In this Supply Chain Matters logistics industry specific commentary we reflect on global parcel carrier UPS’s Q2-2021 financial performance including the good and not so good for efforts to mitigate ongoing exploding supply chain transport costs.

 

Global parcel delivery carrier United Parcel Service (UPS) reported Q2-2021 financial performance that provided both good, and from our Supply Chain Matters lens, not so good scenarios for individual businesses and their supply chain management teams, large or small.

UPS reported total quarterly revenues of $23.4 billion, a 14 percent increase over year ago levels when the global impacts of COVID-19 shutdowns were beginning to make a discernable impact on economies and businesses. Reportedly, analysts were forecasting revenues to come in at $23.2 billion. Revenues for the carrier’s domestic U.S. operations rose 10.2 percent while revenues associated with international segments rose 30 percent.

The carrier recorded a quarterly profit of $2.7 billion compared to $1.7 billion in the year earlier period. According to The Wall Street Journal, the company’s operating margins for its U.S. operations were at 11.6 percent on an adjusted basis compared to 9.3 percent a year earlier. The carrier’s target remains at 12.7 percent for all of 2021 reflecting a year-on-year increase of over 36 percent higher profitability.

 

Behind the Numbers

Beating analyst expectations and generating an added billion in profitability would be a great headline, but investors and analysts are apparently perceiving differently. Shares of the company’s stock were down nearly 9 percent on the initial reporting.

Of concern to investors is that the carrier’s Q2 average daily unit volumes declined 0.8 percent globally and 2.9 percent because shareholders remain focused on any news that shows signs of dampening volume levels in the current global economic environment.  UPS CEO Carol Tome indicated in the performance briefing that as retailers are now reopening physical stores, customers returned to the physical shopping experience, hence the decline in volumes.

Noted by The Wall Street Journal in its reporting, Tome’s declared “better not bigger” growth strategy implies that this carrier remains more selective about which customers it wants to do business with. That includes added focus on more profitable small and medium sized business shippers who do have the benefit of higher volumes to negotiate annual rate structures. The Journal additionally noted that the carrier has been increasing contracted shipping contracts for large shippers in some cases by as much as 30 percent. That latter smacks of a take it or leave it approach, that the carrier will extract higher rates on the basis of perceived cost to serve. Tome reiterated that strategy this week in indicating: “We are changing the growth targets of the company and are no longer focused solely on volume growth.”

One reason behind UPS’s latest quarterly financial performance was the decision to in January shed its LTL freight business in a $800 million deal with Canadian based LTL carrier TFI International.  As the renamed carrier TForce Freight, TFI executives subsequently undertook efforts to identify unprofitable customers. In a recent interview with FreightWaves, TForce Freight CEO Alain Bedard indicated that the carrier “moved aggressively to target freight that don’t fit the network with large shippers while restoring accessorial charges that have been waived.” Bedard further noted to the publication that TFI is having a lot of conversations with shippers as to the carrier not being paid enough for certain service routes. However, some of these customers may have had broader multi modal logistics service agreements with UPS that spanned both parcel and LTL shipment needs. With the LTL business now a separate concern, a customer’s LTL volume stands in a different perspective.

Industry headlines in June buzzed with the news that FedEx Freight abruptly terminated 1,400 customers with little or no prior warning for the declared reason for needing to restore network reliability. The blowback from customers was nearly immediate and some of these suspensions had to be restored.  FedEx Freight executives alluded that other LTL carriers were dumping customers which in-turn disrupted its network dynamics. A statement from this carrier to explain its decision was that with growth comes necessary decisions to reduce backlogs and adequately staff for volume.

 

Not So Good Industry Scenarios

From our Supply Chain Matters lens which is more broadly focused on the interrelationships of supply chain and business strategy fulfillment, is the not so good perspective that UPS may not be the only carrier being overtly selective about which customers a carrier elects to serve.

As more large and influential carriers increasingly practice such strategies, the fallout for logistics and transportation customers is a more selective market as to whether carriers want to haul your particular goods or at what cost. Normally, annual service contracts would be the basis for pegging annual transport costs but there are not normal times. Transportation and logistics costs are now the purview of C-Suite executives who increasingly have to report to their shareholders the reason for exploding costs in this area.

It should therefore not be a surprise that many more businesses and industry associations are now calling for increased regulatory scrutiny related to global and domestic transportation.

As those in the industry are well aware, carriers will utilize price hikes to shed non-profitable customers or routes. What differentiated the FedEx Freight development was the suddenness, as if to send a distinct message.

What is becoming far more visible is the industry’s traditional rate actions of added surcharges, fees and poor timing of overall rate increases in the midst of exploding transport volumes. They can now do so leveraging advanced cost-to-serve analysis tools. Such actions among multiple carriers and across multiple transport modes are now leading to more visible economic harm for shippers and freight benefactors in added costs and ultimately consumers themselves in higher prices for goods.

Adding to this is that regulators and legislators have grown increasingly concerned about the perceived market power of an Amazon not only in online retail market influence, but in an ability to select which logistics customer fulfillment segments it desires to do business in and with what conditions. For many other carriers desiring to be just as selective in what transport segments and rate structures they desire to target, the notions of a scenario where certain businesses and their respective customers having to succumb to monopolistic service choices is not an ideal scenario.

This week’s industry headlines already include such accusations, among them that ocean container lines are practicing monopolistic pricing in the form of multi-carrier alliances that pool capacity for specific shipping lanes, or in arbitrarily abandoning of an annual service contract to force shippers to have to navigate significantly higher spot market rates.

The not so good scenario is that this trend for multiple global carriers electing a strategy to cherry pick which customers they want to do business with and at what rate levels erodes the notions of a “common carrier” available to all businesses, regardless of size. As more and more businesses and industry associations continue to quantify the overall financial harm that is occurring to their bottom lines and to individual economies in the form of higher prices and growing inflationary forces, added regulatory actions would seem to be forthcoming. One example of this is the Biden Administration’s most recent Executive Order calling for investigation of rail and shipping industry anti-competitive practices.

The adage for global transportation and logistics industry players remains, be watchful of the seeds and the eroding customer relationships that are collectively being sown. It is becoming way beyond individual carrier actions with technology tools that are being focused more on customer profitability vs. added network efficiencies.

 

Bob Ferrari

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