UPS and Fedex have both announced rate increases for the coming year, but this year’s increases come with a little twist. Both carriers have announced that they will start using a “dimensional weight” freight rating system (a system that considers package density as well as weight). This new pricing structure is a game changer. The battle for the consumer’s dollar that has waged on for the last decade between traditional brick and mortar retailers and small internet sellers may have just taken a taken a new, and very dramatic, turn.
The dimensional weigh program won’t affect all shippers equally. Those shippers that ship large parcels with low weight to residential addresses will feel the impact most severely.
So why is this a game changer? The reason is simple. A significant number of small internet shippers that sell in low density, low value, categories (diapers, lamp shades, light bulbs etc.) that compete solely on price, will now see the freight component of their business model jump considerably. I would not be surprised to learn that some web sellers will see their freight costs double. For years these sellers have grown their businesses because they have enjoyed a significant cost advantage over traditional retailers. All of a sudden, all that is about to end. A number of websites that sell low value, low density, items will find the dimensional weight rates put them at cost disadvantage to the traditional retailers.
Traditional retailers that sell in low value, low density categories will benefit as price conscious consumers migrate from low cost internet sites back to the brick and mortar stores. In fact some categories will probably see price increases at retail, as retailers will raise prices (and increase profitability) in categories that no longer compete with small internet sellers.
In certain product categories, this change in shipping prices could potentially have a larger benefit to traditional brick and mortar retailers, at the expense of small internet merchants, than the concept of a national internet sales tax.
(The Marketplace Fairness Act has been stuck in congress for years.)
One could ask “Won’t the FedEx prices go up for the traditional retailers as well, making everything equal again?” Probably not. Most major retailers are already very big accounts for both FedEx and UPS. As such, they will be in a position to negotiate away, much, if not all, of the price increases related to package size.
It’s not clear how all this will pan out eventually, but the early signs are that Traditional Brick and Mortar Retailers just got a huge boost in the battle for the consumer’s dollar.
David Coleman is the CEO and Founder of Brandoogle (brandoogle.com). Brandoogle works with retailers and brands to combat showrooming with a proprietary suite of software and services. He can be reached via e-mail at firstname.lastname@example.org.