Anticipated higher e-commerce volumes are driving more carriers to implement peak season surcharges to manage capacity. Photo credit: Shutterstock.com.

Small parcel carriers are preparing for higher holiday volumes in the United States by implementing peak surcharges to manage anticipated capacity and operational costs, as retailers expect a holiday season that will tilt heavily toward e-commerce sales.

FedEx and UPS have implemented peak holiday surcharges for several years to manage capacity requirements. But additional carriers are joining them this year, as the United States Postal Service (USPS) and OnTrac, a regional small parcel carrier covering the western US, will both implement temporary peak surcharges for the first time.

Similar to UPS and FedEx, the USPS has seen its parcel volumes increase rapidly during the COVID-19 pandemic. However, in announcing its first-ever peak season surcharge, which will run from Oct. 18 until Dec. 27, the agency attributed the decision primarily to a need to generate “much-needed” additional revenue.

“This time-limited adjustment will increase prices for our commercial customers in line with competitive practices without impacting customers at the retail level,” USPS said in a statement. “In doing this, the Postal Service is protecting the retail consumer during a vulnerable economic period while increasing prices on commercial volume during heightened volume levels.”

OnTrac attributed the surcharges to a need to “offset increased operating costs” associated with the accelerated growth in e-commerce during the pandemic.

“OnTrac has experienced increased volumes as shippers look for alternative last-mile providers beyond FedEx and UPS,” said Keith Myers, senior consultant at the consulting firm Shipware.

While Myers does not expect all small parcel regional carriers to follow OnTrac in implementing peak season surcharges, he does expect one or two others to follow suit. LaserShip, a regional carrier covering the eastern and midwestern US, appears to have followed OnTrac, albeit on a smaller scale. According to its website, peak season residential surcharges will be in effect from Nov. 21 until Dec. 31.

Surcharges cover additional costs

E-commerce as a percentage of total US retail sales jumped to 16.1 percent in the second quarter of 2020 as retailers shut down to slow the spread of the coronavirus disease 2019 (COVID-19). That was up from 11.8 percent during the first quarter and 10.7 percent during the same quarter last year, according to the US Census Bureau’s quarterly e-commerce report. Compared with the second quarter of 2019, total retail sales declined by 3.6 percent, while e-commerce sales surged 44.5 percent.

“To accommodate the volume surge, carriers have incurred such costs as hiring additional drivers, paying additional overtime, expanding sort hours and capabilities, especially for larger packages,” Rob Martinez, CEO of Shipware, told JOC.com. “Moreover, carriers are incurring higher costs for facility sanitization, masks and other PPE [personal protective equipment], sanitization stations, social distancing monitoring, personal time off, etc.”

Analysts expect the surge in e-commerce volumes that ignited in the early days of the pandemic to continue unabated through the holiday season, raising the possibility that consumers newly comfortable with online transactions could begin their holiday shopping earlier than usual.

During a recent National Retail Federation (NRF) webinar, Salesforce said it expects e-commerce as a percentage of total US retail revenue to reach 30 percent during the holiday season, compared with 14 percent during the 2019 holiday season.

According to Brian Bourke, chief growth officer at third-party logistics provider SEKO Logistics, customers have reported peak-like volumes throughout the pandemic. “But the unknown is how much the holiday season will add to this existing and prolonged surge in growth,” Bourke said.

Brian Cornwell, CEO of Target, said in the company’s second-quarter earnings call the retailer is preparing for a “very different” and “extended holiday shopping season” in 2020, a sentiment echoed by Kohl’s CEO Michelle Gass, who said the department store is expecting a “holiday season like no other.”

Carriers’ peak season surcharges will likely not be enough to manage capacity and indeed, Salesforce expects last-mile delivery carriers will run out of capacity during the holiday season.

Contact Cathy Morrow Roberson at Cathy.Morrowroberso@ihsmarkit.com and follow her on Twitter: @cmroberson06.