Dramatic increases. Little reaction time. Huge costs.
Carriers will have a lot more leverage than usual when it comes to increasing their general rates, and you can bet they plan on using it. We may not have a crystal ball, but we’ve spent years tracking the GRI (General Rate Increase). Your future depends on a proactive approach. Read this article to understand how the GRI will affect your bottom line with our 2022 predictions.
Content Summary
Prediction #1: Residential shipping fees will increase dramatically
Prediction #2: The rate of ground minimum charges will see a YOY increase
Prediction #3: The financial impact on your business could be much higher than the announced GRI
Be proactive now or pay for it later
Minimize the GRI impact on your bottom line
For the first time since 1997, the demand for parcel shipping exceeds the supply — making it a carriers’ market.
Carriers will have a lot more leverage than usual when it comes to increasing their general rates, and you can bet they plan on using it.
This is not good news for shippers. Pandemic-related and peak surcharges currently in effect are already cutting into shippers’ profit margins. Plus, the time between when carriers make their GRI (General Rate Increase) announcement and implement the new rates is getting shorter — going from a few months to a few weeks — giving shippers little time to adapt.
While we don’t have a crystal ball, after years of tracking the GRI in granular detail, we do know that taking a proactive approach can significantly minimize its impact on your bottom line.
To help you prepare, here are our top three predictions about the 2022 GRI.
Prediction #1: Residential shipping fees will increase dramatically
Since COVID-19, many companies have increased their business-to-consumer (B2C) shipping. However, since carriers’ current capacity is already strained, residential and extended delivery shipments will likely be targeted in the 2022 GRI. This is because it’s often more expensive for carriers to ship to residential areas than to a commercial location.
As a result, we anticipate a lot of shippers will see dramatic increases. Over the past three years, the Residential Surcharge for Home Delivery has increased by 6.81% for FedEx and 8.86% for UPS. The Delivery Area Surcharge – Extended – Ground Commercial has increased by more than 20% for both FedEx and UPS.
Bottom Line: As a shipper, you need to not only understand the total cost of these charges on your business but become more sophisticated and creative in addressing their impact on your profit margins.
Prediction #2: The rate of ground minimum charges will see a YOY increase
From 2018 to 2021, the rate of ground minimum charge has increased significantly. From 2019 to 2021, FedEx has raised its rate by 14.84% YOY, and we only expect to see further increases this year from both FedEx and UPS.
How can this negatively impact your business?
The minimum charge is often considered the “minimum cost of doing business.” So, it’s important to recognize that no matter what discounts you have in place, if the minimum charge is greater than those discounts, your discounts won’t save you money.
For example, if you have a $10 package price and a 50% discount, you’d expect to pay $5. However, if the minimum charge in this situation is $8, that’s what you’d end up paying because your agreement says you’ll pay the greater of the discounted rate or the minimum charge.
Bottom line: If you are not pacing along with the ground minimum or addressing it, you’ll see your margins erode, with your revenue going directly into the carriers’ pockets.
Prediction #3: The financial impact on your business could be much higher than the announced GRI
Every year, carriers announce a general rate increase. While the net rate increase is typically around 4.9%, this doesn’t mean it will be applied equally to every shipper.
Carrier agreements and the various rates they charge are complex and convoluted. There are over 120 rates that carriers can change from year to year due to their general rate increase, and these changes will determine the repercussions on your specific business.
For instance, in 2021, both FedEx and UPS announced a 4.9% general rate increase. However, specific rate changes, such as FedEx and UPS increasing their Additional Handling – Weight rate by 6.25% year over year (YOY), mean that the net rate for a business frequently shipping heavy packages could easily exceed 4.9%. In fact, over the past three years, the FedEx Additional Handling – Weight rate has increased by 27.5% and by 10.9% for UPS.
Bottom line: It’s important you don’t take the announced GRI at face value. You need to dig into your own shipping data and understand how the GRI changes will affect your business specifically.
Case Study: GRI’s real-world impact on a sporting goods retailer
For one Sifted customer, a sporting goods retailer, an analysis of FedEx’s 2020 GRI increase revealed that the company’s effective rate increase would be 13%, not 4.9%. A big part of this increase was due to the Additional Handling – Dimension surcharge, which increased to 41.65% YOY for the company. The overall cost of the 2020 GRI increase to the business would be $273,303 more than the previous year for shipping the same packages.
However, by identifying where increases were most significant, the company could almost completely offset the overall increase by renegotiating base charges and other areas of their agreement.
Be proactive now or pay for it later
More than ever, shippers need to take a proactive approach to the GRI. With the likelihood of significant rate increases, you don’t want to wait to discover after the first quarter (or even later) that your profit margins have tanked.
Instead, when you anticipate how the GRI will impact your business and make swift changes before the new GRI is implemented, you can minimize the overall cost to your business.
To be proactive, you need to have a detailed understanding of your shipping profile data, including:
- Service types
- Package weights
- Package dimensions
- Pickup and delivery locations
- Surcharges
Once you have a holistic view of your shipping profile, you can use your historical data to model the upcoming GRI changes and how they will uniquely impact your business; specifically, which rate increases will hit your bottom line hardest.
Below is an example of how Sifted can provide a detailed analysis of your shipping profile and how upcoming GRI changes will impact you.
Armed with these insights, you can then do two things:
- Model how operational changes could minimize or eliminate higher rates By understanding how reconfiguring the dimensions or weight of your packages and locating your distribution centers more strategically could reduce new rate increases, you can determine where it makes sense to invest in these types of operational changes.
- Negotiate your carrier agreement from a position of knowledge You need to know what rate increases in your carrier agreement are creating the biggest hit to your bottom line so that you can spend your negotiation leverage on the places where you’ll see the most bang for your buck.
Minimize the GRI impact on your bottom line
The pandemic may have accelerated the B2C demand for parcel delivery, but consumers have gotten used to the convenience of having almost everything they need shipped to their doorstep. Demand for parcel delivery isn’t going away any time soon — and shippers need to brace themselves for higher shipping prices in 2022.
The question isn’t whether your shipping prices will go up, but how can you minimize the hit to your bottom line?
The answer: You need to be armed with the correct data to understand where this year’s GRI will affect your business the most, so you can negotiate best-in-class pricing with your carrier and make critical operational changes that will further minimize the impact.
“If you’re not course-correcting your agreement or keeping your pricing in control, your rates are going to balloon out of control. You can’t stay in business that way because your margins are gone.” – Jeremey Lee, Vice President of Sales at Sifted