TABLE OF CONTENTS Jul 2014 - 0 comments

FedEx Freight goes for dimensional pricing

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By: Ian Putzger
2014-07-01

For some customers, shipping with FedEx Ground will become more expensive in the coming year, considerably more expensive, according to some observers.

The company announced in May that it would apply dimensional pricing to all shipments on FedEx Ground effective 1 January, 2015. Currently it levies dimensional charges only on shipments in that segment that measure more than three cubic feet.

Management emphasized in the announcement that this would align pricing at FedEx Ground with the current practice in its Express division, which has been applying dimensional charges to all packages regardless of size.

Some observers suspect that the move has more to do with raising prices than creating a more harmonised pricing mechanism. Horst Manner-Romberg, principal of German research and consulting firm M-R-U, which focuses on the parcel and mail markets, notes that dimensional pricing has been a popular tool for package delivery companies to extract higher payments from customers.

"Because the market is so competitive, they cannot come up with higher charges up front, but they measure the shipment when it arrives at the sort centre, and if they find it exceeds the dimensions that the customer gave when he made the booking, they levy additional charges. This is met with less opposition from the clientele," he says.

Dimensional pricing has been used by carriers to boost yields. Some airlines encountered vociferous protest last year when then announced plans to levy security surcharges on the basis of chargeable rather than actual weight, a plan that was branded a money grab by freight forwarders. Likewise, an airline attempt a few years ago to change the formula for calculating volumetric charges met with stiff opposition.

Some observers anticipate significantly higher costs for clients who ship or receive lightweight items measuring less than 3 cu ft via FedEx Ground. By some estimates, they could end up paying about 30 percent more. Items like diapers, sweaters or shoes that have been shipped by e-tailers free of charge or at low rates will face considerable rate hikes.

Gary Breininger, president of Toronto-based BGR Coaching & Strategic Solutions, notes that volumetric pricing can be a lever for asset utilisation. "I think this may be driven by e-commerce," he adds.

Manner-Romberg agrees that the growth in B2C e-commerce has created additional cost pressures for delivery companies. Besides the economics of residential deliveries, the growing size of such shipments is presenting challenges.

"In Europe we see a trend to ship larger and heavier products by e-commerce - washing machines, dryers, furniture... This is extremely challenging for delivery firms. Often they need a second person on the vehicle because the driver cannot carry some items alone," he says.

Moving bulky goods through sort centres designed for parcel traffic creates additional issues and cost, he adds.

Some observer have described the FedEx move as a harbinger of a tectonic shift in the e-commerce delivery sector. This seems unlikely, as the company is aligning its pricing mechanism with practices that many of their competitors embraced long ago.

"In Canada, this is nothing new. UPS - like many competitors - charges on weight and dimension," a spokesman for UPS Canada comments. He confirms that the company has been applying dimensional charges across the board in Canada, not only for shipments measuring more than 3 cu ft.

"This is nothing new. It is rampant in the freight sector," agrees Breininger. "FedEx already did it on the express side."

In 2011 both FedEx and UPS changed the factor for computing volumetric charges in their domestic systems. This is done by multiplying a shipment's length, width, and height, and then dividing that figure by its weight. Both companies changed the dimensional weight volumetric divisor from 194 to 166.

Since then there have not been any changes to the formula, the UPS spokesman says. The company is constantly analysing its costs, but there are no indications of an imminent change, nor is there any fundamental review of charges and yields in progress at this point, he states.

"With regard to rate changes, there is nothing new on the horizon," he says, "but there are new services around B2C on the horizon."

Meanwhile users of FedEx Ground are left to ponder one question. Who will pay for the higher charges - shippers or consumers?



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