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December during the company’s quarterly analyst call,
acknowledging that there are e-commerce shipments
it doesn’t make any money on. T. Michael Glenn,
FedEx’s number-two executive until he retired at the
end of 2016, said on the call that FedEx had “
discontinued relations with a few customers” during the peak
holiday season because their shipping profiles didn’t
align with the company’s objectives of volume expansion and yield improvement.
Steve Gaut, UPS’s chief spokesman, said in an e-mail
accompanying its fourth-quarter results on Jan. 31 that
the company must be “appropriately compensated”
for the costs of expanding its physical and IT networks. At
UPS, where B2C traffic in 2018 is expected to exceed business-to-business (B2B) volumes for the first time ever, 2017
capital expenditures will total $4 billion, up more than 30
percent from 2016 levels.
UPS is spending hundreds of millions of dollars to automate its “tier one” U.S. hubs that today handle a little more
than half its domestic volume. The modernization should
improve network productivity by up to 25 percent when
the work is done sometime in 2019. This will allow UPS
to route up to 60 percent of its total U.S. ground volumes
through tier-one hubs, according to Rob Martinez, president and CEO of Shipware LLC, a consultancy.
FedEx Ground, the ground parcel unit that handles the
bulk of FedEx’s e-commerce deliveries, has added four
However, massive investments will take a bite out of the
carriers’ revenues if the traffic mix isn’t optimal. UPS’s
fourth-quarter revenue came in lighter than expected, in
Service (USPS) for last-mile delivery, rather than moving
solely through the UPS network, where the company could
charge more. Wall Street proceeded to punish UPS’s share
price in the short run; from Jan. 31 through Feb. 2, the
price of UPS’s shares fell about $11 a share. FedEx shares
fell about half that amount. (Both companies’ shares have
rebounded as of Feb. 10, the day this story was filed.)
At UPS, domestic B2C operating margins have ranged
between 10. 9 percent and 14. 7 percent from the start of
2013 through the fourth quarter of 2016, according to SJ
data. However, B2C margin growth has been compressed,
albeit slightly, over that time. From the end of 2013 through
the end of last year, domestic margins have fallen by 0.6
percent, SJ said. (See Exhibit 2.)
A ROBUST TOOLKIT
Retailers should take heed of the carriers’ comments about
price adjustments. First off, there aren’t many alternatives.
USPS offers low prices and abundant last-mile capacity,
but Smith on the analyst call argued that as a primarily
last-mile carrier, USPS doesn’t have the capabilities to
deliver the so-called “upstream” services to parcel shippers
and their customers. Then there is Amazon.com Inc., the
Seattle-based e-tailer that is building out a transport and
logistics network to fulfill orders placed on its website as
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016
B2C of
domestic
volume 41.7% 40.5% 43.0% 48.3% 44.0% 43.0% 45.0% 50.0% 43.8% 43.1% 45.4% 51.0% 44.5% 44.1% 47.5%
Domestic
operating
margin 13.1% 13.7% 14.4% 12.9% 10.9% 13.5% 14.7% 11.4% 11.6% 13.6% 14.2% 13.1% 12.1% 13.7% 13.5%
growth
of total
B2C
shipments – – – – 2.3% 2.5% 2.0% 1.7% -0.2% 0.1% 0.4% 1.0% 0.7% 1.0% 2.1%
Year-over-year margin
growth – – – – - 2.2% -0.2% 0.3% - 1.5% 0.7% 0.1% -0.5% 1.7% 0.5% 0.1% -0.7%
EXHIBIT 2
UPS: Domestic B2C volume vs. operating margin
SOURCE: SJ CONSULTING
EXHIBIT 1
U.S. B2C volume growth: 2010–2016
B2C of total parcel volume – U.S. domestic*
2010 2011 2012 2013 2014 2015 2016
B2C
ofvolume 43.7% 45.2% 46.5% 47.4% 49.7% 50.9% 52.1%
*Includes all parcel carriers in the U.S. (UPS, FedEx, USPS, and regional carriers)
SOURCE: SJ CONSULTING
