Share on

FedEx and UPS are offering SMB clients exceptional discounts

FedEx, UPS roll out ‘exceptional discounts’ to SMB customers

FedEx and UPS are offering SMB clients exceptional discounts - Supply Chain Tribe by Celerity

According to the TD Cowen/AFS Freight Index, shippers have benefited from lower delivery rates because of competitors' pricing wars.

According to the July 16 TD Cowen/AFS Freight Index, FedEx and UPS are still offering shipping reductions to draw in new business, which has helped reduce delivery rates despite rising fuel surcharges.

In Q2, the ground parcel rate per shipment decreased from 28.9% in the same quarter last year to 26.8% over the index's baseline from January 2018. As discounting activity persists, rates are anticipated to stabilize in Q3 at 25.7% over the baseline.

According to a news release from AFS, Michael McDonagh, president of parcel, "small-to medium-size shippers are seeing exceptional discounts that might typically be reserved for much larger customers."

Prior to this, the index had predicted that Q2 rates would rise somewhat year over year. However, FedEx and UPS have defied this prediction by continuing to offer substantial discounts in order 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." "While maintaining stable discounts for large customers, both carriers are more aggressive in their discount offerings to small and medium-sized customers."

According to Mingshu Bates, chief analytics officer of AFS Logistics, in an interview, discounts are usually volume-based, meaning that larger shippers benefit from a system that leads to more savings at higher volumes. However, in the current market, smaller clients can obtain prices that were previously only available to companies twice their size. UPS and FedEx are prepared to absorb these savings since smaller companies still have a lot of potential to improve their bottom lines.

The carriers only have to spend a little amount to obtain that volume, according to Bates. "I believe that's the main area where they can continue to make money while offering discounts." In a slow demand climate, the delivery giants believe that drawing in smaller shippers would increase profitability, but this will not be an easy task. UPS's U.S. average daily volume up 0.7% year over year in Q2; but, small business traffic was "down until June when it flipped positive," according to CFO Brian Dykes during an earnings call.

According to McDonagh in an interview, shippers should be ready for less generous discounts if FedEx and UPS volumes reach levels that satisfy the carriers. This is because the delivery giants will be focusing more aggressively on per-package revenue.

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

For the time being, shippers have the advantage in pricing power, but recent rises in fuel surcharges have allowed FedEx and UPS to steal more money despite the massive discounts, according to AFS Logistics. For instance, as a result of carriers using surcharge increases to counter decreased revenues, the express parcel rate per package increased to 4.7% in Q2 from 3.8% in the previous year.

"In an attempt to compete for those modest volumes, parcel carriers are deploying heavy discounting while also frequently hiking surcharges to squeeze out additional revenue from limited demand," according to a news release from AFS Logistics.