the delivery network began several years ago, but the project took on added urgency last winter after UPS and FedEx failed to deliver Amazon packages to some customers by Christmas, according to two people familiar with the matter. Amazon blamed the carriers, but offered $20 credits to many affected customers.

"What happened during Christmas cost a huge amount of money" for Amazon, UPS and FedEx, said Marc Wulfraat, president of logistics consulting firm MWPVL International, which tracks Amazon closely but isn't working with the retailer.

If Amazon expands its delivery network, it would likely rely initially on cheaper, more flexible regional carriers—such as the East Coast's LaserShip Inc. and the West Coast's OnTrac— as well as the Postal Service for deliveries, according to supply-chain experts and logistics consultants. That would affect package volumes at UPS and FedEx, potentially hurting their efficiency. LaserShip and OnTrac declined to comment.

Sanford C. Bernstein and Co. analysts estimate that Amazon shipped about 608 million U.S. packages in 2013. The Postal Service handled 35%, UPS 30%, regional shippers 18% and FedEx about 17%. The distribution hasn't changed much in recent years.

UPS and FedEx ground rates on average have increased 3% to 5% annually in the past five years, an incentive for Amazon to develop its own delivery service, industry observers say. Amazon cited rising shipping costs in boosting the price of its Prime unlimited two-day shipping membership in the U.S. by $20, or 25%, earlier this year.

Amazon typically pays between about $2 and $8 to ship each package, according to shipping-industry analysts, with the cheapest option through the Postal Service and the most expensive via UPS or FedEx.

Amazon shipments should account for less than 1% of revenue for both FedEx and UPS, said Jack Atkins, an airfreight and logistics analyst at Stephens Inc. That suggests Amazon's delivery network would have a limited effect on the shippers' profits, at least initially.

FedEx Chief Executive Fred Smith in December said that Amazon "can unquestionably do local deliveries should they choose to do so." But he said the vast majority of packages would continue to be moved by FedEx, UPS and the Postal Service. A FedEx spokesman declined to comment further.

A UPS spokesman declined to comment.

Amazon's in-house delivery efforts have experienced hiccups. Online forums in the U.K. are rife with customers reporting missed, late or inaccurate deliveries. Several packages shipped to The Wall Street Journal's San Francisco office assigned to "Amazon Logistics" arrived several days after their guaranteed delivery dates. Customer-service representatives said that because the division is new, it is more difficult to track packages.

David Steigman, a customer in San Francisco, said two recent orders of DVDs like "The Hobbit" with tracking information for "AMZN_US" repeatedly missed Amazon's own delivery deadlines. "After the first time, I asked them not to ship me anything using that service, but they did it again anyway" said Mr. Steigman. "I don't want to be Amazon's test market for their new shipping idea—that's not what I am paying for."

www.online.wsj.com/news          Greg Bensinger, Laura Stevens

Amazon Plans Revamp of its Delivery Network

Company-controlled capacity to serve 40 largest population centers, consultant says.

March 6 -- Amazon.com. Inc. is moving quickly to revamp its delivery network to gain more control over its fulfillment infrastructure while reining in spiraling transportation costs, according to a supply chain consultant with close ties to the e-tailing giant.

James Tompkins, who runs Tompkins International, a Raleigh, N.C.-based consultancy, said Amazon has divided the nation into three segments based on population size: The top 40 markets, which comprise about half of the U.S. population; the next 60 largest population areas that account for about 17 percent, and the remaining population, which account for about one-third.

The top 40 markets will be served by a private fleet being built by Amazon to support an expansion of its online grocery business, called "Amazon Fresh," according to Tompkins. The next 60 will be served by an array of regional parcel delivery carriers, he said. The remainder will be served mostly by the U.S. Postal Service, he said.

UPS Inc., which today handles much of Seattle-based Amazon's current deliveries, will not play a prominent role in the network realignment, Tompkins said. Nor will FedEx Corp., which manages a lesser portion of Amazon's delivery business. An Amazon spokeswoman was unavailable to comment.

Orders will be routed through Amazon's 55 fulfillment centers, with deliveries made the same day, the next day or, at most, in two days, Tompkins said. Inventory will be positioned to exclusively support local deliveries. A national delivery network as operated by providers like FedEx and UPS will be rendered irrelevant because they will be considered too slow to suit the typical Amazon customer, he said.

Tompkins said that Amazon has a timeline for its rollout, but that he is unaware of the details. "They are moving on this very aggressively," he said.

Amazon two years ago seriously considered a bid for FedEx as a means of buying into an existing delivery operation, according to Tompkins. However, Jeffrey P. Bezos, Amazon's founder and CEO, backed away after determining FedEx's network structure was too national in scope to fit Amazon's strategy of local fulfillment and delivery, Tompkins said. A FedEx spokesman declined comment.

Tompkins has worked in the supply chain management field for decades and is considered one of the nation's leading authorities on its role in e-commerce. His relationship with Amazon is not clearly defined, a status seemingly more by design than coincidence. When asked to describe the nature of his involvement with Amazon, Tompkins replied that he was contractually obligated not to comment.

