Despite competition from Amazon.com, the package delivery giants are increasing prices. Here’s a look at why — and what it means for investors.
Prices are going up. Around the time of the company’s first-quarter 2017 results in late September, FedEx Corporation (NYSE:FDX) followed rival United Parcel Service, Inc (NYSE:UPS) in hiking selected shipping rates by 4.9% — a rate far in excess of inflation. What’s going on? What does it mean for investors in both stocks? And what can customers expect from pricing in the future?
Why prices are going up
The pricing increases will grab the headlines, but in reality they are part of a series of actions both companies have been taking to maximize profitability. In short, FedEx and UPS need to take these measures because they are seeing margin pressure as a result of burgeoning e-commerce delivery growth. That pressure shows up in different ways.
Clearly, hiking prices will help both companies increase yield rate growth in the future. In short, both companies are trying to maximize profitability rather than just chase volume growth and fight off Amazon.
For consumers, it’s obviously not good news to see higher rates. However, for investors, it’s good news. The evidence is that UPS and FedEx have struggled to deal with managing profitability in the face of strong e-commerce delivery growth. The measures taken are in response to the pressures that both these huge companies are feeling on their profit margins. Given the strength of e-commerce delivery demand, seems likely that these costs will be more than accepted by the consumer – which is fantastic news for investors.