Delivery Dramas Overwhelm Retailers—and Their Customers

Perhaps you’ve wondered why that $70 Mother’s Day bouquet included an additional $30 delivery fee, or seen a UPS truck pulling a second trailer full of packages. Or perhaps you mumbled something unpublishable after seeing the delivery charge for that new piece of furniture.

Shipping and supply chains were supposed to settle down after the pandemic. Instead, many retailers say shipper-suppliers have hiked prices by almost 20%. And while retailers generally pass on these charges to customers, they recognize that they’re walking an increasingly fine and risky line between losing business and losing their margin. “Everyone’s feeling it,” says retail expert Craig Rowley, senior client partner at Korn Ferry.

To some degrees, leaders in any industry can be caught off guard by cost shifts. In the case of retail, the shipping-rate hike is due to a leap in fuel and labor costs, as well as to the shift to home-delivery shopping, which is pricier per item. While ten years ago, a driver might have dropped off ten to 30 boxes at a store, today they might deliver a package containing a single toothbrush to someone’s home. “The labor and fuel cost of delivering ten boxes versus one box is similar,” says Rowley. E-commerce now accounts for about 16% of US retail sales, and up to one-third of apparel sales. Innovative options like electric cars and drones have not yet proven cheaper or more efficient than home service via delivery vehicles.

During the pandemic, companies did the best they could to maintain home deliveries. “Things were held together by duct tape and baling wire,” says John Long, North America retail sector leader at Korn Ferry. “The pendulum has swung back to more normalized e-commerce delivery patterns.” The upside is that recent years have supplied companies with reams of data; they’re now able to identify the zip codes that place the most profitable orders. With that information in hand, companies are now reconstructing their supply chains, moving inventory hubs closer to customers. Many retailers are strongly encouraging in-store pickup. Some are also reconsidering their free-shipping policies, including which deliveries qualify. “Every transaction doesn’t need to be profitable, but a customer overall needs to be profitable,” says Long.

Further price jumps have likely been driven by the rise of same-day deliveries. Amazon’s two-hour deliveries are widely credited with setting the bar, making it possible for customers to (for instance) order birthday gifts the day before the party. While consumers are familiar with national and global shipping companies like USPS, UPS, DHL, and FedEx, a web of local shippers, contracted directly by retailers, exists as well. Some are willing to ship items at a loss, especially in less urban regions, in order to maintain customer coverage. “It’s quite competitive,” says Meredith Moot, senior client partner in the Logistics, Distribution and Transportation practice at Korn Ferry. Retailers can find themselves squeezed in the middle, she says: “Customers want to see free shipping. In reality, it costs to fuel a truck and pay the delivery worker.”

Experts advise that firms look at the delivery times of nearby or similar companies, as well as survey customers’ delivery expectations. “Firms should be benchmarking themselves against their strongest competitors,” says Long. For example, if nearby florists commonly do deliveries in a few hours, then that’s the norm. But an exercise-equipment company might easily get away with one-week turnarounds or even longer, depending on competitors’ practices.

For executives navigating shipping costs, experts advise making sure to include logistics and or transportation managers in high-level discussions. “Give your head of logistics a seat at the table in discussing sustainable cost opportunities,” says Moot.

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