UPS shipping delays show perils of stores overpromising

(c) 2013, Bloomberg News.

The failure of United Parcel Service FedEx to deliver packages in time for Christmas has exposed the perils of retailers promising to get last-minute gifts to customers.

Chains from Kohl's to Amazon.com to 1-800- Flowers.com offered gift cards and refunds after angry shoppers took to social media to vent their frustrations at the missed shipments. On its website, UPS said the volume of last- minute air packages exceeded its capacity to process them.

Merchants battling for market share during a ho-hum holiday season have been trying to outdo one another with deep discounts and promises that shoppers can wait as long as they want to order gifts online. While analysts say the shipping snafu is unlikely to make Americans abandon online shopping, they say parcel-delivery companies will have to boost capacity and retailers may need to seek alternatives to prevent a recurrence.

"You had a perfect storm of events from the consumer side, the retailer side and the shipping side," said Craig Johnson, president of Customer Growth Partners LLC in New Canaan, Conn. "Normally those kinds of schedules are all kind of prepared or coordinated with the carriers."

On Dec. 21, Barnesville, Minn., resident Bernadette Odden ordered videos for one of her daughters from Amazon, which promised to deliver them on Christmas Eve. They never arrived. Odden, 35, called Amazon and received a $20 credit, which she immediately cashed in for a camera.

"I don't think Amazon should take the fall for UPS's screwups," she said in a telephone interview. "From now on, I will possibly check which courier is being used."

UPS is conducting an analysis of what caused the delayed air shipments, Peggy Gardner, a company spokeswoman, said in a telephone interview.

"We're looking at all aspects this year and talking with our shippers as part of the process following every peak season," she said. Gardner declined to discuss the number of shipments that missed the scheduled delivery day.

In an e-mail, FedEx said it had shipped 99 percent of its ground deliveries on time and didn't specify a percentage for its air shipments.

U.S. retail sales rose 3.5 percent this holiday season, MasterCard Advisors SpendingPulse reported Thursday, in line with other predictions for relatively weak sales.

Yet Americans are stampeding online to buy holiday gifts, putting more pressure on shipping companies. Merchandise purchased via personal computers gained 10 percent this year to $42.75 billion, ComScore Inc. reported Thursday. While online sales were softer than expected the week before Christmas, that can be explained in part by retailers piling on discounts earlier, pulling forward sales in a season that was six days shorter than last year.

UPS's status as the world's largest package-delivery company wasn't enough to absorb rapidly changing consumer behavior. Americans are waiting longer and longer to pull the trigger on purchases, said Marshal Cohen, chief retail analyst at NPD Group, a Port Washington, N.Y.-based research firm.

"We have watched retailers groom the consumer to wait," he said in a telephone interview. "It's like rewarding bad behavior. You're saying to the consumer, 'the longer you wait, the better the deal, don't be fooled.' "

Putting further pressure on the shipping companies, retailers trying to compensate for a "mediocre" shopping season extended their order cutoff so customers could receive their purchases on Dec. 24, Johnson said.

During peak periods, shipping companies add trucks and aircraft and hire thousands of temporary workers.

UPS and FedEx "may need to increase investments to handle such volume surges," Anthony Gallo, an analyst at Wells Fargo & Co., wrote in a note to investors. "The 2014 Thanksgiving and Christmas calendars will be similar to 2013."

UPS was disproportionately affected because of its Amazon Prime contract, which guarantees delivery in two days, said Benjamin Hartford, a Robert W. Baird & Co. analyst. Prime orders were "far greater than anticipated and it came much later than expected," he said.

While FedEx has exposure to Amazon as well, it doesn't have a contract for the Prime guarantee. Hartford estimated UPS will spend $50 million to $100 million this quarter on refunds, rebates and higher operating costs.

Merchants — even Amazon, which has spent billions on fulfillment centers — rely on parcel-delivery companies.

"Amazon's mistake is they are a victim of their own success," said Michael Pachter, an analyst at Wedbush Securities Inc. "They have given us such amazing service for so long that we rely on it and wait to make our orders. Amazon should probably tell people that they have second-day service but they don't trust the third-party vendors."

The company is trying to reduce its reliance on shipping companies with Prime Fresh, a same-day local delivery service offering groceries and other daily necessities. So far, Prime Fresh is available only in Seattle, San Francisco and Los Angeles. In the wake of the missed UPS deliveries, Amazon might be tempted to speed up the rollout to other cities, said Shawn Milne, an analyst at Janney Montgomery Scott LLC.

"It would then control same-day delivery late in the holiday," he said.

Since building a delivery infrastructure to rival that of UPS and FedEx may not be possible, Amazon will have to renegotiate shipping contracts, said Pachter. The retailer should work with the shippers to set package-delivery capacity, and better manage customers' expectations as to when purchases will arrive, he said.

Most last-minute purchases ordered two to three days before Christmas ship by air. UPS offers refunds for air and international packages that don't arrive on time during peak shipping season. There were no guaranteed delivery times for packages shipped by ground after Dec. 11. Ground deliveries have similar cutoff dates every year during the peak season.

"The majority of the shipments that were set for delivery by Christmas Eve did make their delivery destinations," Gardner said. "Some of those shipments were delayed."

1-800-Flowers.com reached out to customers as soon as it learned shipments were going to miss the delivery deadline.

"A very small percentage of our gifts were affected due to the widely reported issue regarding UPS deliveries," Yanique Woodall, a spokeswoman, said in an e-mail. "In some cases, we were able to substitute their gifts with our same-day delivery floral arrangements from our florists. In addition, to apologize for any inconvenience, we offered a $20 savings pass to our customers."

Amazon also offered customers $20 gift cards and refunds on purchases that UPS didn't ship on time. The world's largest online retailer cited failures in UPS's transportation network in messages to customers, saying its own fulfillment centers processed customers' orders in time for holiday delivery. Amazon is reviewing the performance of the delivery carriers, spokeswoman Mary Osako said in an e-mail.

UPS declined to comment, saying it doesn't talk about specific customers.

Kohl's, a department store chain, is contacting those affected and will fully cover the cost of all items not delivered on time, Jen Johnson, a spokeswoman, said in an e-mail

Hartford and Donald Broughton, an Avondale Partners LLC analyst, expect UPS to change its policies and pricing in 2014 so that consumers who choose to order late pay a premium, helping even out package flow through the peak season.

"They are cognizant of the reputational risk this presents," Hartford said of UPS in an interview. "They are going to take proactive, immediate steps to address the situation from a service standpoint and a customer experience standpoint."

_ With assistance from Craig Trudell in Southfield, Michigan, Lindsey Rupp in New York and Aaron Ricadela in San Francisco.

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