Small Retailers Face Rising Shipping Costs Ahead of Holidays

Rising transportation expenses are putting pressure on small retailers across the United States as they prepare for the holiday shopping season, with higher fuel prices driving up delivery costs and threatening business profits. Some companies are considering increasing shipping fees or eliminating free delivery to manage the growing expenses.

Jenni Shields, owner of Evie Pearl Handmade, a Kansas-based business selling handmade hair accessories, said shipping one package now costs nearly $6 on average. That compares with approximately $4.50 last year and $2.93 when she started the business eight years ago.

Shields currently charges customers $6 for shipping, including approximately $1.50 for packaging materials. However, the latest increases have left her absorbing additional expenses rather than breaking even on orders.

She described the financial impact on her small business, which operates from her spare bedroom in Kansas City, Kansas.

"I am losing money at this point, and I've really taken a huge hit this year. I feel like it's just been this slow increase up [in shipping costs], and I feel horrible," said Shields, owner of Evie Pearl Handmade.

Shields is considering increasing her shipping fees for the first time in six years. She also said higher delivery charges have contributed to slower sales during one of her busiest periods.

Competing with major online retailers that offer free shipping has become increasingly difficult for smaller businesses, she said.

"I can't compete with Amazon on the free shipping. I can't do that. I can't afford that. I'm seeing so much of my percentage that's supposed to come back to me and my family being put towards the shipping costs," Shields said.

Higher transportation expenses are affecting businesses across multiple industries. Fuel price increases following the February attacks by the United States and Israel on Iran have pushed up shipping costs across sea, air, rail and road transportation.

Amazon reported an 11% increase in shipping expenses during the third quarter compared with the same period last year. Meanwhile, global air cargo rates reached approximately $3.37 per kilogram, representing a 43% increase from a comparable period a year earlier, according to transportation marketplace Freightos.

Judah Levine, head of research at Freightos, attributed higher air freight rates to increased fuel expenses and demand for rapid transportation of hardware used in data center construction.

Jason Seidl, managing director and transportation analyst at TD Cowen, said the increases are putting pressure on retailers' profitability. Larger companies generally have contractual shipping arrangements that protect them from sudden price movements.

"squeeze their margins in the near-term," Seidl said.

He explained that larger businesses have greater protection against fluctuating transportation prices through established agreements.

"Larger companies tend not to be exposed to the spot market, and they'll have what we call dedicated deals in place," Seidl said.

Smaller retailers generally have fewer options to manage these increases. Additional holiday surcharges introduced by UPS, FedEx and the U.S. Postal Service are adding to their operating expenses, with charges varying according to package type.

Todd Shelton, founder of a New Jersey clothing company that has operated for 23 years, has also adjusted his shipping policies. The business, which produces men's jeans, T-shirts and button-up shirts locally, began charging customers for return shipping for the first time this week.

The return delivery expense is now deducted from customer refunds. Shelton also faces higher material costs for imported Japanese denim and shirt fabric from Portugal. Although the company remains profitable, rising expenses have reduced its profit margins, prompting consideration of higher product prices or additional shipping charges.

Despite increasing business expenses, consumer spending is expected to remain strong during the holiday period. The National Retail Federation forecasts a 4.2% increase in retail sales through the end of the year, bringing total spending to $1.01 trillion, compared with $972 billion last year.

Aaron Cheris, global retail practice head at Bain & Company, said inflation accounts for part of the projected spending growth, as consumers face higher prices for everyday purchases.

"Customers all expect to spend more this holiday, but part of why they expect to spend more is they expect things to cost more, not because they'd like to spend more or they were hoping to get more quantity of stuff. So what I suspect happens is that non-discretionary categories do fine, because you buy the food you were going to need to buy anyway, but then the amount of cash that's left over for [discretionary] goods is less," Cheris said.