FedEx and UPS are heading into the fourth quarter with record-high delivery prices, according to the TD Cowen/AFS Freight Index, and the mechanism matters more than the headline. Between the first quarter of 2021 and September 2026, 72 percent of the increase in the ground fuel surcharge came from carrier adjustments rather than from the price of diesel. That means relief at the pump does not translate into relief on the invoice. For retailers using stores as fulfillment nodes, the cost of a ship-from-store order is being reset by a formula they do not control.
Key Conclusions
Peak surcharges are usually treated as a seasonal line item. This year they behave more like a permanent repricing, because the surcharge formula itself has been adjusted. AFS Logistics calculates that even if diesel returned to 2021 levels, shippers would still pay roughly triple what they paid in the first quarter of 2021.
The demand side is not helping. Nearly half of shoppers say they are worried about affording holiday gifts this year, according to an ICSC survey, while September retail sales rose 6.7 percent largely on price. Retailers are therefore caught between customers who are price-sensitive and carriers whose surcharges are structurally higher.
Best Practices
Rebuild the ship-from-store cost model
Start by replacing the fuel-index assumption with the carrier's actual surcharge table, applied to the real package profile: weight, zone mix, residential share and dimensional weight. Most store fulfillment models are built on an average package that does not exist, which hides the orders that lose money.
Set a delivery cost ceiling per order
Once the cost model reflects surcharges, set a ceiling per order and route around it. Orders above the ceiling should default to buy-online-pickup-in-store or locker delivery, both of which convert a variable carrier cost into a fixed store cost. This is the fastest lever a store network has, and it does not require renegotiating carrier contracts.
How the Surcharge Formula Changed the Math
Carrier adjustments outran diesel
The index attributes 72 percent of the ground fuel surcharge increase to carrier adjustments, with the remainder tied to diesel. In practice this means the surcharge has decoupled from the underlying fuel price. A retailer modeling delivery cost as a function of diesel will systematically under-forecast, because the formula's slope and thresholds have moved.
Discounting came back, but for the largest shippers
Ground parcel discounting activity rebounded to first-quarter levels after a slight decline in the second quarter, and both carriers concentrated discounts on large shippers. Smaller retailers face the full surcharge with far less negotiating leverage, which widens the cost gap between a national chain and an independent store.
Common Mistakes
The first mistake is treating surcharges as a peak-season anomaly. The formula changed, so the increase persists into January and beyond. The second mistake is averaging delivery cost across all orders. Averages hide the long-zone, heavy, residential orders that destroy margin, and those orders are exactly where routing rules can help.
The third mistake is assuming store fulfillment is always cheaper than a distribution center. It is cheaper only when the store already holds the inventory and the customer is close. When a store ships a long-zone order from shallow stock, the cost can exceed a DC shipment, because the store carries no outbound consolidation.
The Store as a Fixed-Cost Buffer
A store network has one advantage a distribution center cannot replicate: it already pays rent. Turning a variable carrier cost into a fixed store cost is therefore a margin decision, not just a service decision. BOPIS and locker pickup move the last mile onto the customer, and the retailer's cost becomes labor and space it is already paying for.
That advantage has limits. Stores have finite backroom space and limited labor hours during peak, so pickup capacity has to be measured, not assumed. The practical approach is to model pickup capacity by store, by hour and by day, then cap online promises at that capacity. Over-promising pickup is how a fixed-cost advantage turns into a service failure.
Summary
Carrier pricing has been repriced structurally, and store networks are the most available offset. The retailers that model surcharges properly, cap delivery cost per order and route the rest to pickup will protect margin without raising prices in a market where customers are already stretched.
The next step is unglamorous: pull the carrier surcharge table, apply it to the real package mix, and compare the result with the assumptions currently in the fulfillment model. Most teams will find a gap large enough to justify changing routing rules before peak.
Data Sources
- FedEx, UPS record-high Q4 delivery prices：https://www.supplychaindive.com/news/fedex-ups-delivery-prices-set-for-record-high-q4/832992/
- September retail sales up 6.7%：https://www.retaildive.com/news/monthly-retail-sales-from-the-us-commerce-department/574252/
- Shoppers worried about holiday budgets：https://www.retaildive.com/news/shoppers-worried-affording-holidays-icsc/832615/
- Tariffs add 2.9 points to goods prices：https://www.retaildive.com/news/tariffs-pushed-up-consumer-goods-prices-ny-fed-inflation-elections-tax-taxes/832701/
FAQ
Why are surcharges rising even as diesel falls?
A:Because carriers changed the surcharge formula. The index attributes 72 percent of the ground fuel surcharge increase since 2021 to carrier adjustments rather than fuel price.
What is the fastest way to offset the cost?
A:Shift marginal orders to pickup or lockers, which converts a variable carrier cost into fixed store cost already covered by rent and labor.
Why is averaging delivery cost dangerous?
A:It hides long-zone, heavy and residential orders that lose money, which are precisely the orders routing rules can redirect.
Do smaller retailers get the same discounts?
A:No. Discounting rebounded mainly for large shippers, so smaller retailers face the full surcharge with less leverage.
How should pickup capacity be planned?
A:Measure it by store, hour and day, then cap online promises at that measured capacity.
Is ship-from-store always cheaper?
A:No. It is cheaper only when the store holds the inventory and the customer is nearby; long-zone shipments from shallow stock can cost more than a DC shipment.
