United Parcel Service Inc. is telling dozens of retailers it
intends to do away with big discounts on oversize packages this
holiday season and, in the case of some retailers, year round,
according to people familiar with the matter.
The move could hit consumers hard—forcing them to get their
items at a store or absorb some of the shipping charges of more
than $57.
In recent years, online offers of free shipping on bigger and
heavier items like grills, mattresses and patio furniture has
ballooned. Take furniture, for instance. About 8% of it was sold
online in 2014, up from 5% in 2009, according to Kantar Retail
estimates based on Commerce Department data.
That is causing a logjam for UPS's network, especially during
the holidays. Oversize packages often don't fit on the intricate
networks of conveyor belts which run through the company's sorting
centers. That forces employees to carry the big, often heavy items
directly to the delivery trucks, where they take up extra space.
And it causes more work for drivers making the final
delivery—especially if they have to climb stairs.
The past two holiday seasons have been difficult for UPS. In
2013, it failed to deliver everything in time for Christmas due to
unusually bad weather and a surge in unexpected last-minute orders.
Last year, it over prepared and productivity plummeted.
As a result, the delivery giant started approaching retailers
midcontract about a week ago to adjust its pricing to eliminate
those packages or ensure what it considers adequate compensation,
according to people with direct knowledge of the changes. In one
scenario, the cost of shipping a 50-pound oversize package such as
a barbque grill could more than triple from the current price of
$29, depending on a retailers' discounts. The increase would have
to be absorbed by the retailer, the consumer or both.
Items that are affected are those measuring more than 130 inches
in combined length plus girth. An oversize package triggers a flat
fee of $57.50 and automatically bumps up the weight for which a
customer is charged to a minimum of 90 pounds.
Many retailers have discounts on those extra charges, while a
handful received full waivers, according to the people familiar
with the matter. UPS is approaching customers on a case-by-case
basis.
When UPS offers customers waivers or discounts, they are
typically based on volume assumptions, said John Haber, chief
executive of supply-chain consultant Spend Management Experts.
Now that retailers are "selling more and more of these items
online, and the assumptions that went in to the initial pricing
have changed, it's costing [UPS] a lot of money. It's taking up a
lot of room in their network," Mr. Haber added.
Consultants who advise retailers on negotiations with UPS and
other delivery companies said that retailers are likely to try to
fight back on increased charges.
UPS has notified some of the retailers of the pending change,
but notifications are ongoing, according to people familiar with
the matter. Since the retailers already have contracts with UPS, in
most cases this involves negotiating a change to the contract,
which retailers can sign off on—or not.
Wal-Mart Stores Inc. said the terms of its shipping agreements
are confidential, as did Costco Wholesale Corp. Home Depot Inc.
said it hasn't heard of any changes to its shipping agreements.
"UPS approaches each customer relationship as an individual
account and we strive to balance our customers' needs with UPS's
desire to be properly compensated for the services we provide," a
UPS spokesman said. He added that the company doesn't comment on
individual customers.
E-commerce profitability has been under pressure for UPS as
retailers negotiate big discounts and delivery costs rise.
UPS signaled it would take a harder stance on e-commerce pricing
in its most recent quarterly conference call with analysts, when
executives said they declined to renew contracts with "a couple of
substantial customers" whose business wasn't profitable enough for
UPS. They also said they were holding firm on new price increases
instated this year to charge retailers by size instead of weight
alone for ground packages.
Paul Ziobro and Sarah Nassauer contributed to this article.
Write to Laura Stevens at laura.stevens@wsj.com
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