In what has already been an incredibly newsworthy year, a story that has flown comparatively under the radar has significant implications for retailers shipping to the USA.
From 1st July 2020, the USA introduced a new pricing structure for the entry of low-value small parcels into the country. For retailers, this has sizably increased the costs of delivering goods via postal entry, and has notably levelled the playing field between postal entry and commercial entry in regards to their cost.
Here, we will outline how this change in shipping to the USA came about and what this means for e-commerce companies looking to meet the needs of their customers in this essential export market.
What has happened in the USA?
Back in September 2019, the UPU (Universal Postal Union) announced that they had reached a new agreement on international remuneration rates, with a system that would replace the long-established terminal dues system.
Under the prior terminal dues system, the USA would be required to grant favourable postage rates to countries defined as developing, including China. Due to this perceived inequality and lack of updates to this approach, the USA had sent a letter to withdraw from the UPU as far back as October 2018 before this new agreement was reached.
To put this into context, under the prior terminal dues system, if a small parcel sent from New York to Beijing costs the shipper $14, the same parcel sent from Beijing to New York would only cost $4.
Under this new proposal, known as “Option V”, self-declare rates will replace the prior terminal dues system to remunerate the delivery of inbound international bulky letters and small packets. Under this agreement, member countries of the UPU who meet certain requirements – including an inbound letter-post volume in excess of 75,000 tons – will be able to opt-in to self-declaring their rates as of July 2020.
The USA is the first country to make this transition, with the rates taking effect on 1st July. From this date, the USA is able to set inbound delivery rates at up to 70% of the cost of domestic shipping rates, and this may potentially be increased by 1% each year up to a maximum of 80%.
In practice, however, the added cost for shipments into the USA for retailers are likely to increase by approximately 100%. This is a substantial increase in costs, and one that not all retailers were properly prepared for.
Furthermore, 31 other countries set reciprocal rates, meaning these terms now also apply to USA-based shipments. At a later date, other UPU members that meet the requirements mentioned earlier may also adopt this proposal, so this is a developing story for retailers to keep their eyes on.
Why has this happened?
As noted above, the USA had intended to withdraw from the UPU if the organisation persisted with the previous approach to terminal dues. As a founding member of this 145-year old international body, the USA’s withdrawal would undoubtedly impact relationships between postal entities and commercial shipping providers across the globe.
A pullout would have changed international shipping forever, whether you look at it in terms of the cost, clearance processes, available technologies and tracking visibility.
What does this mean for e-commerce retailers?
Many consolidators, postage sellers and cross-border service providers received new contracts from the UPU back in May relating to this change. However, in the myriad of news and events that have already taken place this year, this new development has caught many UK retailers off-guard.
The main takeaway from this change in the USA is that the cost of postal entry into the USA has increased significantly. Prior to this development, postal entry typically represented the more cost-effective approach for delivery into the country, although sacrificing some of the features and extras that commercial entry can offer.
This was benefited by the rise of the de minimis threshold in the USA from $200 to $800 in 2016. This development ensured that any packages sent directly through the USPS valued under $800 would face no duty tax, making postal entry even more attractive.
Now, that situation has changed dramatically – the cost of postal entry and commercial entry are closer than they’ve ever been in the USA. Through no fault or action of their own, retailers now find themselves in the tricky situation of either explaining to their American customers why the costs of delivery have increased, or finding a way to provide a better offering to make this price hike more palatable.
This will be especially noticeable for customers with low basket values when they complete their shopping online. The added costs of extras such as shipping on top of a product is one of the primary causes of shopping cart abandonment among American consumers.
Because there is no exception to this rule – it impacts all retailers that send small parcels to the USA equally. Unless you are in a position to send items over in small, lightweight letters, you will be affected by this rise in inbound delivery rates.
Why is this such an important development?
What makes this change in shipping rates to the USA so critical is the sizeable portion of UK exports the country is responsible for.
Out of the £689bn in goods and services exported by UK companies globally in 2019, 15.7% of this was accounted for by American consumers. That’s the equivalent of over £108bn coming from the USA alone!
As such, this makes the USA one of the standout markets for retailers looking to expand their customer base beyond domestic shores. It also represents the most active and valuable e-commerce market in the world, with e-commerce penetration in the country reaching 16% of overall retail sales in 2019.
With the effects of COVID-19 having accelerated the adoption of e-commerce in the USA and worldwide, this market has only grown larger in the past few months, presenting more opportunities for retailers here in the UK.
What should retailers do next?
In light of this news, we believe now should be viewed as an opportunity for UK e-commerce companies to assess their current approach to delivery into the USA, and whether they can now provide their customers a more complete, feature-driven service.
Due to the blanket nature of this development, a rise in the cost of deliveries into the USA is practically inevitable. Therefore, if the cost to the retailer and, consequently, their customers in regards to delivery are set to grow regardless, is it worth exploring solutions that can deliver more value, be that enhanced tracking, a greater choice of delivery options or personalised customer communications?
Simply put, because of this change, the onus is now on retailers to find ways to justify the costs of delivery into America. To learn more about this situation and how the relationship between postal entry and commercial entry in the USA has changed, please check out this article.