Small retailers absorb shipping costs as fuel prices climb
Jenni Shields, who has run her small business selling handmade hair accessories for eight years, paid $2.93 to ship an order when she started — close to $4 in today’s dollars. Last year, an average shipping label for her products cost around $4.50. When she took a typical batch of orders to her local U.S. Postal Service office in Kansas City, Kansas, last month, the average was nearly $6 per package, CNBC reported.
Shields is one of the small- and medium-sized retailers struggling to keep up with rising shipping costs as the price of fuel continues to trend upward. Customer demand is strong, but some retailers said their profits will be dented — if not eaten up entirely — by higher shipping and other costs.
Shields charges her customers $6 in shipping fees, which includes roughly $1.50 for packaging supplies. She said the upswing means she is no longer breaking even and is absorbing the added costs. “I am losing money at this point, and I’ve really taken a huge hit this year,” said Shields, owner of Evie Pearl Handmade, which sells bows, quilted headbands and other accessories. “I feel like it’s just been this slow increase up [in shipping costs], and I feel horrible.”
Rethinking free shipping
The surge in fuel prices since the U.S. and Israel attacked Iran in February has driven up the cost of shipping by sea, air, rail and road, pushing costs higher across the board — including for Amazon, which reported an 11% increase in shipping expenses in the third quarter compared with last year, and for individual retailers. Globally, air cargo is going for about $3.37 per kilogram, up 43% from a similar period a year ago, according to transportation marketplace Freightos. Judah Levine, Freightos’ head of research, said that in addition to higher fuel, demand for fast shipping of hardware used to build data centers is helping to boost air freight rates, even weeks before peak last-minute holiday packages take to the skies.
For businesses, that runup is going to “squeeze their margins in the near-term,” said Jason Seidl, managing director and transportation analyst at TD Cowen. “Larger companies tend not to be exposed to the spot market, and they’ll have what we call dedicated deals in place.” That doesn’t help smaller companies, which are walking a delicate line of not wanting to alienate customers who have enjoyed free shipping for nearly a generation.
Todd Shelton, founder of the eponymous 23-year-old New Jersey clothing company that makes high-end men’s jeans, T-shirts and button-up shirts locally, said he started charging customers for return shipping this week for the first time after absorbing the higher expenses this year. The shipping is deducted from customers’ refunds. Shelton said his costs for materials have risen too, such as his imported Japanese denim and shirt fabric from Portugal. The company is still profitable, but higher costs have eaten into profit margins, and he is considering raising prices or charging customers for shipping, he said.
Shields said she is considering raising her shipping fees for the first time in six years to keep up with the increases. The holiday season is one of her busiest, but she said she has seen a slowdown in sales because of shipping fees. “I can’t compete with Amazon on the free shipping. I can’t do that. I can’t afford that,” she said. “I’m seeing so much of my percentage that’s supposed to come back to me and my family being put towards the shipping costs.” With no sign of fuel prices declining significantly, Shields, who runs her business out of her spare bedroom at home, said she is not sure small businesses will be able to emerge on the other side of the holidays.
Surcharges and strong demand
Shippers including UPS, FedEx and USPS have all instituted holiday surcharges, with prices varying by package type and lasting through the end of the season. Though that is typical during the peak holiday period each year, those charges have continued to rise over the past few years. Even as costs climb, consumers are still spending: according to the National Retail Federation, retail sales through the end of the year are expected to grow 4.2%, translating to total spending of $1.01 trillion, compared with last year’s holiday sales totaling $972 billion, which was 3.1% growth.
Some of that growth is from inflation, meaning consumers are simply paying more for the same goods. “Customers all expect to spend more this holiday, but part of why they expect to spend more is they expect things to cost more, not because they’d like to spend more or they were hoping to get more quantity of stuff,” said Aaron Cheris, the global retail practice head at Bain & Company. “So what I suspect happens is that non-discretionary categories do fine, because you buy the food you were going to need to buy anyway, but then the amount of cash that’s left over for [discretionary] goods is less.”
Still, Cheris said it is shaping up to be a record year for shipping costs, putting immense pressure on smaller retailers. That means many retailers may find themselves in financial distress in the first quarter of next year as they struggle to make it through the holiday season, he said. He added that larger retail companies will also have to reckon with rising costs, though they may not feel those effects until later quarters because they have shipping contracts that are already locked in and control over their own delivery fleets. “If anything, it benefits the scale players over the little players, but it’s kind of a little bit bad for everybody,” Cheris said. “I think that is the challenge.”
