FedEx, UPS Recalculate, Raise Rates

Holiday Shopping
Mark Lennihan/AP

By Nick Carey

CHICAGO -- United Parcel Service (UPS) and FedEx (FDX) are rolling out pricing systems to curb online retailers' large package sizes. That means, of course, higher rates.

Starting Monday, UPS and FedEx will no longer charge for U.S. ground packages under 3 cubic feet by weight but by their "dimensional weight." Instead of simply weighing a box, retailers must multiply its length by its height and width, and then divide that by 166 to reach its dimensional weight.

"We believe this (dimensional weight pricing) will encourage customers to reduce their package sizes," Bill Smith, UPS vice president of marketing, told Reuters.

UPS and FedEx announced the change in May and have worked to help customers adjust. But some small firms lack the resources to change packaging and may switch to the U.S. Postal Service, said Amine Khechfe, general manager of Endicia, which offers shipping solutions for e-commerce vendors. Under the new systems, according to Endicia, a woman's shoulder bag weighing 2 pounds -- shipped in a box measuring 19 by 15 by 5 inches -- will have a dimensional weight of 9 pounds and cost 45 percent more to ship.

More Business Headed for the Post Office

Atlanta-based UPS says retailers are shipping lighter goods but have not shrunk the size of their packaging materials.

"We need to charge a fair value for use of our asset, which in this case is space," FedEx spokesman Jess Bunn told Reuters.

Online retailers such as Amazon (AMZN) are expected to be prepared. But smaller firms like Oregon-based Natura Health Products would struggle: It expects to pay 36 percent more for shipping many packages. Natura sells nutritional supplement products, many for cancer patients, and spends about $180,000 a year on shipping through FedEx and USPS, said logistics manager Chris Thorsen. To avoid such increases, the company will shift more shipping business in 2015 to U.S. Postal Service. The share shipped by USPS will rise to about 50 percent from 40 percent in 2014.

The USPS still charges by weight. In July, it announced some price cuts to target e-commerce.

Research firm Morningstar estimates e-commerce will grow at least 10 percent annually over the next five years. Analyst Keith Schoonmaker said such growth and the new pricing model will allow UPS and FedEx to let some of this low-yield business to the post office.