UPS’ recent earnings release was hardly inspiring. While revenue and volumes were up, the costs associated with these increases were a set-back for the company. For additional details on the financial aspects, my colleague, Thomas Cullen, will provide his thoughts in Ti’s newsletter while I enjoy a few days of vacation.
But of course, I’d like to put down a few thoughts of my own. It’s been well documented the investments UPS has made throughout 2014 to avoid a repeat of the 2013 holiday season. However, this time around, instead of leaving customers empty-handed, UPS left its investors empty-handed. I applaud UPS for going all out to make sure packages were delivered on a timely basis during the 2014 holiday season. But, a concern I have is the fact that this is a company that has been built on the talents of industrial engineering. Its pride and joy has been the efficiency of its hubs and networks all the way down to the likes of measuring and timing of how long it takes to get from the package car to the front door of a delivery spot – and in the most cost effective manner. How could they have gotten it so wrong?
An interesting comment from the earnings call caught my ear – it’s difficult to forecast e-commerce – and I think for right now that’s correct. But a word of advice to UPS and other traditional delivery providers (i.e. FedEx), figure it out and fast. Regional carriers, start-up companies and Amazon are all growing and expanding delivery networks. Technology is playing a fantastic role and all are taking advantage of it. The key is being agile.
So, to get to that agility, UPS announced how it would proceed in 2015. Cutting costs where it can is priority while expanding hub capacity in key areas, continuing its implementation of ORION and the use of SurePost Redirect and Access Points in taking costs of its system. In fact, it was noted in one publication that it cost three times as much to deliver packages to a home than to a business which receives more packages in a single stop.
UPS also announced it would implement peak residential surcharges on a customer segmented basis. These surcharges will focus on SurePost and residential packages. According to the CEO, “pricing strategies will be designed to ensure we’re properly compensated for the value we provide.”
There’s no denying the value UPS provides in delivering packages but these residential surcharges along with the recent annual rate hike as well as the change in price calculation to dimensional weight pricing may lead one to ponder alternatives. For retailers, the existence of “free shipping” may be in jeopardy and with no “free shipping” the risk of losing customers may rise.
In addition, UPS’ international business, particularly Europe, also noted increased in-country expenses because of demand during peak season exceeded network capacity.
2015 will be another year in which UPS has its work cut out for them. Cost cutting, enhancing its network and changes in product demand are among the issues facing the company. During the earnings call, UPS noted that products distributed closer to consumers resulted in some trade down from premium products. This will be a trend that the company will have to pay close attention to as this where a lot of start-up companies, in particular, are focusing on and could be competitive threat to UPS.
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