Key takeaways: Driven by elevated fuel prices, freight rates have surged sharply, putting pressure on small and mid-sized retailers as they head into a difficult holiday selling season.
Some small business owners say they are considering raising shipping fees or scrapping free shipping policies to cope with cost pressures.
Experts say this year's freight rates have hit near-record highs; large corporations may weather the storm, but the cost shock is being borne mainly by small businesses.
On November 30, 2022, at the U.S. Postal Service Los Angeles Processing and Sorting Center in Los Angeles, a worker handles a large batch of mail packages.
When Jenny Schiltz started her small handmade hair accessory business eight years ago, shipping a single order cost $2.93; adjusted for inflation, that is roughly $4 today.
Schiltz said that last year the average shipping label for her products was about $4.50. Last month, when she processed a routine batch of orders at her local U.S. Postal Service branch in Kansas City, Kansas, she was shocked to find that the average shipping cost per package was close to $6.
With fuel prices continuing to climb, Schiltz is just one of many small and mid-sized retailers gasping under the weight of rising shipping costs.
Small business owners like Schiltz are facing a grueling holiday season. Customer demand remains strong, but some retailers say high shipping fees and other costs will erode profits, or even wipe them out entirely.
Schiltz charges customers $6 for shipping, about $1.50 of which covers packaging materials. After this year's sharp freight increases, orders no longer break even, and she absorbs all the extra costs herself. "I'm losing money right now, and this year the losses have been severe," said Schiltz, owner of the handmade brand Evie Pearl Handmade, which specializes in bows, quilted headbands and other accessories. "The shipping costs crept up bit by bit, and I feel terrible about the situation."
Rethinking free shipping policies
Since the U.S. and Israel struck Iran in February this year, fuel prices have soared, pushing up freight rates across sea, air, rail and road transport simultaneously. Costs have risen across the entire industry, and even e-commerce giant Amazon has not been spared. The company reported that its third-quarter shipping expenses rose 11% year over year; small and individual retailers are likewise bearing the cost pressure.
Data from freight platform Freightos shows that global air cargo prices stand at about $3.37 per kilogram, up 43% from the same period last year. Judah Levine, head of research at Freightos, said that beyond fuel price increases, air freight demand for data center construction hardware has pushed up air cargo rates, and this comes weeks before the peak holiday season for express air shipments.
Jason Seidl, managing director and transportation analyst at TD Cowen, said the freight surge "will squeeze corporate profit margins in the short term. Large companies generally do not participate in the spot market and have already signed long-term dedicated freight agreements."
But that does not help small and mid-sized businesses. Over the past generation, consumers have grown accustomed to free shipping, and small businesses are now caught in a dilemma, afraid to abruptly change their policies and lose customers.
Todd Shelton, a 23-year-old local apparel brand based in New Jersey that focuses on premium men's jeans, T-shirts and shirts, has been absorbing rising shipping costs all year, according to founder Todd Shelton. This week, for the first time, the company began charging customers for return shipping, with the cost deducted directly from refund amounts.
Shelton's raw material costs have also risen, including imported Japanese denim and Portuguese shirt fabric. The company is still profitable, but steadily rising costs are continuously eating into its profit margins. He is considering raising product prices or charging customers for shipping.
Schiltz is also considering raising shipping fees for the first time in six years to cope with rising costs. The holiday season is the busiest time for Schiltz's business, but she has already observed that shipping costs are slowing sales. "I can't compete with Amazon on free shipping. I can't do it, I can't afford it," she said. "A large portion of the income that should belong to me and my family is being eaten up by shipping costs."
Schiltz runs her shop from a spare bedroom at home, and she sees no sign of fuel prices falling significantly. She is unsure whether these small businesses can survive this holiday season.
Surcharges run high, but consumer demand remains strong
United Parcel Service Inc (UPS), FedEx (FDX) and the U.S. Postal Service have all introduced holiday surcharges, with rates varying by package type and the charging period lasting until the end of the holiday season. While peak-season surcharges are customary each year, their levels have continued to rise in recent years.
Despite climbing costs across the board, consumers remain willing to spend. The National Retail Federation (NRF) predicts that holiday retail sales through the end of the year will rise 4.2% year over year, totaling $1.01 trillion; last year's total holiday sales were $972 billion, a 3.1% year-over-year increase. Part of the sales growth comes from inflation, meaning consumers are spending more money for the same goods.
Aaron Cheris, global head of retail at Bain & Company, said: "Consumers expect to spend more this holiday season, but more because prices are higher, not because they want to spend more or buy more. So my judgment is that essentials categories will perform reasonably well—people still need to buy daily necessities—but there will be less discretionary cash left for optional consumer goods."
Cheris said this year's freight rates may hit a record high, putting enormous pressure on small retailers. Many small and mid-sized retailers may find themselves in financial trouble in the first quarter of next year after surviving the holiday season. Large retail enterprises also face rising costs, but the impact will be delayed: they hold locked-in long-term freight contracts and also have their own delivery fleets.
"Larger companies are relatively advantaged, but in reality no one is completely immune. That is the dilemma the industry faces right now," Cheris said.
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