Dive Brief:
- UPS’ average domestic daily volume was up 8.5% year over year (YoY) in the first quarter, according to the company’s Tuesday earnings call. But the shift in volume from commercial to consumer deliveries, brought on by the global pandemic, landed a blow to the carriers’ profitability and generated questions from analysts about future price increases. The carrier withdrew its 2020 guidance.
- Stay-at-home orders became commonplace in the first quarter, shifting purchasing online and by late March, roughly 70% of the UPS’ volume was residential deliveries. Automated sorting capacity and years of ramping up network speed were not enough to keep these shifts from affecting costs. “We were not able to fully offset the unprecedented and swift changes in market demand and mix,” said outgoing CEO David Abney. Revenue per piece was down 1.8% globally YoY in the quarter ending March 31, and operating profit for the domestic package operation was down 45% YoY.
- UPS will continue to review pricing customer by customer as volume mix shifts, executives said. “Prices can be dynamic, just like everything else,” Abney said.
Dive Insight:The smaller parcels and increased stops associated with even the densest residential delivery routes took a bite out of UPS’ margins and prompted analysts to wonder if further pricing increases will be necessary to compensate, because consumer business is more expensive and less lucrative for carriers like UPS. Domestic miles driven were up 10% and stops were up 15%, according to President of U.S. Operations George Willis. The average weight of packages has also declined.
“We are actually implementing pricing changes, and also solutions that will impact characteristics, but we’re doing it customer by customer,” Chief Sales and Solutions Officer Kate Gutmann said.
Shifting regulations and global operating conditions are adding to costs. Abney said the carrier has been playing “musical airplanes,” to try to respond to shifting global demand for air capacity as regions of the world begin to restart their economies.
Though the technology-driven transformation work UPS has undertaken in recent years did not insulate the company from the margin impact of the pandemic, the work will continue with long-term improvement in mind, executives said. The company removed $1 billion in capital expenditures from its 2020 plans, but still pledged to have 100% of parcel volume flowing through automated sorting by 2022 — 85% by the end of 2020. UPS still plans to add 5 million square feet of automated capacity this year.
“Over my 46-year career at UPS, I have never seen the level of demand variability in the markets we serve and among our customers that we are now experiencing,” Abney said on his final earnings call before passing the baton to former Home Depot CFO Carol Tomé June 1.
“We are actually implementing pricing changes, and also solutions that will impact characteristics, but we’re doing it customer by customer,” Chief Sales and Solutions Officer Kate Gutmann said.
Shifting regulations and global operating conditions are adding to costs. Abney said the carrier has been playing “musical airplanes,” to try to respond to shifting global demand for air capacity as regions of the world begin to restart their economies.
Though the technology-driven transformation work UPS has undertaken in recent years did not insulate the company from the margin impact of the pandemic, the work will continue with long-term improvement in mind, executives said. The company removed $1 billion in capital expenditures from its 2020 plans, but still pledged to have 100% of parcel volume flowing through automated sorting by 2022 — 85% by the end of 2020. UPS still plans to add 5 million square feet of automated capacity this year.
“Over my 46-year career at UPS, I have never seen the level of demand variability in the markets we serve and among our customers that we are now experiencing,” Abney said on his final earnings call before passing the baton to former Home Depot CFO Carol Tomé June 1.
