UPS finds home delivery a double-edged sword

United Parcel Service Inc. plunged the most in two years as a rapid shift toward home deliveries exposed how much further the courier has to go to keep up.

The world’s largest package- delivery company com- mitted to spending an extra US$ 1 billion to automate warehouses and pay for other efforts to cope with increasing demand from Internet shoppers. Stepped-up investment plans, along with expectations for a strong U. S. dollar, weighed on a 2017 profit forecast that fell short of analysts’ estimates.

Online retailing is mak- ing UPS busier than ever but the challenge lies in earning more from record shipments to homes, which are less-profitable than commercial deliveries. Since 2007, adjusted operating profit at the company’s large U.S. package division has slipped to less than 13 per cent of sales from more than 15 per cent, according to data compiled by Bloomberg.

“Thus far, it seems like e- commerce has generated problems equal to benefits,” Logan Purk at Edward Jones said. “This has been a ghost that has been haunting UPS for a few years, and that’s how to move all this volume profitably.”

The shares fell 6.75 per cent to US$ 109.13 Tuesday after dropping as much as 7.1 per cent, the biggest intraday decline since January, 2015.

UPS underestimated the pace of e- commerce growth in the fourth quarter and by December, residential deliveries hit a record 63 per cent of total package volume, CEO David Abney said. The unexpected surge in less profitable shipments, particularly during the holiday-shopping season, dragged fourth-quarter earnings to a lower level than analysts had expected.

UPS is boosting capital expenses to US$ 4 billion in 2017 from $3 billion or less in previous years. The company must “double down” on its efforts to cope with surging ecommerce, Abney said.

Drivers typically drop off 1.1 packages at residences, while commercial stops often come with multiple packages. That raises the cost of home deliveries and makes them less profitable for UPS. The company has several initiatives to try to lower those costs, including automating warehouses and dropping off certain packages at drugstores and convenience stores near people’s houses, rather than on their doorsteps.