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Depending on one’s perspective, FedEx Corp.’s planned Jan. 1 switch to dimensional pricing on ground parcel shipments measuring less than three cubic feet is either another attempt to grab shippers by the short hairs or a rational move to price its surface capacity in line with an evolving traffic mix. The policy change could also wean customers off an addiction to excess packaging that adds unnecessary cube and cost to each delivery.

The move is unprecedented—as of Jan. 1, all FedEx ground shipments will be priced based on their dimensions instead of their weight. But the goal is a familiar one. Memphis, Tenn.-based FedEx and its chief rival, Atlanta-based UPS Inc., have tried for seven years to convince shippers to either tighten up their packaging or fit more weight into the parcels they tender. Since 2007, both have used the tool of volumetric division, where a parcel’s cube is divided by a preset divisor, to price packages based not on their weight but on how much space they occupy in a delivery van. In January 2011, both shrunk their divisors to 166 from 194 to make it even costlier to tender lightweight, bulky parcels that take up a disproportionate share of van capacity and, according to the carriers, distort their pricing schemes.

Currently, however, shipments under the three-cubic-feet threshold are exempt. As a result, a five-pound parcel measuring less than three cubic feet is priced based on its weight.

FedEx’s move changes the game. Take, for example, a one-cubic-foot box that measures 1,728 cubic inches, the sum of multiplying the shipment’s height, weight, and length. Dividing that number by the divisor of 166 now in effect yields dimensional pricing of about 11 pounds, even if the parcel weighs less than that.

Extending the math to the three-cubic-feet threshold only amplifies the magnitude of the change: Dividing 5,184 cubic inches by the 166 divisor yields a rate equal to that of a 36-pound shipment. Shippers generally pay the greater of the actual or dimensional weight.

To put it in terms a layperson could understand, come Jan. 1, 2015, a five-pound package of toilet paper ordered on Amazon.com could be priced as if it were a 20-pound shipment.

SHEDDING B2C WEIGHT?

Those affected by the shift have several choices: add heft to their packages so they can be priced by the weight, reduce the cubic dimensions of their parcels through more efficient packaging, pay the higher charges, minimize the damage through effective negotiation, or go elsewhere. Some choices are considered feasible. Others appear less so.

FedEx may not be sorry to see many of these shippers
go. The explosive growth of e-commerce has pushed
more business-to-consumer (B2C) shipments into FedEx’s
ground network than ever before. Most of those ship-
ments consist of lightweight, bulky items. What’s more, an
e-commerce transaction often entails the delivery of only
one item. By contrast, a typical business-to-business (B2B)
delivery stop involves multiple packages each weighing a
decent amount, a more profitable scenario for a carrier.
Given that carriers price their delivery expenses on a per-
stop basis, it isn’t surprising B2C shipments have become
an exercise in margin compression.

The problem is amplified by a shipper’s insistence on surrounding the product with Styrofoam popcorn, Bubble Wrap, or other types of padding that may or may not add protection but certainly adds to cube. Jaris Briski, general manager of integrated parcel solutions for Pittsburgh-based third-party logistics service provider Genco, said he’s concluded from numerous visits to shippers’ facilities that “they are very generous” with additional packaging. The FedEx move will force many to “take a serious look at their configurations,” Briski added.

Rick Jones, president and CEO of Austin, Texas-based LSO (formerly Lone Star Overnight), a regional parcel carrier, reckons that FedEx wants to recalibrate its traffic mix so B2B shipments make up more of its density. This, in turn, may lead to a shedding of B2C business as merchants that lack the volume leverage of a company like Amazon are effectively priced out of the FedEx system, he said.

Jones, who spent 22 years at UPS, said his old employer would likely follow FedEx’s lead because it faces the same predicament. UPS has said it is studying the FedEx decision but declined further comment.

As for what this means for the market, it is difficult to quantify the number of shipments that could be affected by the FedEx change, and the estimates get murkier if UPS, which handles three times the daily ground volume of its rival, is thrown into the mix. According to consulting company SJ Consulting, which maintains a database of 100 million domestic parcels moved annually, 32 percent of those packages have shipment characteristics that would make them vulnerable to the FedEx move. Within that subset, about 57 percent of shipments weigh five pounds or less, weight breaks that would face the steepest increase, according to Satish Jindel, SJ’s president.

Jindel said his database may understate the impact, however. FedEx and UPS combined handle about 16 million ground parcels each shipping day. When that number is multiplied by 250 or so shipping days, the volume of affected packages “can go much higher” than the universe his company tracks, Jindel said. The change will add an estimated $186 million to FedEx’s annual operating income