Is UPS Becoming a Leaner Parcel Carrier?
In January of 2021, UPS sold off its freight division to TransForce International for $800 million. Leaving aside the details of the sale, one can question why UPS would sell off their complimentary less than truckload (LTL) division. There is little doubt that most shipping Carriers have benefitted from the pandemic and have seen positive impacts to their bottom-line for small parcel divisions. Looking specifically at the LTL division of UPS, it generated $3 billion in revenue for 2020. While that’s a large figure, it amounts to a small percentage of the company’s full-year revenue. And from a profitability perspective, it managed to generate just about break-even operating income.
Carol Tome took over as CEO of UPS in June of 2020. Although she was on the board of UPS since 2003, she was the full-time CFO at Home Depot until 2019, when she retired. After joining UPS in June, she launched a review of the entire UPS business, including their business model. Tome told analysts on Wall Street that she wants to make UPS “better, not bigger.” She believes that the landscape is changing, in both the competitive and customer environment, and UPS needs to change as well. Her focus is to also bring down debt and costs. And part of this belief and philosophy seems to translate into a focus on accounts and areas which have greater margin, and a diminished approach to high volume, low margin accounts.
With the LTL industry being saturated with dozens of large players, the sale of the capital intensive, low margin freight business unit now makes more sense, with proceeds expected to reduce debt. On the client-side, UPS seems to indeed be focused on increasing revenue per shipment by introducing new fees and applying significant rate increases, especially targeting the larger shippers. Just this past holiday season, UPS set capacity allocations for many of these large shippers, including some of the largest retailers. Many of the large volume shippers that experienced a one-off rate increase towards the end of 2020 also had to absorb the traditional annual rate increase! In addition, many shippers in general who use the UPS SurePost® service had already experienced a rate increase prior to the actual 2021 general rate increase going into effect. They too will also face the impact of the annual rate increase. So, it certainly seems to be the case that the new CEO has a mandate of greater profitability and operating income growth.
The shipping environment is ever changing, and one could argue that it’s also becoming more complicated for shippers. Regardless of volume, all shippers will now have to contend with rate increases, new fees, new rules, and adjustments imposed by the Carriers, not just yearly but at a more frequent pace.
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