Diversifying Delivery: Internet Retailer Magazine reprint

APRIL 2015 | WWW.INTERNETRETAILER.COM
iversifying
eliveryelivery
UPS and FedEx have dominated
e-commerce parcel shipping, but an
increasing array of alternatives are
making pitches for e-retailers’ business.
+Whate-commerceprosearn
India’semerginge-retailmarket
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E-retailers say the recent rate increases and the shift to
dimensional weight fees that raise the cost of many ground
shipments are not only increasing their bills, but making
them harder to understand. “They almost purposely make
their rate grids and contracts difficult to understand,”
says Amin Harari, co-founder of health and beauty
products e-retailer CleanBoutique.com and fulfillment
company SM Operators LLC. “Every day there’s a new fee
or excuse to upcharge you.”
Add in widespread delays late in the 2013 holiday
season, and more web merchants are weighing alterna-
tives. “Holiday 2013 was a huge issue and a tough season,”
says Chris Halkyard, chief supply chain officer and general
manager of distribution services for flash-sale e-retailer
Gilt Groupe Inc. “It made people in my position think that
not only would we like cheaper options, but also we’d like
to take some of the pressure about capacity off and not
have all our eggs in one basket.”
E-retailer leader Amazon.com Inc. is diversifying too,
and where Amazon leads, others often follow. After
the misses of the holiday 2013 season, Amazon said it
would review the performance of delivery carriers. In
2014 Amazon began routing more parcels to the U.S.
Postal Service as part of a 2013 deal that includes Sunday
delivery and Amazon sorting packages in specialized
distribution centers to get the best rates
from USPS. An Amazon spokeswoman says
a single sortation center—it had 15 at last
count—can process “tens of thousands” of
customer packages daily.
As a result, some web retailers are turning
to alternatives to the national carriers. Gilt,
for example, at the end of February shifted
“nearly all” of its ground shipping business—an
average of 20,000 packages a day—from UPS to
package consolidator and shipper Newgistics
Inc., which carries packages through its ground
network and hands off to the Postal Service for
final delivery. Halkyard says that while it takes
an average of about four days—1.5 more days
than it took UPS to get consumers their pack-
ages via ground shipping—consumers aren’t
complaining and the savings will allow Gilt to
offer more free shipping promotions and better
discounts. “We see this switch improving our
LTV,” he says, referring to the customer lifetime
value metric that projects how much in all a
customer will spend with a business.
The Postal Service, regional carriers and
consolidators like Newgistics are lining up to
T
o say the least, many e-retailers are frustrated with the rate
increases and laundry list of accessorial charges on the shipping
bills they receive from UPS Inc. and FedEx Corp., the two national
shipping companies employed most often by North American
e-retailers to get web orders to consumers’ doorsteps.
iversifying
eliveryUPS and FedEx dominate e-commerce
parcel shipping, but rate increases
have e-retailers looking at a
growing array of alternatives.
BY PAUL DEMERY AND ALLISON ENRIGHT
Copyright 2015,Internet Retailer | Reprinted with permission ofVerticalWeb Media,LLC | 125 SouthWacker Drive,Suite 2900,Chicago IL 60606,(312) 362-9529

serve discontented web retailers. And some con-
sultants and retailers like Gilt say these options
are worth considering. But shifting the delivery
mix can be tricky, and some retailers fear that
moving part of their business to alternatives
could cost them volume discounts with the two
big carriers, and instead are using the alterna-
tives as leverage to negotiate better deals with
UPS and FedEx.
Web retailers figure to have some clout.
Business-to-consumer packages accounted
for 45% of UPS’ domestic package volume last
year, and FedEx says it spent $1 billion during
its fiscal 2014 to expand the capacity of its
ground network in large part to accommodate
e-commerce parcel growth. FedEx declined to
comment for this story; UPS provided e-mailed
responses to questions. On the question of how
e-retailers are responding to dimensional weight
pricing it said it is working with customers to
lower their shipping costs and advising them on
how to determine appropriate package size.
HOW MUCH SHIPPING FEESARE UPVARIES
by product and a retailer’s volume. But some
say prices are up as much as 30%. That includes
an average 4.9% annual rate hike, various
residential and fuel cost surcharges, and the
move to charging by a package’s physical
dimensions—dimensional weight pricing, as it’s called—
rather than its actual weight.
