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Rising gas prices fuel e-tailer anxieties

Online retailers are starting to worry about spiking oil prices, which are elevating shipping costs.

Declan McCullagh Former Senior Writer
Declan McCullagh is the chief political correspondent for CNET. You can e-mail him or follow him on Twitter as declanm. Declan previously was a reporter for Time and the Washington bureau chief for Wired and wrote the Taking Liberties section and Other People's Money column for CBS News' Web site.
Declan McCullagh
3 min read
Online retailers are starting to worry about spiking oil prices, which briefly reached $67 a barrel last week and are elevating shipping costs for some companies.

Peapod, the Skokie, Ill.-based online service that trucks groceries to customers, has held off on raising delivery fees, but is paying close attention to the trend in oil prices. "For now, we're riding it out," said Elana Margolis, a company spokeswoman.

Oil prices

Brief spikes in oil prices don't always translate into higher pump prices, of course. But by-the-barrel prices have been inching relentlessly upward for five years, with a big jump last fall, and shipping companies used by e-commerce sites have responded by charging more. UPS, for instance, says its fuel costs leaped 45.3 percent between the second quarter of 2004 and the same time this year.

Both FedEx and UPS have imposed special fuel surcharges on top of normal delivery fees. "It's a monthly adjustment that we do based on a rounded average of the U.S. Gulf Coast spot price for a gallon of kerosene jet fuel," FedEx spokeswoman Darcie Goodwin said. "It's to help customers respond to the changes in the fuel price so that they can forecast and plan."

Each company currently levies a 2.75 percent fuel surcharge on ground shipments. For airborne packages, FedEx's rate is 12.5 percent. UPS has capped its air surcharge at 9.5 percent and says it does not expect to increase it in the near future.

Larger retailers may have the muscle to negotiate for lower surcharges. "We haven't seen a change in either our customer traffic or in our expenses in terms of what it's costing us to acquire merchandise and deliver merchandise to customers," said Henry Posner, director of corporate communications for B&H Photo-Video, a photography and electronics retailer in New York.

Because B&H has made UPS its preferred shipper, "they treat us very kindly," Posner said.

J&R Music World, another large New York retailer, also has managed to avoid rate increases, said sales manager Kenny Scott.

Big business not immune
But even some of the largest companies are facing the squeeze. Wal-Mart Stores, the world's largest retailer, this week blamed higher oil costs when warning that its third-quarter results would be weaker than expected. In April, Best Buy attributed dipping customer visits to higher fuel costs.

Drugstore.com also sounded a note of caution in a March filing with the U.S. Securities and Exchange Commission. "Shipping costs, which are included in cost of sales, continue to exceed the amount we charge customers for shipping," the company said. "We expect to continue to subsidize a portion of our...shipping costs for the foreseeable future, through free shipping on nonprescription orders of $49 or more, as a strategy to attract and retain customers."

In addition, a U.S. Postal Service rate increase is in the works. The Postal Rate Commission is weighing an across-the-board 5.4 percent hike for domestic mailings, which, if approved, could take effect in January 2006, spokesman Jim Quirk said.

"For every penny increase in fuel, it adds about $8 million in expense," Quirk said.

Newegg.com, a La Puente, Calif.-based computer gear retailer, says it has held off on passing along fuel levies to its customers. Referring to the company's relationships with its shippers, marketing director Stuart Wallock, said, "We're very good negotiators."

For consumers, prices at the pump have more than doubled in the last decade, according to Energy Department statistics. This week, a gallon of premium gas averaged $2.74--still less than half what heavily taxed European drivers must pay, but 75 cents higher than at the beginning of the year.

High pump prices are prompting shippers to find ways to save money. FedEx recently announced plans to add up to 75 diesel-electric hybrid vehicles to its fleet, with fuel costs estimated to be more than a third less than for comparable nonhybrid vehicles.

UPS plans to roll out a technology system by 2007 that tells drivers the number of packages that need to be delivered at a single stop. The system is intended to prevent return visits to the same neighborhood, which is a problem now.

"They'll just double back (from the other side of town), and you have the additional fuel, additional time, additional wear and tear on the vehicle," said UPS spokeswoman Susan Rosenberg. She estimated the planned system could save 100 million miles on the road, or 14 million gallons of fuel per year.