A "FRESH" EXPANSION

Though Amazon Fresh has been operating for five years, it is today only available in Seattle, San Francisco, and Los Angeles. However, Amazon plans to expand the grocery business to between 30 and 40 U.S. markets in 2014, according to Tompkins.

Tompkins said the private fleet network would commingle groceries with general merchandise, thus building the scale needed to make ground shipping cost-effective and to offer a compelling value to customers, Tompkins said. It would also set in motion a chain of events that would result in Amazon competing with FedEx and UPS.

The online grocery business, which is plagued with high fulfillment costs, is not considered a particularly attractive enterprise on its own. However, Bezos has used Amazon Fresh as a proving ground to test a more ambitious delivery model rather than as a way to build a national grocery footprint, according to Tompkins. By using his own vehicles to deliver groceries, Bezos has been able to fine-tune his own delivery network and understand the pros and cons of leveraging his own infrastructure than those of the incumbents, Tompkins said. Now Bezos is poised to apply that knowledge on a broader scale, Tompkins said.

Transportation costs remain a thorny issue for Amazon. Its shipping expenses in 2012, the most recent period that full-year figures were publicly available as of this writing, rose to more than $5.1 billion, up from nearly $4 billion in 2011, according to the company's 10-K filing with the Securities and Exchange Commission.

Shipping costs in 2012 exceeded shipping revenue by nearly $3 billion, according to the filing. Amazon generates much of its shipping revenue from third-party merchants who sell products through the company's site and use its fulfillment services for storing inventory, picking and packing, and shipping.

In the filing, Amazon said it expected its "net cost of shipping"—the ratio of shipping costs to revenue—to continue rising as parcel rates increase and more customers take advantage of the company's delivery offerings such as "Prime," which charges a $79 annual fee for unlimited two-day deliveries. Amazon has said it is considering a $40 annual price hike for Prime subscriptions.

Not everyone believes Amazon will migrate from FedEx and UPS so quickly. Scott Devitt, Internet analyst for investment firm Morgan Stanley & Co., said during a late February webcast that Amazon will continue to leverage the established delivery infrastructure and will not become a disruptive force in the delivery market. Amazon will continue to use its enormous buying power to extract favorable rates from its delivery partners and will see that as a more attractive alternative to building out its own network, Devitt said.

Frederick W. Smith, FedEx's founder, chairman, and CEO, told analysts recently that only FedEx and UPS have the delivery networks capable of efficiently handling the demands of Amazon and other e-commerce providers. Smith said his company, UPS, and the U.S. Postal Service would remain at the forefront of e-commerce shipping for the foreseeable future.

Tompkins said that Amazon has been planning its strategy long before the well-publicized delivery problems that occurred during the 2013 holiday season, when about five million of its shipments were not delivered in time for Christmas. Much of the fallout was laid at the feet of UPS, though some have argued that Amazon erred by understating how many packages were coming UPS' way toward Christmas day, thus overwhelming the Atlanta-based carrier's air network and triggering the backlog.

Amazon is still smarting from the fiasco, however. The company's fulfillment executives believe UPS and FedEx are not investing enough in equipment, infrastructure, and other resources to keep up with Amazon's growth, according to a person familiar with the matter.

These days, every move in the e-commerce space is significant because of its enormous potential. E-commerce has penetrated just 10 percent of the U.S. market, and between 6 and 7 percent of the global market, according to Morgan Stanley estimates. Based on projected annualized growth rates of 15 percent, e-commerce could be a $1 trillion worldwide business by 2016, according to the firm.

Mark B. Solomon        http://www.dcvelocity.com/    

Another Perspective: Faltering Carriers and Web Shopping Expectations

December 26, 2013 -- After years of preaching the convenience and reliability of online shopping — shop in your pajamas, with fast, free delivery — retailers may have been too successful at spreading the message this year, contributing to the volume of holiday orders that overwhelmed delivery services like U.P.S. and FedEx.

As the companies scrambled to deliver gifts the day after Christmas, they also struggled to explain how it all happened. Some analysts wondered aloud whether it was not just logistics, but industry and customer expectations that needed to be re-examined, while one suggested the companies might have to reconsider their pricing system.

“We have this perception that anything can be delivered at any time, and that it will be super cheap and really fast — but this is not Santa Claus,” said Sucharita Mulpuru, an analyst at Forrester, the research firm. “It is an operation in which there are constraints, and there are costs associated with getting more packages than were expected to be somewhere on time.”

The volume even surprised the United States Postal Service. Officials said on Thursday that they had expected a 12 percent increase in packages during the holiday season, but package shipments jumped 19 percent, and it added Sunday deliveries to accommodate them. A spokeswoman for FedEx said this season was the busiest the company had ever seen.

But it was United Parcel Service, the world’s largest package delivery company, that was perhaps the most unprepared for the crush. The company hired 55,000 seasonal workers this year, but that number was roughly the same as last year and the year before that — not enough to keep up with rising demand.