Web-only retailer BabyAge.com Inc. found that dimen-
sional pricing resulted in one of its hottest products—the
Today’s Mom pregnancy pillow—shipping as an 18-pound
package, nearly double its actual 10-pound weight,
founder and CEO Jack Kiefer says. Even smaller packages
were getting hit hard, he adds. “If you take the DIM weight
factor and other standard rate increases and residential
surcharges, it got to the point where we were looking at it
costing $9 to ship a 1-pound package across the street.”
BabyAge reacted to the rate changes by shifting much
of its volume away from FedEx’s consumer-focused Home
Delivery service. Kiefer says he’s received overtures from
the USPS promising attractive rates, but he isn’t ready to
leave FedEx. Instead, he shifted about 60% of BabyAge’s
shipping to FedEx SmartPost, up from about 2% last year.
The SmartPost service provides bargain rates compared
with FedEx Home Delivery and Ground services, he says.
At Ampére Creations, a retailer and wholesaler of hand-
bags and backpacks, UPS and FedEx fees are up about 20%
for a typical package. Daniel Chen, director of marketing
and sales, says he’s now shipping “about 99%” of online
consumer orders with USPS, while continuing to use UPS
mostly for shipments to wholesale customers.
UPS will work with retailers to devise the best mix of
shipment routes, packaging and rates, particularly for
high-volume destinations and package types, says Jolynn
Khamky, director of fulfillment and head of shipping and
« 25APRIL 2015 | WWW.INTERNETRETAILER.COM

all that out isn’t easy, they add.
Many retailers are testing USPS, but worry
about losing favorable contract terms they’ve
negotiated with the two big carriers, says Todd
Benge, managing partner at shipping consul-
tancy BirdDog Solutions Inc. “It’s not that you
want to be misleading to UPS or FedEx, but this
is your business, and shipping is one of the few
areas where the vendor tries to be in control of
everything. But retailers need to experiment and
form a vision of how to position their national
carrier contract so as not to hinder their capabil-
ity to be flexible in their network.”
THERE’S NO QUESTION USPS IS MAKING
A FORCEFUL PLAYTO capture more parcel
volume from e-retailers—its shipping and
packages segment is the only part of USPS
where volume is growing.
Parcel shipping accounted
for 20.2% of operating
revenue for the year ended
Sept. 30, up from 18.7% in
2013 and 17.8% in 2012. It
proposed last summer to cut
the shipping fee for light-
and middle-weight parcels
shipped using its Priority
Mail service, which led UPS
and FedEx to file complaints
with the Postal Regulatory
Commission (PRC), the
government entity that
oversees and must approve Postal Service rate
changes. FedEx, in its filing, stated: “What
USPS is proposing is an aggressive push to
gain market share in the fast-growing business
of e-commerce distribution services. ... Price
reductions of such magnitude will substantially
affect competing service providers and the
market as a whole.”
Both FedEx and UPS argue in PRC filings
that USPS is using revenue generated
through its so-called “market dominant”
products and services, such as first class
and standard mail, to subsidize the new
logistics operations at JackThreads, a web-only retailer
of men’s apparel that mainly ships via UPS. Khamky says
most JackThreads parcels are 10 pounds or less, and one
option that avoids the dimensional weight penalty is to
ship some products in soft packages instead of boxes. But
she fears customers might object. “We ask ourselves, ‘If I
were a customer, would I get upset if I received this gift in
a soft package?’ or ‘Would clothing get wrinkled if it didn’t
ship in a box?’”
Part of USPS’ appeal for e-retailers is that it doesn’t use
dimensional weight in its pricing and charges extra fees
in only a few circumstances, such as sending to an Army
Post Office address or to Alaska. “There are no surprises
when you get your invoice. It is nice to know what you are
getting and paying,” Harari says. He ships about half of
his volume through Newgistics, 10% with USPS and the
remaining 40% split between UPS and FedEx.
But retailers have to keep their customers in mind before
making a move. In Ampére’s case,
the consumers who account for a
small, though quickly growing, part
of its total business appear happy
with USPS delivery. But on the
wholesale side, Chen notes, many
customers insist on either UPS or
FedEx because of their reputations
for reliability and because they pro-
vide tracking information, which
USPS has not provided reliably in
the past.
