CHICAGO (Reuters) - Determined not to repeat a holiday season that left millions of packages delivered too late and customers seething, United Parcel Service Inc (UPS.N) and FedEx Corp (FDX.N) are investing heavily in new infrastructure - but the continued dynamic growth of e-commerce will test those efforts.
The world’s two largest shipping companies are building new facilities, adding more temporary holiday workers and pushing retailers to help them avoid a recurrence of a pre-Christmas shipping logjam.
Even so, the rise in shipping originating with e-tailers including Amazon.com Inc (AMZN.O) and Zappos could test even the new capacity levels. Peak days at both companies now equal roughly double their average daily volumes.
Mark Wallace, vice president of engineering in the United States at UPS, said the company still has volume limits, despite substantial investment this year. “There is only so much capacity in the network.”
A late spike in demand last year caused by last-minute online promotions plagued express delivery companies.
Some 2 million express packages were left stranded by delivery companies on Christmas Eve, according to shipment-tracking software developer ShipMatrix Inc. UPS experienced far more severe problems than FedEx.
This year, UPS has allocated $500 million to expand and improve facilities and is hiring 95,000 seasonal workers - or 10,000 more than last year - to handle 2014 holiday packages.
During its second-quarter conference call, UPS Chief Executive David Abney said “these projects will weigh on earnings in 2014” but pay off long-term. A spokesman declined to comment further ahead of UPS’s next quarterly earnings, expected to be released on Friday.
FedEx has said up to 90 percent of its $1.2 billion investments this year are to boost capacity. The company plans to hire 50,000 seasonal workers, up from 40,000 last year. Patrick Fitzgerald, senior vice president of marketing and communications at FedEx, said this year’s capital investments would not affect the company’s earnings forecast.
The investment is designed to address the rapid growth of consumer goods ordered online. Through 2013, peak volume, referring to the busiest day of the year, had climbed 57 percent over five years at FedEx, to 22 million packages. It jumped 40 percent at UPS, to 31 million packages.
Deloitte LLP predicts sales growth of up to 14 percent this holiday season, and FedEx said on Wednesday it expected peak-day package volumes to reach 22.6 million this year.
The peaks have become more pronounced closer to Christmas as last-minute online free shipping deals have proliferated. Unchecked, those peaks will only grow worse, experts said.
“The e-commerce shipping model isn’t sustainable in its current form,” said Yossi Sheffi, a professor of engineering systems and director of the Center for Transportation & Logistics at the Massachusetts Institute of Technology (MIT). “You cannot build a shipping network to operate 365 days a year based on a spike in packages three days before Christmas.”
In a bid to better manage the peak, the shipping giants have asked retailers for clearer estimates of 2014 holiday volumes and have encouraged earlier deadlines for consumer orders.
“We now have the kind of visibility we didn’t before on what to expect from our largest customers,” said UPS’s Wallace.
FedEx’s Fitzgerald said customers could be disappointed if they offer last-minute sales without first consulting FedEx. “If we don’t have the right discussions up-front, we may not be ready to handle” a sudden surge, Fitzgerald said.
In mid-August, Wal-Mart Stores Inc (WMT.N) gave its carriers its peak forecast, both by day and by shipping facility, three weeks earlier than usual. Contingency plans include shipping from alternate Wal-Mart distribution centers or upgrading packages to faster services if “deemed at risk” of missing Christmas, said spokeswoman Jaeme Lazckowski.
Nordstrom Inc (JWN.N) has moved up its cutoff point for Christmas deliveries by three hours on Dec. 23, and UPS has agreed to additional last-minute flights for the company.
FedEx and UPS had no choice but to engage retailers in reducing peak loads and getting them to manage consumer expectations on realistic delivery deadlines, said veteran Cowan & Co analyst Helane Becker. “They can’t keep trying to squeeze more and more through such a narrow funnel,” she said.
Both FedEx and UPS are concerned about impact on their core business-to-business customers.
“When packages went undelivered last year, that also affected high-volume business customers,” said Rick Jones, a former UPS executive and now CEO of regional delivery company Lone Star Overnight. “Have no doubt this is not about getting little Johnny his Christmas present. It’s about protecting that core business.”
Logistics experts say the 2014 adjustments are a temporary fix, and more changes are needed for the 2015 holiday season. A price hike might help tackle ubiquitous free shipping offers, and negotiations with Amazon, in particular, likely will occur.
“What you will see is Amazon Prime with a little minus for the three days before Christmas - where free shipping doesn’t apply,” said MIT’s Sheffi. “And Amazon will be able to blame UPS for it anyway.”
Amazon declined specific comment. “We work very closely with all of our delivery partners and are confident in their ability to deliver for Amazon customers this holiday,” the company said in a statement.
FedEx’s Fitzgerald said the company does not plan a 2015 price increase “at this point.” A UPS spokesman said the company has focused on fixing last year’s problems instead of pricing.
Editing by David Greising and Matthew Lewis