FedEx said that effective next year, its FedEx Ground service will apply dimensional weight pricing to all shipments.
Currently, FedEx Ground applies dimensional weight pricing only to packages measuring three cubic feet or greater.
"Dimensional weight pricing, also known as 'Dim' weight is a common industry practice that sets the transportation price based on package volume - the amount
of space a package occupies in relation to its actual weight," explained Kevin Sterling, a senior vice president at the investment company BB&T Capital Markets. "Dimensional weight is a calculation of a theoretical weight of a package and levels the playing field with shippers of dense objects versus lightweight items."
He said that according to data from ShipMatrix, Inc., 32 percent of ground packages will be impacted by the new Dim pricing.
Sterling wrote, "According to Satish Jindel and ShipMatrix, parcels delivered to residential addresses and weighing under 5 pounds in weight have increased from 58 percent of total ground package volume to 75 percent in 2013. However, parcels delivered to commercial addresses weighing under 5 pounds have changed from 45 percent in 2008 to just 48 percent in 2013. Obviously, the growth of e-commerce and the proliferation of on-line shopping has been the biggest factor in the growth of lighter weight packages to residential addresses."
FedEx said the Jan. 1, 2015, change “will align the FedEx Ground dimensional weight pricing with FedEx Express by applying it to all packages."
In a note to investors, David Ross, managing director in the transportation and logistics research group at the investment bank Stifel, said the change could increase profitability and lead the way for dimensional pricing at FedEx Freight.
He said Stifel was leaving its estimates and rating for FedEx unchanged for now, "as we are unsure of the magnitude of impact from these changes, although we believe them to be positive.”
He said the company was making the change as a result of the faster-growing business-to-consumer segment that typically involves lighter-weight/smaller shipments than the business-to-business segment.
“We believe space, not weight, is the best measure of capacity and cost in parcel networks, so this shift should allow the company to better match revenues and expenses,” Ross said.
“We are most interested in this announcement, though, by what was not announced, but could be down the road. With the increase in dimensional weight pricing in small package networks and with UPS Freight's recent talk of moving some interested shippers to a simplified density-based pricing system, as opposed to the archaic but still standard freight classification system, it may not be too long until density-based pricing becomes the new standard in LTL pricing,” Ross said.
“Now, this has been talked about for many years," he added, "but with FedEx and UPS controlling nearly 25 percent of the LTL market and other carriers investing in dimensioners, we believe we are getting close (within a few years) of seeing a significant shift.
"With FedEx leading the charge, we believe UPS has a golden opportunity to follow FedEx's lead and implement dimensional weight pricing on all shipments," Sterling said. "With the growth of e-commerce and online shopping, Dim pricing on all shipments makes sense to us, particularly for UPS, the largest parcel carrier. To say it another way, if UPS does not follow suit, shippers will be switching their ground carrier rather quickly or this announcement by FedEx does not stick; the outcome is rather binary in our opinion.
"With implementation seven months away, UPS has ample time to roll out Dim pricing on all ground shipments and large, and lightweight shippers have time to adjust supply chains and packaging to minimize the financial impact as much as possible," he said.
FedEx also said its FedEx Freight unit will increase its published fuel surcharge indices by 3 percentage points, effective June 2.
FedEx Freight updates its fuel surcharges for the U.S. and Canada every week based on published average diesel fuel prices.
The company said with the increase of 3 percentage points, “FedEx Freight’s fuel surcharge remains one of the lowest among the major less-than-truckload (LTL) carriers in the U.S.”
In an article for Forbes, Paula Rosenblum,
a retail analyst for Retail Systems Research
, said “further pressure will be put on Amazon and other e-commerce providers to get packaging of customer orders right. In Amazon’s case, this is no trivial problem.”
She added, “While most articles have thus far indicated this could well be a blow to consumers, presuming shipping costs would be passed along to them, I see it differently. I see it as a blow to Amazon.com and a boon to retailers who've been desperately trying to fend off Amazon’s encroachment into their turf.”