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Fares on Santa’s Sleigh Bump Up

United Parcel Service (NYSE: UPS), for the first time, is implementing a surcharge on packages shipped during its busiest weeks of the holiday season. To avoid the inevitable bottlenecks that occur each December, UPS is hoping the higher fees will encourage retailers to ship packages outside of these peak times.

The surcharges will be applied to packages shipped from November 19- December 2 and then in the week before Christmas (December 17-23), the periods when the bulk of packages are typically shipped.

Even though the early season orders that come along around Black Friday are not needed until later in December, the sheer volume of packages crunched into such a short period creates excess expenses for delivery companies.

Macy’s (NYSE: M) is trialing a program where customers accepting longer delivery times are rewarded with “Macy’s Money” which can be used for future purchases. Amazon (NSDQ: AMZN) offers a similar feature to Prime customers who can trade 2-day shipping for credits for movies or videos.

This option makes perfect sense. Although consumers are used to the promise of 2-day delivery, most presents ordered on Black Friday are not needed for several weeks. By weeding these packages out of the delivery system, UPS hopes to lower its expenses for the holiday season.

Both UPS and rival FedEx (NYSE: FDX) increased overall rates by about 5% last winter. These rate hikes took effect after Christmas, so retailers sailed through the holiday season without having to digest the expense, but those price hikes were not enough to smooth out package traffic.
                                                                                   


While many consumers enjoy the “free” 2-day shipping offered to Amazon Prime customers, the swelling membership of Prime members is partly responsible for the rate increases enacted by FedEx and UPS.

As Amazon grows, its clout as these shippers’ biggest customer balloons. While you and I and a boatload of smaller retailers absorb higher shipping fees, Amazon will most likely skate along without any increase. When you’re a supplier’s biggest and most critical customer, you can be a tough negotiator.

Call it surge pricing. Like Uber’s model of dynamic pricing where your ride on a rainy weekend evening will cost twice the amount of a trip on a fair-weather Wednesday afternoon.

UPS has spent the last 12 months making significant investments in its hubs, trucks, and facilities. Last year the company noted its profits fell below expectations due to the higher expense of e-commerce business.

Transportation companies all over the globe are searching for ways to profitably grow their e-commerce solutions. UPS complained last year that many e-commerce deliveries are for oversized packages. That vacuum that you ordered for your mother-in-law? It’s big and bulky and heavy. UPS wants to be compensated for the additional cost of delivering that product.

Trucking companies, who carry packages trans-continental to UPS and FedEx hubs, are seeing their business boom too. The Cass-Freight Index, which measures North American freight volumes, hit a three year high in October, the most recent available data.

While it might seem obvious that exploding revenue is a huge bullish sign for transportation companies, the action by UPS shows that those incremental revenues must be measured against the higher expense required to support additional orders.

In the ever-growing world of e-commerce, shipping companies and retailers alike are reviewing the procedures and terms that dictate their costs. The National Retail Foundation expects e-commerce sales to grow at triple the rate of overall retail sales this holiday season.

Years of double-digit e-commerce sales have transportation companies making deliberate and robust plans to expand their capacity.

I’ve been analyzing how the money flowing into this growth will help certain public companies and just in the past three months have recommended transportation-related trades that returned between 51% and 79% for subscribers.

Please consider subscribing to my Profit Catalyst Alert service to learn about more stocks I expect to benefit from this shift.


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