So instead of turning to USPS
as a primary carrier for wholesale
shipments, Ampére is seeking a
better deal from UPS. “Our B2B customers are still 100%
committed to UPS, FedEx and other carriers, and we are
expecting our B2B business to grow, so we are working
with UPS to renegotiate our rates,” Chen says.
As retailers and other shippers consider alternatives,
however, they have to consider what they may lose in the
form of volume discounts from UPS and FedEx. Figuring
MOVING MAIL
In January the Postal Service issued a request for
information about the design and production of
180,000 vehicles to replace its aging fleet.A key design
requirement in the RFI was to make the vehicles bigger
so they can better accommodate packages.Those vehicles
are equivalent to about 75% of USPS’ delivery fleet.
CARGO SPACE
Current fleet: 121 cubic feet
Proposed fleet: 155 cubic feet minimum
28% more storage
“It’s not that you want to be mislead-
ing to UPS or FedEx, but this is your
business, and shipping is one of the
few areas where the vendor tries to be
in control of everything. But retailers
need to experiment and form a vision
of how to position their national carrier
contract so as not to hinder their capa-
bility to be flexible in their network,”
says Todd Benge, managing partner at
BirdDog Solutions Inc.
26 » DIVERSIFYING DELIVERY

have scanning guns,” says Dave Sabot, president of
CheapHumidors.com, an e-retailer of smoking accessories.
“Now, they are not as good as FedEx or UPS, but they are
scanning it several times through their system and there
is more accountability for that package.” CheapHumidors
ships most of its lighter-weight packages via USPS, and
heavier items via FedEx. But with the improvements at
USPS, he’s also moving some of his FedEx shipping volume
to that company’s more economical SmartPost service,
which ships a package through FedEx’s network but hands
off to the Postal Service for final delivery. Sabot says FedEx
SmartPost is cheaper than USPS for heavier packages
traveling longer distances.
WHEN CONSIDERING ITS SHIFTTO NEWGISTICS,which
has USPS making final delivery, Gilt’s Halkyard says he
called an old Air Force buddy who is now a mail carrier
in El Paso, Texas, and asked him if the tracking improve-
ments were as good as he was hearing. “He said, ‘I’ve
got this scanner in my hand right now and I have to scan
everything,’” Halkyard says. “He said at the start of every
shift [management] highlights anybody who’s not scanning
and that every carrier is held fully accountable.”
Consumer electronics e-retailer Newegg Inc. too is
looking to incorporate USPS more into its shipping mix,
and is actively negotiating a customized program with the
Postal Service, says Kunal Thakkar, senior vice president of
operations. “The network improvements they have done in
the last few years make it far more superior than it used to
be,” he says of USPS. “The brand perception is starting to
change as more consumers see their orders get delivered by
them.” Thakkar says Newegg ships about 75% of its volume
pricing in “competitive products,” the category
parcel shipments fall into. These segments are
supposed to be accounted for separately, and
revenue generated in one isn’t supposed to sub-
sidize the other. UPS and FedEx demanded the
PRC make USPS show how it is accounting for
these, but the PRC approved the rate changes and
they went into effect in September. “Evidence
of cross-subsidization is pervasive, as the Postal
Service is increasing rates on monopoly mail
products, while at the same time decreasing
services,” says Bala Ganesh, UPS retail director,
in an e-mailed statement to Internet Retailer.
“Conversely, they are keeping parcel rates steady,
even lowering rates for certain customers that
use UPS products, while increasing small parcel
service delivery standards.”
Gary Reblin, vice president of new product and
innovation at the Postal Service, says the price
changes are intended to offer more competitive
pricing and build on Priority Mail’s popularity.
“We are a vital business partner for small and
large businesses and lowering shipping prices
will save them money and improve their bottom
line,” he says. “With our affordable shipping
options, we hope to attract new business
customers and become their preferred delivery
service.” He provided further comment on
affordability: “As two global shipping companies
make changes to their pricing models in 2015—
resulting in higher costs to the customer—it’s
more important than ever to make sure you’re
not paying more than you should be for your
shipping needs.”
USPS is doing more than changing its rates
to position itself for more parcel volume. It is
currently taking bids to replace its aging fleet of
180,000 mail trucks. A key design requirement
in its bid request is to design the vehicles with
at least 28% more cargo space to accommodate
more parcel volume.
