The Supply Chain Matters blog provides commentary to the latest quarterly financial performance of global parcel carrier UPS and its implications to small and medium businesses.

The Story

Parcel carrier and logistics services provider United Parcel Service (UPS) reported Q1-2021 financial performance this week and the reaction was exultant on the part of investors and equity markets.

Among the financial performance headlines were:

Consolidated revenues of $22.9 billion, a 27 percent year-over-year increase. U.S. operating revenue increased 22.3 percent to just over $14 billion. International segment revenues grew 23.1 percent to $4.6 billion. Supply Chain and Freight Segment operating revenue increased 34.3 percent to $4.3 billion.

Consolidated profit of $2.8 billion, a 158 percent year-over-year increase, and up 164 percent on an adjusted basis. There was a net benefit of $2.4 billion comprised of an after-tax pension payment benefit of $2.5 billion and other charges of $140 million. This benefit was primarily driven by the American Rescue Plan Act of 2021, a stimulus plan that protects certain multi-employer pension plans from becoming insolvent through 2051.

Consolidated daily volume increased 14.3 percent on a year-over-year basis.

The news of UPS’s latest quarterly financial and operational performance caused its stock price to jump 11 percent with today’s stock price hovering above its 52-week high.

UPS Performance

The Commentary

Reporting by Bloomberg and The Wall Street Journal both indicated perceptions that UPS’s strategy to rely more on small and medium business parcel shipping needs as well as specialty services to pharmaceutical and drug companies, including distribution of COVID-19 vaccines and drugs, are reaping financial rewards for the global parcel carrier. CEO Carol Tome indicated to investors that upwards of 169 million vaccine doses among 50 countries were delivered in the quarter.

Further, analysts seem of positive perspectives for CEO Tome’s “better not bigger” strategy of focusing on margin growth rather than adding additional capacity to accommodate certain less profitable large retailers. In January, the parcel carrier agreed to sell its freight business to Canadian based TFI International, exiting the commercial LTL trucking segment.

A further important observation is that UPS’s commercial volumes finally turned positive in the completed quarter. Q1 revenue per package average subsequently increased 10 percent for both international and U.S. operations.  According to Bloomberg, the carrier’s adjusted operating margin rose 12.9 percent from 6.2 percent a year earlier.

 

Added Supply Chain Matters Perspectives

The latest quarterly financial performance by UPS may not likely share the same exultations as Wall Street interests.

Online commerce and logistics managers of various small and medium businesses continue to scramble in meeting online B2B or B2C product needs in an environment where Free Shipping remains an extremely compelling online buyer influence. The reality is that one of the likely reasons that UPS has reaped its financial rewards has been constantly raising shipping rates tied to exploding online commerce support volumes. That strategy is now laser focused to the SMB segment.

Many are aware that the Free Shipping influence stems from the market and logistics services power of online retail platform provider Amazon and its Prime services.

In a February 2020 commentary Supply Chain Matters observed:

“UPS similarly appears to be willing to ride the online fulfillment wave with Amazon, despite the need for continuous multi-billion-dollar network expansion and volume handling investments to serve as Amazon’s fallback carrier.”

UPS is now being rather selective in supporting large online retailer shipping needs, likely because UPS executives’ sense that Amazon focused business volumes are not likely to grow as Amazon Logistics Services continues to take broader ownership of door-to-door parcel shipping. A reminder of such reality is visually provided every day as we observe larger branded Amazon Prime parcel vans circumventing both residential and commercial neighborhoods along with UPS brown vans.

For certain small and medium businesses, difficult decisions need to be made as to whether to support currently supported online retail services needs or contracting such parcel logistics services needs to Fulfilled by Amazon, Walmart.com or other one-stop online platform providers. The question often comes down to which channel will likely provide the least cost increases over time.

With product and finished goods lead times continuing to lengthen because of multiple component shortages and global transportation bottlenecks, such decisions will remain painstakingly difficult.

Indeed, logistics and transportation carriers and be the darling of investors in these disruptive product demand and supply network conditions but remember that investors these days tend to have shorter-term investment horizons. Supply chain management teams have to navigate necessary contingent short-term as well as strategic longer-term tactical and strategic decision needs. With online becoming a more compelling business requirement, the cost aspects of online in both dimensions will garner a lot of sleepless nights.

 

Bob Ferrari

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