How Pandemic Changes are Driving Higher Carrier Rate Increases

Glenn Gooding [00:00:03]:

Welcome to Parcel Perspectives, the podcast dedicated to small parcel shippers. I'm Glenn Gooding and each episode we dive into insights, best practices and strategies to help you navigate this complex, costly market. Join me as we explore ways to strengthen your long term partnerships with your chosen carriers and stay competitively aligned.

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TJ Roberts [00:00:31]:

The GRI the general rate increase maybe take just a quick minute, give us a little bit of a background on the GRI. Has this always been something that we dealt with? Those who are new to transportation have probably just accepted the GRI. But what's a little bit of the background from your experience with the GRI? Sure.

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Glenn Gooding [00:00:49]:

So the general rate increase is an opportunity for the carriers to update their terms of service, their tariff, their rates for an upcoming fiscal timeframe, in this case the calendar year. They dont reserve the opportunity to do that at their will or at their whim throughout, but there is a formal reset every single year, and this is it. With regard to how long has it been going on or where did it come from? My goodness, its been happening for a long, long time. Well before I think UPS was competing with FedEx or FedEx even existed. I would tell you, if you really want to geek out on this, I would say the first rate increases at UPS occurred when UPS entered into a labor relationship with the teamsters that ensured a year over year wage increase. Once ups was faced with that specter, they had to increase revenues. Hence rate increases really entered the marketplace. And that's been a long, long time.

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Glenn Gooding [00:01:50]:

It's evolved over time. And I think the reason why we're talking about it is it's gotten quite complex. It's very, very hard. And it's almost like listening to an announcement from the Congressional Budget Authority on progressive tax rates. What they tell you and what versus what they take out of your paycheck and what you pay in taxes may entirely be two different things. And so I'm hoping I can offer some insights to that as we have a conversation today.

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TJ Roberts [00:02:13]:

Yeah, that's great. I totally agree. In fact, a phrase that I heard a few years ago with debt was death, taxes and grih. And that has become pretty much the mantra. When I started in the industry, the GRI was fairly predictable. Obviously, FedEx and Ups were head and head, neck and neck, with DHL kind of floating out there trying to come in and provide their market share as well. But it was fairly consistently at about a 4.9% increase. And obviously there's variables to that.

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TJ Roberts [00:02:47]:

Take us through a little bit of the last couple of years. Obviously, post pandemic has been a challenge and a change for a lot of companies, not just in shipping and logistics, but across the board. Maybe tell us a little bit about what's been unique about the last couple of years.

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Glenn Gooding [00:03:03]:

You bet. That's a lot to unpack. It's a meaty question. It's a great question. TJ. I'll do my best. To start, I'd say the GRI has morphed over time with regard to the carriers being a victim of their own revenue management policies, if you will. What? I mean, when s or FedEx look at their cost to serve across their entire product mix, you might imagine some packages are making more money for them than others.

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Glenn Gooding [00:03:29]:

So there's been a weird emphasis on things that don't drive as much revenue. For example, lightweight short zone packages. And so over the years of increases, particularly increases, when you mentioned 4.9%, the increase on a lightweight short zone package might be much greater than 4.9. So you compound that year over, year over, year over year. After a while, they kind of create their own destiny. The volume now moving through a carrier network is heavier weight, longer stuff, and next thing, oh my goodness, now I'm getting hit on that side. So now they hit start hitting the heavyweight stuff. And so you kind of have that kind of noise going on, specifically going back to the last couple of years, the pandemic and whats going on.

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Glenn Gooding [00:04:11]:

Im going to defend the carriers for a minute here. The intent here is just to educate, not to beat anybody up. But the pandemic fundamentally turned the small partial supply chain upside down. So we go back to Monday 2020 pre pandemic. I would tell you at a high level, you had roughly a 50 50 split commercial, residential. Residential maybe is a little more dominant than that, but it was roughly 50 50 split. Boom. Effective April 2020, everybody had to stay at home, businesses shut down.

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Glenn Gooding [00:04:46]:

So what happened? Things went from 50 50 to 80, 2080, 515, 85%. Being residential, well, shouldn't be a surprise to anybody that has any interest in listening to a podcast of this nature. Residential deliveries have a different cost to serve than commercial deliveries, entirely different impact to a carrier network. And so it really, really upended the carriers cost structure, their cost modeling their business plan, their operations for a variety of reasons. And so they had to kind of align a rate structure that allowed them to stay profitable, provide a return to their investors during this timeframe. And so what you saw and what were living in right now, and I think of GRI as almost inflation. Inflation is a buzzword right now. It impacts all commerce, it impacts your Amazon deliveries, it impacts a delivery that your grandmother sells you.