Shipping experts and e-retailers who are using
USPS say it has also gotten better at tracking
packages. Tracking parcels as recently as two or
three years ago was more haphazard, they say,
with packages sometimes being scanned when
received by USPS, sometimes at local post offices
and sometimes upon delivery. Often there was a
lag between when a scan happened and when
that information was uploaded so the customer
could see it. That’s no longer the case.
“The Postal Service has really ramped
up its technology and all the carriers now
Eastern Connection: Conn.,
Del., D.C., Ind., Ky., Maine,
Mass., Md., Mich., N.H., N.J.,
N.Y., Ohio, Pa., R.I., Vt., W. Va.
OnTrac: Ariz., Calif., Colo., Idaho, Nev.,
Ore., Utah, Wash.
Spee-Dee Delivery Service Inc.:
Ill., Iowa, Minn., Mo., Neb., N.D., S.D., Wis.
LSO (Lone Star Overnight):
Ark., La., N.M., Okla., Texas
Pitt Ohio: Ky., Mich., Ohio, Pa., W.V.
LaserShip: Conn., Del., D.C., Fla., Ga.,
Maine, Mass., Md., N.C., N.H., N.J., N.Y.,
Pa., R.I., S.C., Va., Vt., W. Va.

with most of those charges focused on SurePost
and other residential delivery services. The
aim is to turn around last year’s decline in net
income, which sank 30.6%, to $3.032 billion
from $4.372 billion in 2013.
FedEx doesn’t break out operating income
or profit margin figures for SmartPost, but the
margin on SmartPost has historically been tighter
than on the overall operations of FedEx Ground,
which includes SmartPost and Home Delivery,
industry analysts say. FedEx does say, however,
that SmartPost revenue has been squeezed in
recent years as USPS has raised its charges.
FedEx reported a 6% year-over-year increase in
SmartPost revenue last year, to $983 million from
$926 million, but said revenue per package, or
“yield,” increased less than 1% to $1.78 from $1.77
in 2013, and declined 1.7% from $1.81 in 2012.
Staying with UPS or FedEx and choosing a
more economical shipping option like SurePost
or SmartPost means an e-retailer can use a
cheaper shipping method and still count those
shipments toward their overall FedEx and UPS
shipping volumes, says Kenneth Moyer, vice
president of supply chain strategies for LJM
Consultants. That, he says, can ensure a retailer
still qualifies for high-volume rate discounts
those two carriers typically offer. Any savings
from moving some volume to a lower-cost
carrier can be eaten up quickly if a retailer loses
a volume discount, Moyer says.
And while UPS and FedEx readily negotiate,
that’s not the case with the Postal Service,
which by and large can’t negotiate off published
rates and is mired by government bureaucracy,
e-retailers say. “We have [Postal Service] reps
who service our account when needed, but they
don’t reach out to us as much as we might reach
out to them,” Sabot of CheapHumidors.com says.
But he has quarterly meetings with his FedEx rep.
At Gilt, Halkyard tried to work directly with
USPS when it was considering shipping alter-
natives, but it was slow going, especially when
dealing with officials in Washington. Ultimately,
Gilt decided to go with Newgistics, which he
calls a “nice intermediary.” The retailer lets the
vendor manage terms with USPS.
AS SOME E-RETAILERS REVIEWTHEIR
SHIPPING MIX,they’re finding new carrier
options. Pitt Ohio, a traditionally regional
carrier with its deepest footprint covering West
Virginia, Pennsylvania, Ohio, Michigan and
with UPS and FedEx and 25% through a mix of DHL, USPS,
regional carrier OnTrac and others.
“USPS is getting aggressive in the e-commerce space,”
says Todd Everett, chief operations officer at Newgistics,
and more reliably handles last-mile delivery than in the
past. “They recognize the parcel business and servicing the
e-commerce market is a critical part of their business.”
The USPS service Newgistics uses for last-mile delivery
is called Parcel Select; it’s the same service UPS uses for
SurePost and FedEx for SmartPost, their last-mile services
via USPS. Parcel Select’s growing volume is indicative
of e-retailers’ desire for cost savings. From October to
December, USPS delivered 515.92 million Parcel Select
packages, up 24.1% from 415.61 million a year earlier,
generating $908 million in revenue. Although UPS does
not break out SurePost volume in units, it says SurePost
volume increased more than 45% last year, and accounted
for approximately half of the overall 12% growth in its U.S.
domestic shipping volume. At FedEx, SmartPost volume
grew 6% during fiscal 2014.
