Small Retailers Face Holiday Squeeze as Shipping Costs Surge 43%

Air cargo rates have jumped 43% year over year to roughly $3.37 per kilogram, and small retailers say the spike threatens to erase their holiday profits entirely. Jenni Shields, owner of Evie Pearl Handmade in Kansas City, Kansas, is already losing money on every order she ships.

Shields has run her handmade hair accessories business for eight years. When she started, she paid $2.93 to ship an order — close to $4 in today's dollars. Last year, an average shipping label cost her about $4.50. Last month, when she brought a typical batch of orders to her local U.S. Postal Service office, the average came to nearly $6 per package.

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

Why are shipping costs climbing so fast?

The surge in fuel prices since the U.S. and Israel attacked Iran in February has driven up the cost of shipping by sea, air, rail and road. The increases stretch from individual sellers to Amazon, which reported an 11% rise in shipping expenses in the third quarter compared with last year.

Judah Levine, head of research at transportation marketplace Freightos, said higher fuel isn't the only force at work. Demand for fast shipping of hardware used to build data centers is also pushing air freight rates higher, even weeks before peak last-minute holiday packages take to the skies.

For businesses, that runup is going to "squeeze their margins in the near-term," said Jason Seidl, managing director and transportation analyst at TD Cowen. "Larger companies tend not to be exposed to the spot market, and they'll have what we call dedicated deals in place."

That protection doesn't extend to smaller companies. UPS, FedEx and USPS have all instituted holiday surcharges, with prices varying by package type and lasting through the end of the season. Such peak-period charges are typical, but they've continued to rise over the past few years.

How are retailers responding?

Small business owners are walking a delicate line: they don't want to alienate customers who have enjoyed free shipping for nearly a generation.

Shields charges customers $6 in shipping fees, including roughly $1.50 to cover packaging supplies. This year's upswing means she no longer breaks even on orders and absorbs the added cost herself. She's considering raising her shipping fees for the first time in six years.

Todd Shelton, founder of the eponymous 23-year-old New Jersey clothing company that makes high-end men's jeans, T-shirts and button-up shirts locally, started charging customers for return shipping this week for the first time, after absorbing higher expenses this year. The shipping cost is deducted from customers' refunds.

His material costs have also risen, including imported Japanese denim and shirt fabric from Portugal. The company remains profitable, but elevated costs have eaten into margins. Shelton said he's considering raising prices or charging customers for shipping.

The holiday season is one of Shields' busiest, yet she's already seen a sales slowdown because of shipping fees. "I can't compete with Amazon on the free shipping. I can't do that. I can't afford that," she said. "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."

Will shoppers keep spending?

Consumers are still spending. The National Retail Federation expects retail sales through the end of the year to grow 4.2%, totaling $1.01 trillion. Last year's holiday sales reached $972 billion, a 3.1% increase.

Some of that growth is inflation, meaning consumers are simply paying more for the same goods.

"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," said Aaron Cheris, global retail practice head at Bain & Company. "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."

What happens after the holidays?

Cheris said it's shaping up to be a record year for shipping costs, putting immense pressure on smaller retailers. Many may find themselves in financial distress in the first quarter of next year as they struggle through the holiday season.

Larger retailers will also have to reckon with rising costs, though they may not feel the effects until later quarters because they hold locked-in shipping contracts and control their own delivery fleets.

"If anything, it benefits the scale players over the little players, but it's kind of a little bit bad for everybody," Cheris said. "I think that is the challenge."

With no sign of fuel prices declining significantly, Shields — who runs her business from her spare bedroom at home — said she's not sure small businesses will make it to the other side of the holidays.