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Glenn Gooding [00:05:42]:

Everybody pays these to your earlier point, death taxes and gris right everybody. Its unavoidable. So the carriers at a high level have had to push more rate increases to account for that fundamental change in the supply chain and the buying patterns of the consumer. And then as is always the case, when you introduce a revenue stream to a carrier, they cling on to it. They have to show they fall in love with that revenue. They cant let it go. And so invariably when something gets introduced for valid reasons, pandemic being a very valid reason, the carriers are going to find a creative way not to let that revenue stream go. And so that's what we're seeing now.

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Glenn Gooding [00:06:26]:

We're seeing higher than what we've historically seen for rate increases that become more complex or nuanced. And they're creatively rebranding some of these surcharges and things that entered the marketplace during the COVID pandemic.

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TJ Roberts [00:06:40]:

I think that's interesting. The surcharges oftentimes are overlooked. When someone thinks of a GRI 100% right. They think of the base rate getting increased and they don't think about the real impact of how the surcharge influences that. But as we've seen the last couple of years, surcharges end up being in many cases the bulk of the, of the increase and depending on the shipper's profile. Glenn, to your earlier point, you know, if you're an e commerce shipper sending a lot of residential, those surcharges are not only expected but they're the ones taking the brim of these increases.

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Glenn Gooding [00:07:18]:

You bet, you bet. There's a lot of reasons for that.

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Glenn Gooding [00:07:21]:

It's not uncommon at all.

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Glenn Gooding [00:07:23]:

When you drill down and look into a client or a shipper's shipping supply chain expects across all parcel easily 30% to 40% of it can be comprised of what we call surcharges and asset stories. There's a lot of reasons for that. Some are appropriately aligned with additional services or expenses the carrier is incurring in the delivery and the processing of that person. A great example would be additional handling if you opted to ship a hundred pound carton via FedEx. You have to realistically realize that can't move on a conveyor that's going to kill somebody. It's going to crush other packages. It has to be handled a different way through a different process. It's a higher expense.

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Glenn Gooding [00:08:11]:

Therefore there's a surcharge for it. In addition, it's a market driven thing going on here, too. A lot of really smart people out there in procurement seats, a lot of smart coos, a lot of smart presidents, CEO's, they're great negotiators, they're great business people, they are very good at negotiating contracts when they understand the marketplace and they understand what their spend is. How do the carriers combat that, make it murky? The more opaque the rate structure and how they're getting billed, the more the advantage falls to the carrier. And so it can be very easy for a skilled sales rep, for a carrier to placate that good negotiator, give them that great transportation discount, that direct transportation discount that you earlier talked about, but then manage or maintain that margin through accessories and surcharges, things that the client doesn't understand, can't quantify, doesn't even know how to ask for. Right? And what the sensitivities are around with. So it gets very, very detailed, very complex, very quickly, and it's super important, particularly when looking at the general rate increase of any carrier. You need to look at what's happening to the assessor as the surcharges as well.

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Glenn Gooding [00:09:28]:

Those invariably are higher than what the announced percent increases are in the marketplace.

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TJ Roberts [00:09:34]:

Yeah, you mentioned any of the carriers. I think that's the other maybe unknown for a lot of shippers or something that goes miss. But the gri is not specific just to FedEx and Ups. I come from that LTL background as well. And one of the key components to any carrier negotiation centered around how long could we freeze pricing. We're going to do a phenomenal job of helping a customer to get better pricing. And then our goal was at a minimum to freeze it for a year and analyze the impact in the next coming year. What other carriers, and are there other carriers that we could see these gris come across as well?

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Glenn Gooding [00:10:15]:

You bet, you bet. Just every carrier imposes a rate increase of some sort. TJ used to start with the USP's. USP's kind of set the waterline for the revenue management strategy for the year, for the small parcel of carriers, what they were doing with priority mail, first class mail, that type of stuff. It's evolved over time, but there's a whole host of regional carriers, great, great carriers. Some are great. They all look to what the big two are doing, UPs and FedEx, they all look to what the USP's is doing and they all impose a rate increase very strategically to align with the market. They're trying to appeal to.

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Glenn Gooding [00:10:57]:

So again, I think your first comment, death, taxes and gris, is very apropos here. There is no escaping gris. It's just a question of understanding them. And better yet, maybe devising a strategy to mitigate them or completely eliminate the effect of one in a given year or what you're trying to accomplish.

