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UPS Will Deliver the Goods This Christmas

This Christmas shopping season will show the least retail growth in years, according to ShopperTrak, whose forecasts last month indicated that sales will rise by just 2.4% this year, compared to 3% last year, 4% in 2011, and 3.8% in 2010. Moreover, total retail store traffic will decrease slightly compared to last year.

While ShopperTrak's data also finds that well over 90% of all retail transactions will still be made in-store, it does suggest that the online shopping experience will continue growing in importance. Although certain e-tailers will be natural beneficiaries of this trend, the surprise winner this holiday season could be Big Brown: package delivery specialist UPS (NYSE: UPS  ) .

Because there is a shortened window for shopping this year -- there are only 25 days between Black Friday and Christmas compared to 31 last year -- retailers are competing harder than ever for customers, and that means free shipping will be even more prevalent this season than before.

The National Retail Federation points to a survey showing that more than 16% of all retailers will offer their first holiday free-shipping offer by the last week of October, while more than one-third say they're already offering year-round free shipping (just 23% did last year). With more than half of online retailers planning to start their online holiday marketing promotions by Halloween -- Sears Holdings already jumped the gun, starting before the back-to-school season even ended -- that should spur the package delivery business to heat up sooner rather than later.

If we look at UPS' fourth-quarter results in 2012, we see that despite challenging domestic and global economic conditions, average daily package volumes grew almost 3% to 18.8 million packages, with total U.S. domestic packages averaging 16.2 million, or a 3% increase, and total international packages up 2.2% at 2.7 million packages per day. 

The carrier ended up initiating another round of rate increases earlier this year, averaging 4.9%, so that while retailers are offering customers free shipping, UPS and FedEx (NYSE: FDX  ) , which also raised rates, won't feel the effects. Importantly, because most online sites ship packages under 30 pounds, the increases they'll experience will be more along the lines of 7% or 8%, and when you add in 10% higher surcharges for deliveries to residential addresses, carriers ought to see greater revenues dropping right down to the bottom line. Both FedEx and UPS also initiated additional freight rate increases in July.

For large, well-financed mass retailers like Wal-Mart, the ability to handle the higher fees is apparent, and having fashioned free ship-to-store delivery that rivals such as Target are quickly emulating, they may make up in volume what they're losing in cost, whatever the impact is on their brick-and-mortar stores from the sluggish economy. E-commerce leader likely won't feel the effects as acutely either, since its prepaid delivery service Prime at least gives it the money up front, but a lot of the smaller shops will be feeling the pinch.

The hitch in the plan is the popularity of ground delivery as an economical choice for customers. The carriers have been restructuring their businesses around the option, and FedEx saw an 11% rise in revenues and volumes while UPS saw just a 3.6% increase in revenues and a 2.6% increase in volumes. But because Big Brown is more geared toward the slower shipment method already, the impact shouldn't be as dramatic for it as it may be at FedEx.

Still, coupled with a slowing domestic economy and overcapacity in the air-freight market, UPS was forced to cut its 2013 earnings estimates to $4.65 to $4.85 per share.

Last year we saw record-breaking e-commerce sales, and there's every reason to believe that will continue this year. Cramming into shopping malls is still consumers' favorite Christmas pastime. But with more than half a billion packages expected to be delivered in 2013, e-commerce growth will offset a sluggish economy and UPS will deliver the goods and the profits for investors when the year-end bacchanalia is complete.

Race to the finish
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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