(Repeats story with no changes to text)
By Nick Carey and Nandita Bose
ADDISON, Ill. Dec 14 In an unassuming building
in the Chicago suburb of Addison, United Parcel Service Inc
engineers design custom boxes for retailers as part of a
joint effort to tackle a vexing issue: the high cost of
delivering e-commerce packages.
Online retail sales are expected to reach $392.5 billion
this year, according to research firm eMarketer, but with U.S.
consumers now demanding free shipping on most packages, shippers
and retailers are facing a squeeze.
Shippers' margins are falling or stagnating, despite steady
price increases, because homes are roughly three times as
expensive to deliver to as business addresses. And retailers
cannot pass along the cost, because they must offer free
shipping in order to compete.
The shared solution: design new, space-saving packages that
can help improve package density on delivery trucks. This cuts
costs for retailers and raises margins for shippers.
Up to 60 percent of requests handled by UPS's package
laboratory are for smaller packages to cut shipping rates, the
company told Reuters.
"In most cases we are able to get retailers a better rate,"
says Quint Marini, who runs the lab. The average rate reduction
is around 20 percent, he said. Main rival FedEx Corp has
a similar facility in Memphis.
The UPS lab puts new packaging through rigorous tests,
piling weights on boxes, then simulating the jolts of a delivery
truck traversing a bumpy road. On a recent morning, the load was
too much for a box containing a furniture shipment, spilling
weights over the floor as it collapsed.
"If the box can't hold the weights, we'll have to fail this
one," said Jonathon McWherter, a UPS engineer conducting the
RATES UP, MARGINS NOT
The stakes are growing. E-commerce shipments accounted for
46 percent of UPS's total volume last year, up from 36 percent
in 2009. UPS expects the e-commerce share to hit 51 percent by
To counter rising costs, UPS and FedEx have raised package
rates by between 4.9 percent and 5.9 percent annually since
2009. They also have levied surcharges on retailers for
residential addresses and rural deliveries.
Rates for a 5-pound (2.3-kg) box traveling up to 1,400 miles
(2250 km) by UPS Ground or FedEx Home Delivery have nearly
doubled since 2006, to $14.18, according to SJ Consulting Group.
Despite the increases, profit margins at UPS and FedEx's
U.S. domestic business have stagnated or declined in recent
years, in part because they have invested billions of dollars to
handle rising volumes.
(See a graphic of UPS and FedEx's rates and margins here tmsnrt.rs/2h1ig9u)
UPS and FedEx have sought new ways to cut costs, such as
dropping batches of packages at urban retailers, where customers
can retrieve them. Now they are focusing more on packaging,
charging a fee for design services while also levying what they
call 'dimensional weight' surcharges for boxes that take up too
much room in relation their weight.
Retailers are hemmed in by their need to match Amazon.com
Inc. The world's largest online retailer offers free
shipping to customers who pay a $99 annual fee to join its
Amazon Prime program - a revenue stream most retailers have not
been able to replicate.
"Amazon has forced everybody into free shipping," said John
Haber, head of logistics consultancy Spend Management Experts.
Amine Khechfe, co-founder of Endicia, which provides
shipping services to e-commerce companies, said retailers are
squeezed. "They've got the pressures of free shipping, which
isn't really free, and their costs are going up," he said.
'CONSUMERS DON'T CARE WHAT IT COSTS'
Many retailers have responded by procuring 'on-demand'
packaging machines, which custom-tailor shipping boxes. Hanko
Kiessner, CEO of Packsize International, which makes such
machines and the software that drives them, estimates 16 percent
of U.S. retailers are using on-demand machines, and predicts a
majority will do so within three years.
Packaging "is now front and center and a glaring opportunity
for improvement," Kiessner said. Packsize also collaborates on
projects with UPS.
Office supply retailer Staples Inc said it has cut
the weight of corrugated cardboard it uses in packaging by 65
percent, but declined to detail the cost savings.
Car accessory and electronics retailer Crutchfield Corp has
saved several million dollars with on-demand packaging since
August 2014, chief fulfillment officer Chris Groseclose said.
Companies like Monster Moto have worked with the UPS lab.
The mini-bike maker has cut shipping costs up to 50 percent on
bikes that sell for between $249 to $749, said CEO Alex Keechle.
"That was a real expense to us, and because of free
shipping, we had to eat it," he said.
SJ Consulting founder Satish Jindel said retailers need to
seek cost savings while also finding ways to pass on costs, such
as minimum orders or membership fees.
"Any retailer who wants to be an e-commerce player and
thinks consumers will have to recognize that shipping costs
money and they need to pay for it, will be out of business,"
Jindel said. "The consumer doesn't care what it costs."
(Reporting By Nick Carey and Nandita Bose; Editing by Bill