THEREWERE 9.6% MORE PARCELS SHIPPEDTHROUGH
PRIORITY MAIL—the class
of mail for which the Postal
Service cut rates—from October to
December. While not an apples-
to-apples comparison, UPS, which
reports package volume as a daily
average, saw its domestic daily
volume during the same period
grow at 6.6%.
In its Q4 earnings call, UPS
said that increase didn’t produce
enough revenue growth to justify
its added spending on improving
holiday season service, characteriz-
ing the network as “underutilized.”
Throughout 2014, UPS hired
100,000 temporary workers and
spent $500 million on network
improvements to prevent the
widespread delays that marred
the prior holiday season. UPS says
those improvements worked and
it met its delivery commitments;
a survey by customer service
tracking firm StellaService Inc.
also shows missed deliveries were
less of a problem during holiday
2014. But going forward, UPS CEO
David Abney said the company will
implement surcharges during peak
periods, like the holiday season,
28 » DIVERSIFYING DELIVERY

Drivenbydata.
Informedbyexpertise.
Readytogiveyouanedge.
1.800.464.3137
www.birddog.com
The Parcel Experts
northeastern Kentucky, for example, says it’s
getting more inquiries from e-retail shippers
than ever before. “In the fourth quarter we
received about five bids, and from some large-
name shippers,” says Chuck Hammel, director
of ground. Pitt Ohio hasn’t closed yet on any
of those deals, he says. But it’s developing a
national option, through its US Cargo division,
which works with other regional carriers to
enable shipping and delivery coast to coast.
Inquiries are up too at Lone Star Overnight
(LSO), says CEO Rick Jones. LSO delivers
primarily in the South and Southwest through
its ground and air network. He says the tenor
of inquiries has shifted from a few years ago—
when most focused solely on the cost savings
shippers could get—to one that’s now a mix of
savings and how flexible LSO can be to meet
shippers’ needs, such as picking up packages at
2 a.m. and delivering the
same day. LSO is working
to improve its visibility
with e-retail shippers; it
recently integrated with
ShipStation so e-retailers
using that vendor’s ship-
ping software can more
easily see how LSO could
service their shipments.
Benge says regional carriers are worth looking
into for some deliveries because they can be
competitive with national carriers on price and
speed within their service areas, although some
retailers are uncertain about trying a carrier they
are less familiar with. “For e-retailers there tends
to be a lot of apprehension about regional carriers.
They don’t know them if they’re not themselves in
that part of the country, and there’s not a lot data
for them to refer to,” he says.
Newegg has tested using several regional carriers, Thakkar
says, but only OnTrac provided the mix of cost savings, speed
and met customers’ expectations enough for Newegg to com-
mit some parcel volume to it. Newegg has used OnTrac for
ground shipping to select ZIP codes in eight Western states
for three years. “They maintain their costs to be very compet-
itive and delivery is a little faster than the
national carriers in specific ZIP codes,”
he says, with 90% to 95% delivered in
one day. Newegg is also part of a pilot
OnTrac is running as it develops its own
last-mile option handing off to USPS. That
service is aimed directly at e-retailers
shipping a minimum of 500 packages a
day into OnTrac’s service area. “It’s easier
to customize a shipping program with the
regionals; and they have the ability to make it happen faster
than national carriers,” Thakkar says.
Whichever carrier mix e-retailers choose to pursue, they
have numbers to crunch and questions to consider. But
now, more than ever, alternatives are available. 
PAUL@VERTICALWEBMEDIA.COM | @PDEMERY
ALLISON@VERTICALWEBMEDIA.COM | @AENRIGHTIR
The shipping carrier mix of
Top 500 e-retailers, over time
2009 2011 2013
UPS 111 145 176
FedEx 79 123 144
USPS 61 90 105
Source: Internet Retailer’s Top500Guide.com. Retailers are asked to
share who their primary carriers are; many retailers report using multiple
carriers. Some do not provide carrier information.
Top 500 e-retailers, over time
Newegg has tested using several regional carriers, Thakkar
says, but only OnTrac provided the mix of cost savings, speed
2013
176
144
105
“For e-retailers there tends to be a
lot of apprehension about regional
carriers. They don’t know them if
they’re not themselves in that part of
the country, and there’s not a lot data
for them to refer to,” says Benge.

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