UPS and FedEx aim to prove they can raise profits as holidays near
UPS Inc. and FedEx Corp., riding high from record package deliveries amid the coronavirus pandemic, are moving on to their next challenge: showing investors they can boost profit in the approaching onslaught of the holidays.
FedEx followed UPS and the U.S. Postal Service this week in setting aggressive peak season fees, signaling increased pricing power with retailers ahead of what’s expected to be an unprecedented year-end surge of packages. The couriers will also compete with Amazon.com to hire hundreds of thousands of seasonal drivers as the e-commerce giant ramps up its distribution network.
The holiday rush sets up a final exam of sorts for UPS and FedEx, which are finally winning over Wall Street after plowing billions of dollars into automated sorting centers, air freighters and routing software. With their seasonal price increases, they’re seeking to prove they can extract more profit from the flood of residential deliveries while keeping customers satisfied. That also means dodging the risk of a logjam, which is already stoking anxiety at big shippers.
“We are going to hit a capacity crunch this peak season, and there is no silver bullet solution for it,” said Glenn Gooding, president of iDrive Logistics, a consulting company that helps shippers lower delivery costs. “There’s just not enough available capacity to handle the influx.”
The pandemic already has pushed more retail sales online and spurred soaring delivery demand at UPS and FedEx. That’s helped propel the companies to a share gain of 37 percent apiece this year, placing them in the top 10 of a Standard & Poor’s index of U.S. industrial companies. The broader gauge slipped 6.1 percent.
“The parcel sector has become investable for the first time in several years,” said Allison Landry, an analyst at Credit Suisse Group.
Quarterly delivery volumes have climbed about 20 percent from a year earlier for UPS and FedEx, and 50 percent for the post office. In the holiday season, total package volume is set to jump as much as 70 percent from last year, said Mike Lambert, chief operating officer at Green Mountain Technology, a consulting company for shippers.
For UPS and FedEx, home shipments are costlier than those to businesses, where each location tends to receive more packages and the distance between stops is usually shorter. The flood of residential deliveries and the extra cost to protect workers from COVID-19 have pressured profit margins at both companies, and it’s unclear if the extra holiday fees will stem that erosion.
What is clear is that shippers are chafing under the couriers’ newfound pricing power. Meanwhile, on-time delivery has deteriorated since the pandemic hit, and both major couriers suspended service guarantees in March. In July, the percentage of on-time deliveries dropped to the low 90s from high 90s before the virus, according to SJ Consulting Inc.
In response to the surcharges, retailers will likely encourage consumers to purchase earlier than usual. Stores may promote curbside pickup of online orders and use crowdsourcing companies for home delivery, said Jess Dankert, vice president of supply chain for the Retail Industry Leaders Association, a trade group. Walmart and Ace Hardware are handling deliveries from stores themselves.
Retailers are also looking to alternatives such as regional package carriers, but many can’t keep up with demand.
DHL, a unit of Deutsche Post that uses the post office for final delivery, stopped accepting new customers Aug. 1 — two months before the normal cutoff for peak season.
The peak season packages handled by DHL could double from last year, said Lee Spratt, who runs the company’s e-commerce operation in the Americas.
Stores could make deliveries more efficient by consolidating orders rather than trying to compete with Amazon on next-day and two-day deliveries, said Satish Jindel, founder of SJ Consulting. Consumers are more concerned with packages arriving on time than with the speed of delivery, he said.
The price increases won’t stop with the holiday surcharges announced this month, Jindel said. UPS and FedEx have raised rates about 5 percent annually for the last several years and will probably boost prices at least 7 percent next year, he said.
Meanwhile, they will face intensified competition from Amazon. Heading into the holidays, the online giant will have expanded its space for sorting and delivering packages by 50 percent from a year earlier.
While Amazon will still depend on UPS and the post office to help deliver packages, the retailer eventually will compete more with UPS and FedEx to pick up third-party residential and business packages, Jindel said.
For now, however, the big couriers are throwing their weight around. With demand spilling over, even smaller parcel carriers such as Austin-based Lone Star Overnight are thinking about adding extra holiday fees.
“Shippers are looking at this and are in sticker shock,” Dick Metzler, CEO of LSO, said of the surcharges at UPS and FedEx. “I’ve got more demand than capacity.”