Online shipping

Online shipping costs set to increase further amid pandemic

An Amazon worker delivers packages amid the coronavirus disease (COVID-19) outbreak in Denver, Colorado on April 22, 2020.

Kevin Mohatt | Reuters

Delivery costs have increased across the country and are expected to continue as the pandemic drags on, creating a serious headwind for retailers, according to a report from Jefferies.

“Recent growth in shipping costs has been fueled by high e-commerce penetration, which has created a significant imbalance between supply and demand and limited carrier capacity,” said Jeffries analyst, Janine Stichter, in the report, which was based on a call with Dean Maciuba, a former FedEx executive who is currently North America managing partner at consultancy Last Mile Experts.

Consumers expect fast and free delivery, but this places a growing burden on many retailers, especially those affected by prolonged closures during the Covid-19 pandemic. Midsize retailers are particularly at risk as many lack the capacity to implement a shipping strategy robust and efficient enough to meet the demand for fast deliveries.

Much of that pressure comes from companies like Amazon, famous for its Prime two-day, one-day, and same-day shipping options. This has made consumers expect fast, free delivery, even if some don’t even want or need it, Stichter said.

Online shopping during the holiday season last year did not peak as high as expected, according to Maciuba. He suspects shipping lines are looking to make up for financial losses as they invested in building infrastructure in anticipation of increased demand that never materialized. On the other hand, retailers could benefit from lower-than-expected shipping costs.

However, the holiday surcharges that shipping carriers like FedEx and UPS have put in place to prepare for the influx of orders aren’t going away. These surcharges will likely become the new norm in the future, in addition to the 5-6% annual increases that are typically seen, Maciuba predicted.

FedEx recently announced new peak surcharges on residential express and domestic ground shipping for customers who had a weekly volume of more than 30,000 packages. The 30-cent-per-package surcharge went into effect on Monday.

Maciuba told Jefferies that the best solution for shipping carriers to combat pandemic and holiday losses is to adopt alternative delivery methods like online shopping, in-store pickup services, pick up curbside and using third-party delivery apps like Doordash or Shipt.