“It hasn’t fluctuated that much over the past couple of years,” Natalie Black, a spokeswoman for the company, said of its holiday staffing. “Whether that was part of the problem, I can’t say. Right now, we don’t know what the linchpin was for the network breakdown.

“You can only fit so much in planes,” she added.

It was unclear how many customers were affected, but complaints poured in from across the country and retailers large and small were caught up in the maelstrom.

While bad weather and a short holiday shopping season were cited as possible causes by U.P.S. officials, they also said the volume generated by growth in online shopping was a likely factor. Online sales have been growing for years, and this season, the rise during the weekend before Christmas was extremely steep, up 37 percent, according to IBM Digital Analytics Benchmark. FedEx said that it had predicted it would deliver 22 million packages on its busiest day this year — double the volume in 2007. The actual number is not yet known. One way to address future demand, Ms. Mulpuru, the analyst, suggested, would be to approach the surge the same way that the airlines do: by charging more for the service.

“An airline doesn’t just buy additional aircraft so they can accommodate everyone who wants to fly the day before Thanksgiving for $300,” she said. “They just raise the price of your ticket and force people to go earlier.”

Shipping is often subsidized for shoppers, Ms. Mulpuru said, and it is retailers that have contracts with companies like U.P.S. If rates stay relatively static for retailers they have no incentive not to encourage people to buy as much as possible until the last possible moment, she added.

This year, for example, if customers ordered from Nordstrom by 3 p.m. Eastern on Dec. 23, they were eligible for arrival on Dec. 24. Amazon’s one-day shipping deadline was also Dec. 23, and it even offered same-day delivery on Dec. 24 in some locations.

Shipping has been a crucial battleground for online retailing since the earliest days of e-commerce, but it has become more important over time.

Krista Clark, an analyst with the research firm eMarketer, said services like Amazon Prime, the online retailer’s program that offers unlimited two-day shipping for $79 a year, had conditioned consumers to expect faster delivery of everything.

At the same time, customers aren’t willing to pay for it. “The thing people care about more than fast shipping is free shipping,” Ms. Clark said.

She cited a study by comScore that found that half of shoppers said free shipping was the most valuable benefit an online retailer could offer.

Some retailers have invested more in central warehouses and distribution systems to better handle online orders. Others, such as Gap, Best Buy and Walmart, have relied on their physical stores to fulfill online orders.

That allows retailers to get the goods in the hands of customers more quickly. “People have gotten crazy trying to compete with Amazon with faster delivery,” Ms. Clark said.

In the process, retailers often bypass the traditional shippers like U.P.S. or FedEx in favor of more localized delivery options — or one day, Amazon has suggested, maybe even drones.

EBay has been promoting a fast delivery service called eBay Now, which works with retailers like Macy’s, Target and Toys ‘R’ Us, to deliver orders in one hour from a store to a customer using a network of human couriers.

Although eBay typically charges a $5 fee for the service, during the holidays, it offered it free, including deliveries on Christmas Eve. (An eBay spokeswoman declined to say how many people actually used the service.)

Although eBay Now is available in only a few metropolitan areas, including New York, San Francisco, Chicago and Dallas, the company plans to expand the service more widely. Amazon and Google are also rolling out local delivery services that could divert some of the shipping volume, and revenue, away from U.P.S. and FedEx.

Though explanations were in short supply on Thursday, U.P.S. took to social media to offer abundant apologies, responding individually with direct messages to its unhappy customers on Twitter. As it apologized, it had plenty of company from retailers that were offering their own regrets, while placing most of the blame on the package carriers.

“While we are dependent on our shipping partners to hold up their end of the bargain on getting your orders to you, we also realize that we are accountable for meeting your expectations and take responsibility for what happened here,” Jamie Nordstrom, president of Nordstrom Direct, said in an email to customers. “We feel awful whenever we let a customer down, especially at this time of year.”

A spokeswoman for Kohl’s said the company was “deeply sorry.” Amazon issued gift cards to affected customers. In San Diego, even a distributor of Glock guns and parts took to Twitter to “apologize if any of your orders didn’t arrive in time for Christmas due to the holiday overload.”

On Thursday, those tardy packages began to trickle in.

Todd Sawicki, an entrepreneur in Seattle, ordered several items from Amazon on Dec. 23 and paid extra to get guaranteed delivery on Christmas Eve. On the 24th, a package arrived via U.P.S. from Amazon, and he figured it was the gifts — Legos for his son, and a bracelet and headphones for his wife.

Far from it. Inside was a toilet repair valve he had ordered earlier.

“It was the Amazon equivalent of a lump of coal,” he said.

On Christmas morning, without anything else to give his wife, he presented her with the wrapped valve.

At 11 a.m. on Thursday, he said, the valve was finally swapped out for the intended Christmas gifts.

Elizabeth A. Harris And Vindu Goel          www.nytimes.com