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TJ Roberts [00:11:16]:

Yeah, let's talk through that a little bit. I think we've gone through, I hate to label it as doom and gloom, because it's not doom and gloom, but it is an impact, right? It's an annual impact that every shipper has to be prepared for. But I'm a million dollar shipper who's been with FedEx for a number of years. I've got a phenomenal relationship with my carrier. Maybe I've dabbled in the waters with a few regional carriers and the last couple of years, these carrier rate increases have vastly impacted my business. What can these customers do? What are some of the strategies that exist in the marketplace that help that million dollar, 2 million, 510 million dollars shipper or less, obviously to minimize some of those cost increases?

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Glenn Gooding [00:11:57]:

Another great question. You know what really stuck with me when you were laying that out, TJ, is one, is when a client says, I have got a great relationship with my curio. Great relationship. I always want to really kind of unpack that for starters. So first of all, I'll be the first advocate. You want a great relationship with your suppliers and your vendors. That's important for a healthy, growing business and brand. You need that collaboration.

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Glenn Gooding [00:12:19]:

But invariably, when I hear happy, my antenna go up, that tells me maybe this client, maybe this shipper isn't really keeping their eye on the ball. Maybe they like their carrier rep. Maybe their carrier rep just took up Penasco. Maybe the carrier rep makes a point of taking them out to lunch on a regular basis. Very responsive. From a customer service perspective, those are all great. But what does happy really mean as far as strategies? You know, TJ, visibility to rate data is critical. Critical.

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Glenn Gooding [00:12:54]:

It's the foundation of anything you want to do at that point. And so my number one piece of advice is get yourself aligned from a technologies perspective to get full granular visibility to your small parcel, spend in all of its intimate detail. If you don't have that, you don't stand a chance of formulating a reasonable plan or confirming whether or not your plan even executed the plan. You know, like I said, I grew up working for the carriers and I've been around the space too long. One of the famous sayings that they taught us as operators back in the day was failure to plan is a plan to fail. You got a plan. A plan requires data, requires visibility. You need technology that allows you to do that.

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Glenn Gooding [00:13:45]:

That's the first thing.

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TJ Roberts [00:13:47]:

Yeah, that's 100% true. There's nothing more jarring than speaking to a potential customer and having them basically outline that their visibility is centered around a weekly report that comes from the carrier website and is really a limited data set. It's eye opening when a customer actually sees that tracking level detail laid out for them with trends and analysis, and then you start applying the actual impacts of those rate increases. It makes for telling a new story and a new strategy going into the new year.

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Glenn Gooding [00:14:20]:

Don't bring up a big analogy. TJ, I don't mean to stop by anybody.

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TJ Roberts [00:14:23]:

No, please.

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Glenn Gooding [00:14:24]:

Here's how I would compare it. We're coming up on tax season, right?

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TJ Roberts [00:14:27]:

Oh yeah, we are.

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Glenn Gooding [00:14:28]:

And your point is valid about clients relying on their carrier to tell them how they're doing or on reporting? TJ, I don't live on you. Do you go to the IR's to have them prepare your taxes for you?

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TJ Roberts [00:14:37]:

I haven't yet.

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Glenn Gooding [00:14:39]:

Probably not the best idea, right? Kind of a rhetorical question. So you're best served going to a certified accountant that specializes in taxes and looks at that with a level of expertise and granularity to legally mitigate how much taxes you're going to pay. Right. Why on earth would a shipper rely on their vendor letting the proverbial fox that guards the henhouse tell them to how they're doing or rely on them for analysis? How can you expect a reasonable result if that is your bonus? Apparandi?

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TJ Roberts [00:15:15]:

Yeah, you're spot on, Glenn. And I think the tax analogy is incredibly well suited for this type of conversation because again, it's that annual experience that everybody has to go through. It's coming across the board to every customer, every individual, and learning to navigate that, having the expertise at your fingertips. I always crack up. Every year my accountant pulls out his book, and it's the new book from the year. And that it is, it's as thick as a Bible, right? It is. It is a very, very thick manuscript. And by the time I get to him, it's usually in February ish timeframe.

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TJ Roberts [00:15:51]:

And he's already got that marked up. Like that book's been around for 20 years. He's had it less than a couple of months. So having that expertise is such a value added partnership. And obviously companies like iDrive logistics and others out there that are trying to provide the data insights and visibility is such a huge help there. Kind of breaking this down a little bit, again, highlighting the key points as we talk about this rate increase and the impact. Number one, this is an annual rate increase. I mean, one of the first things that im hearing you say, Glenn, is especially when those are announced, which typically is in the end of the previous year.

