UPS piloting single-vehicle delivery consolidation initiative for retailers-CEO

From a long-term look, the move is significant because, as a delivery entity, UPS is heavily focused on the downstream channel in the delivery chain. It doesn’t play upstream, something that the company is looking to change.

The program also recognizes that, despite all the hoopla surrounding consumer demand for same-day, next-day or even second-day deliveries, many consumers and businesses don’t want or need such rapid delivery times. The idea that carriers must over-allocate resources to support multiple next-day deliveries on a regular basis is a “hoax,” said one of the sources, who said his company could be just fine receiving weekly deliveries of most orders.

Paying more in 2022

All UPS customers should expect to pay more next year. The company disclosed Tuesday that it will raise U.S. rates by 5.9% in 2022, matching the increase already announced by rival FedEx Corp. (NYSE:FDX). The rate increase applies only to customers who ship without contracts. As has been the case in the past, shippers’ contract rates can fluctuate widely depending on volume, distance, type of service chosen and any applicable surcharges. UPS will release its 2022 rate table by the end of this week, Tomé said.

Contract renegotiations “have gone very favorably,” she said. That could be interpreted in a couple of ways but is probably not great news for shippers. UPS has held the upper hand over shippers during the past 20 months as parcel-delivery demand has exceeded supply in the wake of enormous spikes in e-commerce orders due to the COVID-19 pandemic. UPS and FedEx have been aggressively raising rates, imposing more delivery surcharges and being more selective in the parcels they accept.

Most parcel contracts have a 30-day clause allowing carriers to raise rates while the contracts are in force. According to one source, UPS has exercised this clause with a number of clients and is forcing substantial rate hikes on shippers when renewing pacts that are about to expire.

Large enterprise shippers will continue to be deemphasized in favor of small to midsize shippers more apt to rely on UPS for end-to-end services and will generate profitable revenue in the process, Tomé said. Small to midsize customers (SMB) accounted for 27.4% of U.S. volume in the third quarter, up from 23.6% a year ago, UPS said. Average daily volume tendered by SMBs in the quarter rose 10.9% year-over-year.

Large shippers should also not count on UPS to ship all of their packages, based on Tomé’s comments. Packages are being judged by revenue quality, and those that don’t measure up may be shed, she said. “We are controlling the volume from large shippers, and we’re not handling as many packages for those shippers,” she said on the call. “And that’s OK.”

Amazon, which is UPS’ largest customer, will likely account for about 11.6% of UPS’ 2021 annual revenue, roughly on par with 2019 figures, Tomé said. Amazon accounted for 13.3% of UPS’ 2020 revenue. The year-on-year decline is due to reduced volumes in general from last year’s frenetic pace. However, Tomé made clear on the call that UPS will not be as immersed in Amazon’s shipping business as it has been in the past. “We are not their supply chain. We are part of their supply chain,” she said.

UPS fired on all financial cylinders in the third quarter. Adjusted diluted earnings per share of $2.71 handily beat consensus estimates of $2.59 per share. Operating profit hit $2.9 billion, up 22.6% year-on-year. The three UPS segments, domestic and international package, and supply chain services, reported record third-quarter profits. Operating profit for the first nine months of 2021 exceeded full-year profits for any year in the company’s long history. Revenue rose 9.2%, to $23.2 billion. The company also raised its full-year guidance on operating margins to 13% from 12%.

The company’s productivity metrics were also favorable. In the U.S., pieces per hour rose 2.5% from year-earlier levels. Trailer cube utilization increased by 520 basis points, which allowed UPS to eliminate 10% of daily trailer loads year-over-year, Tomé said. The company’s pre-load operations, where parcels are loaded onto trailers and which is an important measure of UPS’ speed and efficiency, improved by 6.5%, the company said. Tomé was not satisfied with the pre-load performance early in her tenure and made strengthening the function a priority.

Wall Street loved the results. Shares rose $14.17 to close at $218.07, a near-7% gain over Monday’s closing price.

UPS’ program to expand weekly delivery services will be completed by the end of the week, according to Tomé. The company said it will cover about 90% of the U.S. population on Saturday for both residential and commercial pickups and deliveries. UPS’ Sunday deliveries are handled by the U.S. Postal Service under a product called SurePost, in which UPS parcels are handled by mail delivery drivers.

Tomé said that UPS doesn’t expect to encounter labor shortages to the degree encountered by FedEx, whose financial results have been impaired by the dearth of workers. Still, the company isn’t immune to the bottlenecks impacting the supply chain. At facilities near the Ports of Los Angeles and Long Beach, which are bearing the brunt of the problems, UPS receives containers under an arrangement with an outside carrier.. Because the carrier is short on drivers, UPS has received only 50 containers at one of its facilities even though it has capacity to hold 70, she said.

The CEO noted that U.S. consumers are “quite panicked” about their holiday deliveries due to all the headlines about supply chain problems. It is possible that half of all Christmas shopping will be completed by Cyber Monday, which falls on the Monday after Thanksgiving, she said.

(An earlier version of the story misstated UPS’ closing share price on Tuesday.)