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Shipping delays show perils of stores overpromising

Bloomberg News

December 28. 2013 1:00AM
A United Parcel Service aircraft is loaded with air containers at the UPS Worldport All Points International Hub during the peak delivery day in Louisville, Ky., on Dec. 17. This year, UPS expected to deliver more than 450 million packages globally between Thanksgiving and Christmas and was unable to deliver some packages on time. (REUTERS)

The failure of United Parcel Service and 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 to 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 that 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 email, 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 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, 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.

"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."

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

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