FedEx and UPS Unveil Exceptional Discounts for SMB Customers

Dive Brief:

FedEx and UPS continue to offer shipping discounts to attract new customers, resulting in lower delivery costs despite rising fuel surcharges, according to the TD Cowen/AFS Freight Index, which was released on July 16.

In the second quarter, the ground parcel rate per package was 26.8% higher than the index's January 2018 baseline, down from 28.9% the previous year. Rates are likely to settle at 25.7% over the baseline in the third quarter as discounting activity continues.

"Small- to medium-size shippers are seeing exceptional discounts that might typically be reserved for much larger customers," Micheal McDonagh, president of parcel for AFS, said in a news release.

Discounts keep ground parcel shipping expenses under control.

TD Cowen/AFS Ground Parcel Freight Index compared to its January 2018 baseline.

Dive Insight:

The index originally expected that Q2 prices would rise modestly year on year, but FedEx and UPS have defied predictions by maintaining aggressive discounts to attract small company volume.

According to an AFS Logistics Q3 index presentation, "the ongoing pricing competition between FedEx and UPS is expected to extend beyond earlier projections, with negotiation activities in Q3 further diminishing the effects of the GRI." "Both carriers are more aggressive in their discount offerings to small and medium customers while holding discounts for large customers steady."

Discounts are often volume-based, with higher volumes resulting in greater savings, a structure that advantages larger shippers, according to Mingshu Bates, Chief Analytics Officer at AFS Logistics. However, in the current market, smaller clients can obtain pricing historically reserved for organizations twice their size. FedEx and UPS are prepared to accept these discounts because smaller firms still bring significant value to their bottom lines.

"It's a small price for the carriers to pay to gain that volume," according to Bates. "I think that's really where they can still be offering discounts, but still be profitable."

While the delivery giants expect that luring smaller shippers will enhance profitability, it will be difficult in a low-demand market. UPS' average daily volume in the United States climbed 0.7% year over year in Q2, although CFO Brian Dykes stated on an earnings call that small company volume was "down until June when it flipped positive."

When FedEx and UPS volumes return to levels that the carriers are satisfied with, shippers should expect fewer generous discounts as the delivery giants focus more aggressively on per-package revenue, McDonagh said in an interview.

"We know what's going to happen, we just don't know when," McDonagh told the audience.

For the time being, pricing power favors shippers, but recent fuel price rises have helped FedEx and UPS steal additional income despite the discounting spree, according to AFS Logistics. For example, in Q2, the express parcel rate per package increased to 4.7% from 3.8% the previous year, as carriers employed surcharge increases to offset reduced rates.

"Parcel carriers find themselves in a contradictory cycle - frequently hiking surcharges to squeeze additional revenue from limited demand, but simultaneously deploying heavy discounting to compete for those modest volumes," according to AFS Logistics' news release.