UPS fights for volumes

(Photo 58159433 | Packages © Daniel Kaesler | Dreamstime.com)

The success of UPS’ ‘Better and Bolder’ strategy is in doubt as the company faces lower volumes and higher costs. The “Better and Bolder” strategy is the next phase of UPS’ “Better not Bigger” framework, which focuses on modernizing and maximizing profits.

Announced in 2022, the current strategy seeks higher margin volume and increasing worker and facility productivity using automation, artificial intelligence, and other innovations to capture more business.

However, volumes have steadily declined since the pandemic, while UPS countered the declines with higher rates and surcharges.

Meanwhile, a costly Teamster contract and a higher percentage of business-to-consumer (B2C) volumes weigh on UPS’ costs as it continues building its integrated network.

UPS successfully reduced total hours by 10% and improved misload frequency by 67% through its network planning tools during the fourth quarter. Combined, such improvements “contributed to the superior service we delivered to our customers,” UPS CFO Brian Newman told analysts on Jan 30.

But the volumes continue to decline. During the fourth quarter, UPS’ largest division, U.S. Domestic, recorded a 7.4% decline in average daily volumes. The more profitable business-to-business (B2B) average daily volume was down 6.8%. There was no mention of B2C volume performance, but B2B volumes represented 35.5% of total volumes, up slightly from 35.3% during Q4 2022 but still considerably lower than an almost even split between B2C and B2B volumes pre-pandemic.

According to UPS CEO Carol Tome, the 2024 U.S. small package market, excluding Amazon, is expected to grow by less than 1%. “Projected market growth rates for the rest of our business segments suggest some improvement but not until the latter part of the year,’ Tome told analysts.

Where are the volumes?

(Photo 217470905 © Michael Vi | Dreamstime.com)

Fear of a potential strike by UPS Teamster members cost UPS over a million packages a day. By the end of December, Tome told analysts that UPS had won back and pulled through nearly 60% of the volume diverted during the labor negotiation. “Winning back and winning new volume is part of a program we call Project Brown, which will continue into 2024,” Tome said.

However, the small parcel market has evolved during and since the pandemic. B2C parcel volumes have outpaced B2B volumes because of e-commerce and the number of workers working from home in either a hybrid setting or fully remote.

As a result, businesses have diversified the number of last-mile parcel carriers to mitigate costs and offer expanded delivery services such as same-day and next-day deliveries. This diversification cost UPS and FedEx volumes.

Those businesses with physical locations utilized these physical locations as pickup and return locations, further costing UPS and FedEx volumes.

For example,

• In its third-quarter earnings (period ending Oct 28), Target noted that same-day services led by Drive-Up increased 12% year-over-year.  

• Home Depot noted in its third-quarter earnings (Period ending Oct 29) that nearly half of its online orders were fulfilled through its stores.

• In its third-quarter earnings (period ending Oct 27), Walmart noted that its omni services, including pickup and store-fulfilled delivery, led to a 24% increase in Walmart U.S. e-commerce sales and 16% growth at Sam’s Club. In addition, its third-party delivery service, Walmart GoLocal, was approaching 12 million deliveries.

Despite acquiring Roadie in 2021, UPS’ costs are too high, and they cannot compete profitably with new last-mile entrants, including gig platforms such as DoorDash and Instacart, which have partnered with retailers to provide same-day delivery services. It also can not compete against its largest customer, Amazon. In its fourth-quarter announcement yesterday, Amazon said it delivered “more than 7 billion units arriving the same or next day, including more than 4 billion in the U.S. and more than 2 billion in Europe.”

When asked about its enterprise customers (primarily large retailers), Tome told analysts earlier this week, “If I look at our top five decliners in the quarter, that will include our largest customer [Amazon], and there’s an intentional decline there. So, if I look at the remaining decliners, it’s interesting to see what’s happening. Of those, only one has diverted some volume. They’re a dual sourcer, and they have diverted some volume, and I suspect they’ll stay dual sourcing.” Tome continued, “The rest, either their business is just way off, or they have worked hard to create a better experience inside the store to encourage buy online, pick up in store. So, a bit of dynamic is happening within our large enterprise customers.”

As such, UPS is turning towards B2B volumes. It reached its $10 billion in revenue goal with its healthcare solutions, and it’s working to turn less profitable B2C volumes into profitable B2B volumes, as noted in a JOC story I wrote in December.

Is it the end of the UPS/FedEx duopoly on last-mile deliveries? I believe so, mainly when one includes last-mile services provided by gig platforms, Amazon, Walmart, Target’s Shipt subsidiary, and regional parcel carriers.

As such, we’re seeing UPS and FedEx evolve. Both are investing in their networks to rely less on workers and speed up deliveries.

Are there enough parcels to go around? Yes, but UPS will need to lower their costs considerably to win parcels that were once considered ‘non-profitable.’

- Cathy

It’s been a while since my last post. While I aim for a weekly story, sometimes life gets in the way, so think about subscribing (free) so you don’t miss anything.

For daily thoughts and shares, be sure to follow me on Twitter and LinkedIn.

I wear a number of hats these days. Catch my weekly column on air cargo, freight forwarding, and the express markets on Air Cargo Next. I’m also helping out the Reverse Logistics Association as a research manager, and at JOC, I help out as a research analyst and write a weekly LinkedIn newsletter, Freight Forward, summarizing JOC & other published articles and providing an outlook for the week ahead.

Heading to Las Vegas next week? Catch me at the Reverse Logistics Association’s conference and the week after that at the Aircargo Conference.