Retailers shift their thinking on costly last-mile delivery

Consumer need for speed in package delivery, which has reached its apex with same-day shipping, has placed retailers in a tough spot when it comes to managing transportation costs. The result is increased competition among shippers for retail volume in a market dominated by FedEx and UPS, according to a new survey from global consulting firm AlixPartners.

Retail executives surveyed say as more — especially younger — consumers demand same-day delivery, the financial payoff isn’t there.

Roughly three-quarters (76%) of retail executives surveyed by AlixPartners said delivery cost on a per-package basis has increased since last year, and three out of four said home delivery does not add to profitability. An overwhelming majority (85%) said reducing their total cost per order is the No. 1 priority for last-mile delivery.

Shippers are facing their own cost pressures. “Carriers have experienced meaningful inflation in wages, equipment, repair and maintenance, insurance, fuel, tires, real estate, health-care costs, and more,” said Marc Iampieri, global co-leader of logistics & transportation, and partner & managing director of AlixPartners. “Those costs are offset by future rate increases. There is also a macro supply-and-demand equation to consider as e-commerce growth outstrips retail growth.”

Iampieri said the recent UPS-Teamsters contract renewal is a good example of wage inflation. 

To save on delivery costs, retailers are moving away from reliance on single carriers in last-mile delivery. Three out of four executives reported they are using a mix of last-mile options. To date, the shift in shipping strategy has helped FedEx, but hurt UPS. FedEx was the primary last-mile carrier cited by 42% of executives, an increase of 15% year over year. But UPS saw a decrease as primary last-mile carrier, dropping from 35% in 2023 to 25% in 2024.

Overall, two out of five retail executives surveyed said they made some volume switch away from either FedEx or UPS to other providers in the past year.

UPS reported weaker-than-expected profits for Q2 this week and suffered its worst single-day stock loss on record.

UPS said in a statement emailed to CNBC “building supply chain resiliency, including finding the right balance between using one or more than one carrier, is a trend among some in the market.” It also stated that the company is “focused on meeting customers where they are, offering our services across digital platforms around the world.”

In its earnings commentary on Tuesday, UPS cited customers “trading down,” moving to more economic options in the most recent quarter, but also indicated this was linked to the “acceleration of new entrants, new e-commerce customers” that were coming into the market, assumed to be a reference to Asian low-cost retailers and Amazon rivals Shein and Temu….