Since more than half its deliveries are now to homes rather than businesses, UPS is using automation to cut costs while trying to generate more profitable delivery business from smaller retailers who do not have as much bargaining power. But unless it finds another way to generate significant revenue, it appears destined to operate at Walmart and Amazon's mercy. JL
Paul Ziobro reports in the Wall Street Journal:
UPS faces criticism from analysts that focus on carrying millions of packages from large shippers has squeezed margins. By 2020, UPS expects nearly all its U.S. packages will be processed in automated sites, versus half today. Other companies in the midst of the boom in e-commerce are being forced to alter their approach. Amazon has been building up its own delivery network to handle online orders. In addition to planes and trucks, the (it) ordered 20,000 delivery vans to support its budding fleet.
United Parcel Service Inc. UPS -1.23% believes it has an answer for the flood of lower-margin packages it carries for large shippers like Amazon.com Inc.: small businesses and health care.
When such customers ship packages, UPS says it earns revenue and profit multiple times higher than large shippers, which make up a big chunk of the company’s delivery volume. That’s because small and midsize businesses may not have the bargaining power in achieving lower rates that large shippers get, while companies shipping medicine and health products have more time-sensitive commitments that cost more.
“We’re going to participate in richer pools,” Kevin Warren, UPS’s chief marketing officer, said at an investor conference Thursday.
UPS executives laid out plans to cater to more profitable customers as the delivery giant faces criticism from analysts that focusing on carrying millions of packages from large shippers has squeezed margins.
UPS also said it is looking to expand in international markets, as well as participate in the continuing growth of the U.S. e-commerce market, to improve the bottom line. On the latter point, it will focus on improving the revenue per piece it receives across the board and implement higher surcharges on large packages.
Additionally, UPS is cutting costs and operating more efficiently to help offset the huge investments it is making to transform its network with more capacity to process shipments automatically.
The company said the changes would boost earnings by between $1 and $1.20 a share by 2022, primarily though cost savings. UPS currently projects earnings of between $7.07 and $7.37 for 2018.
Thursday’s event, which highlighted recent outsider hires to the top management team, was meant to show that UPS can transform itself as its industry has been overhauled, with more than half of its shipping volume now bound for homes instead of businesses. CEO David Abney said the company wants to shift from a “culture historically centered on constructive dissatisfaction to a new mind-set of continuous transformation.”
Among the biggest changes at UPS is a $20 billion capital-spending plan, centered largely in the U.S., that will automate a delivery system that still relies on numerous manually operated hubs. The company is opening large automated facilities in Atlanta, Salt Lake City, Dallas and elsewhere to handle the surge of online orders. By 2020, UPS expects that nearly all of its U.S. packages will be processed in automated sites, versus just around half today.
The first major test will come during the peak holiday season. The company says that network upgrades have added the ability to handle 400,000 more pieces per hour this year, seven times the capacity that it added last year. Forty new aircraft will also boost its air capacity by one-third.
Chief Operating Officer Jim Barber said UPS will focus on reliability this peak season, after problems in recent years where its network was overwhelmed by packages during the busiest days leading up to Christmas. He said in years past, UPS focused primarily on forecasting overall volume, but this year it will zero in on where the packages are coming from and where they are headed.
“We think we have a better and much more robust plan this year,” Mr. Barber said.
A stronger performance this holiday season would go along way to placating investors.
“Given uneven holiday performances over the last several years, we believe investors need to be convinced that the company appreciates that not all growth is created equally,” Citi analyst Christian Wetherbee said.
Other companies in the midst of the boom in e-commerce are being forced to alter their approach as well.
Amazon has been building up its own delivery network to handle more of its online orders. In addition to planes and trucks, the online giant recently ordered 20,000 delivery vans to support its budding fleet.
FedEx Corp. this week said it would soon start to run its ground-delivery network on Saturdays, something it had typically only done around the peak holiday shipping season.
UPS has over the past year added Saturday operations, which includes picking up orders on the weekend and delivering on Mondays. Mr. Barber hinted that UPS may not stop there. “We also want to talk about Sunday here as we go forward,” he said.
UPS workers are voting on the latest labor contract that could usher in Sunday delivery at the company. The tentative agreement includes a two-tier pay structure for delivery drivers that would allow weekend deliveries at a lower hourly wage.
The results of the vote are scheduled to be released in early October.
UPS has brought in several outsiders that signal it is willing to take on a new direction. Last year, it hired former Walmart Inc. executive Scott Price as chief transformation officer, giving him broad leeway to uncover cost cuts and new ways to approach the business. Mr. Price implemented a recent voluntary retirement plan that is expected to cut $200 million in annual costs. The changes have stripped out layers of management that Mr. Price says now allow UPS to make decisions faster.
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