The problem: It costs UPS a lot more to deliver to doorsteps than it does to deliver bulk shipments to stores and businesses. Yet online shoppers have grown to expect free shipping and retailers are reluctant to charge consumers extra for delivery as they try to drum up sales after their shops were shuttered.
Over the long term, it could mean higher prices for consumers shopping online.
“The shipping costs are rising and rising. Free shipping is not sustainable. There is no such thing,” said John Haber, CEO of Spend Management Experts, an Atlanta-based supply chain consulting firm.
For the biggest corporate customers shipping tens of thousands more packages, UPS on May 31 added a 30 cent surcharge per package onto some of its cheapest shipping rates. FedEx, UPS’s main rival, announced its own peak surcharges last week.
UPS said the peak surcharges “reflect the current dynamic market conditions and uncertainties caused by the Coronavirus, which is impacting available capacity and market demand.”
Haber said UPS, FedEx and the post office “are as busy right now as they are during December, during the holidays.”
Normally, UPS hires 100,000 seasonal workers over a period of months leading up to the holiday season. But with the rapid rollout of COVID-19 stay-at-home orders, “Nobody had time to plan,” Haber said. “Nobody planned to deliver the kind of volume that they’re delivering right now.”
UPS already started to see a financial hit in March from the drop in business-to-business shipments as factories and offices closed due to the pandemic. It said first-quarter revenue grew but profit fell due to "an unprecedented shift in consumer and product mix."
Managing the shift will be a task for the company's new CEO Carol Tomé, who stepped into the role this month, replacing David Abney, who retired.
Business-to-consumer deliveries have grown to nearly 70% of UPS’s volume. Normally it’s closer to 50%.
Many online shoppers have noticed that items ordered on Amazon normally delivered in two days have taken much longer, particularly when the e-commerce giant temporarily restricted non-essential goods during the pandemic. UPS is one of Amazon's shippers.
UPS said the coronavirus has created “unusual complexities” but that the “vast majority” of its deliveries are arriving on time. It is managing increased consumer deliveries “largely with existing staff,” it added in a written statement.
At its ground operations, UPS delivered 98.6% of business-to-consumer packages on time from March 1 through April 18, and 96.5% on time from April 19 through May 23, according to ShipMatrix, a shipping consultancy. That compares with 98.3% and 98.8% a year ago, respectively.
But UPS halted its on-time money-back guarantee for the businesses that ship items to customers — another move usually taken during the holidays.
UPS also is adding a $31.45 surcharge onto large corporate customers that ship more than 500 large packages a week, which could apply to things like large pieces of furniture or appliances. It has had peak surcharges on international shipments since April.
FedEx’s peak surcharges, which differ from UPS’s, could cost some businesses $400,000 more a month, Haber said. He said customers of both FedEx and UPS will likely need to find other ways to ship items or negotiate the charges down. In the short term, some businesses may end up eating some of the extra shipping costs.
ShipMatrix President Satish Jindel called COVID-19 an opportunity for retailers to charge the real cost of shipping. Adding surcharges, according to Jindel, “is a Band-Aid approach to addressing the core issue of how to cost-effectively deliver packages to people’s homes, instead of businesses.”
Along with lower margins, UPS has more logistical challenges from delivering millions more packages to doorsteps.
Businesses including UPS have deployed new social distancing and sanitizing measures, while workers in high-risk groups look to reduce their exposure by staying home. Early on during the outbreak, the Teamsters union negotiated a deal for paid leave for UPS workers diagnosed with the virus or required to quarantine. News articles in Tucson and Germany reported outbreaks at UPS facilities there.
Air cargo carriers have also dealt with flight restrictions and quarantine requirements in a number of countries.
More recently, protests against racial inequality and police treatment of African Americans caused curfews, street closures and deployment of the National Guard. That added new delivery challenges in some areas, causing some delays.
“They can’t get to places,” Haber said. “Couriers have had to redesign their delivery routes.”
Many expect the spike in online shopping while people are isolating at home to last well beyond COVID-19. E-commerce was already growing at an annual rate of around 15%, but ShipMatrix’s Jindel now expects growth to be closer to 20%.
“This virus has permanently changed shopping behavior for certain groups of people who, for various reasons, were either uncomfortable or felt that they wouldn’t know how to shop online,” Jindel said. Whether they’re older or less tech-savvy, “COVID forced them to figure it out — and they found out, I can do it. It’s not difficult. And by the way, it’s more convenient than going into a store.”
It’s yet to be seen how much will change when more people return to offices and workplaces, and they are no longer home when deliveries arrive.
One challenge: Piles of packages on doorsteps become a target for theft, while those who live in apartment buildings without doormen and mail rooms to store packages securely may have a difficult time getting their items.
UPS has increasingly looked to cut costs by reducing the number of repeat delivery attempts, encouraging customers to pick up packages at a network of corner stores and retailers as alternate delivery locations called "Access Points."
"You're going to see an increase in usage of lockers and remote Access Points for sure," said Haber, the supply chain consultant.