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TJ Roberts [00:16:28]:

I think last year was, it felt like it was later in the year than it had been in previous years. But last year it was jog my memory ups first that announced and FedEx followed.

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Glenn Gooding [00:16:39]:

Yeah, it's always a kind of a game of cat and mouse between those two on who goes to market first and who wants to do that. This year it was FedEx first followed by Ups.

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TJ Roberts [00:16:47]:

Fedex first. Yeah, Fedex first. And so one of the key points that you've outlined is when those rate increases are announced, don't take that lightly. Take the opportunity through the end of the year to run that data. Look at what that cost impact is going to be. Typically, budgets are run at the end of the year, right, for the upcoming year. So being able to know and understand what that impacts going to be to your business is what helps drive that budget for the next year. Number two, unique time for the last couple of years post pandemic where the carriers were at max capacity, you know, shut off services like some of the guaranteed refunds that are included, guaranteed service refunds and things of that nature.

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TJ Roberts [00:17:28]:

And we are coming out of that a little bit, but we are still seeing the carriers heavily, heavily pushing on that residential, which is has a higher cost and thus the higher gris that are being hit. I loved your analogy of inflation and thats exactly what it feels like. It feels like that were hitting some of that carrier inflation. Number three, this is not unique to just the FedEx and UPS shippers out there. Glen, do you recommend to all shippers or is it more of a case by case of when does it make sense to have a different carrier mix in play?

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Glenn Gooding [00:18:02]:

Great question. And that has a lot of caveats to it at a high level. TJ, I think anyone responsible for growing their brand and trying to improve the customer experience must be looking at reengineering their supply chain on an annual basis. It doesn't have to be a complete overhaul, but a new few tweaks, a few nuances, better alignment, understanding things. And so if I bring that into some things that are on the radar for 2023, I mean, this is kind of an unprecedented time. Very interesting. We're coming in now, where we're post pandemic, average daily volumes are down a bit. People are working again.

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Glenn Gooding [00:18:46]:

People are shopping at stores sometimes. Don't get me wrong, the direct to consumer channel is still alive and well and growing and. But in comparison to the pandemic volumes, it's different. But I would contend that today, now in 2023, the logistics professional, the operations professional, the procurement professional is going to have to make many more decisions in 2023 than they ever have. TJ, you've got the effect of a general rate increase, one that I might add. It's announced at 6.9%. What I am seeing are increases that are much more appropriately aligned to closer to 10% for many shippers based off the impact of assessor sorrows and surcharges. You have to get your head around that and stay competitively aligned.

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Glenn Gooding [00:19:31]:

You have to know what's happening in the marketplace. We have a UPS Teamster negotiation happening in 2023. Scary times, bud, scary times. If those teamsters choose to go on strike and walk, what is your game plan as a shipper? Do you have a contingency? Have you planned for that? Or are you just held hostage to the market? So a lot to think about in 2023. But at a minimum, just standard best practices from a supply chain and procurement perspective. The carriers open the door for you to take a look and have a discussion with them around fine tuning your partnership every single year. Because every single year they push through that rate increase. And that rate increase is complex.

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Glenn Gooding [00:20:18]:

It differs from what they announced and what they tell you it is. And even if you think you're protected with a rate cap, rate caps don't apply to assessorials and surcharges. And don't forget, 30% to 40% of their spend is tied up with those indices. So everyone's affected. Everyone should be looking at this on an annualized basis and understanding it purely nothing else for budgetary purposes. And you can't do that without great technology and great access to accurate granular data.

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TJ Roberts [00:20:51]:

Absolutely, Glenn, you're a rockstar. Very, very much appreciated. I think this is hopefully hugely valuable, but also give some perspective on the marketplace today. It's a unique time. We have unique times coming down the pipeline. So very, very much appreciate your insight.

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Glenn Gooding [00:21:16]:

Thanks for listening to parcel perspectives hosted by me, Glenn Gooding. I've been in the small parcel space for 37 years, starting with a deep and broad background, working for one of the major carriers as an operator and industrial engineer, later managing pricing at the highest level for the largest, most complex shippers in the world. Since then, I've been a national thought leader and worked to help drive strategy for clients from Fortune 50 companies to startup e commerce businesses, helping them more competitively align in this complex and expensive market. If you enjoyed the show, please subscribe and share with friends. Join us next time for more expert advice and strategies to stay ahead of the shipping game.

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