UPS delivered a whopping 19% more packages last quarter to homebound Americans — but it's a curse in disguise

Mark Lennihan/APUPS delivery drivers are seeing unusually high volumes.
  • UPS’s business-to-consumer deliveries in the US popped by 19% last quarter.
  • Executives spoke of an “unprecedented shift” to online ordering as stay-at-home orders force many Americans to shop online for essential goods.
  • But it’s a curse in disguise for UPS. It saw a drop in business-to-business deliveries, which are more profitable for the Atlanta-based package giant.
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Online ordering, spurred by the closing of many stores, has led to an unusual deluge of packages for UPS delivery drivers.

“We’re getting flat-out hammered right now,” Brian Lee, a UPS driver, told CNN last week. “No one wants to go to the store; everyone buys everything online.”

On Tuesday, the Atlanta-based package giant confirmed that upswing in packages in its quarterly earnings report. In the US, UPS delivered 8.5% more parcels to customers in January, February, and March than the same three months last year. The rise in healthcare deliveries and an “unprecedented shift” toward online ordering drove the package uptick, UPS said.

Drilling in further, business-to-consumer deliveries popped 19% this quarter, Kate Gutmann, UPS’s chief sales and solutions officer, said on a Tuesday call with investors. Business-to-business deliveries fell by 2%.

Chief Financial Officer Brian Newman added that as of late March, some 70% of UPS deliveries were residential – an unusually high proportion.

Much of that increase could also be tied to Amazon, which is experiencing Christmas-like demand during a typically slow period. UPS said the Seattle retail giant comprised 11.6% of its revenue compared with 2019.

As stores close, Amazon has gobbled up even more market share in essential goods like household supplies and groceries. Oppenheimer’s Jason Helfstein has estimated that Amazon’s first-quarter revenue will total $US78.6 billion, up more than 30% from 2019.

For UPS, the uptick in online ordering is a curse in disguise

UPSHollis Johnson/Business Insider

Business-to-business delivery is a higher-margin business for UPS. As a result, UPS’s operating profit was slashed nearly in half, to $US364 million in the US in the first quarter. Its adjusted operating margins fell to 3.5% from 6.6% last year.

Deliveries to businesses, rather than homes, generate more profit for UPS because businesses tend to have more packages in a single stop and tend to be more closely grouped together – compare, say, parking a van to deliver packages in an office park with driving and stopping throughout a suburb.

Chris Wetherbee, a senior research analyst at Citi, told Business Insider that an average UPS delivery at a business translated to 3.2 to 3.5 packages per stop. For a consumer, though, the average delivery is about 1.5 packages per stop.

“Think about a Teamster employee stopping the truck, getting out, running up, dropping off packages, running back, getting in the car, driving again, and doing that over and over again – as opposed to stopping and getting a whole pallet and dropping it off,” Wetherbee said.

CEO David Abney emphasised to investors on Tuesday that his company’s ability to quickly move assets ensured it was equipped to handle the coronavirus pandemic’s upending of global supply chains. For instance, he said, UPS was able to scale air cargo in China as its economy began to reopen in March, and on-time deliveries have endured throughout the crisis.

The call was the last of Abney’s 46-year tenure at UPS, as he’s retiring on June 1. The company also said that it would halt stock buybacks and cut spending but that its goal to get 100% of eligible volume through automated sort by 2022 was unchanged.

For Carol Tomé, who will take over as CEO, balancing the shift from commercial deliveries to residential deliveries may endure as a key financial challenge. Some experts have predicted that the norm of more online ordering may continue past the coronavirus pandemic.

The uptick in residential deliveries of, say, groceries or cleaning supplies translates to a reduction in deliveries to stores that might normally sell those things. As the former increases, the latter will decrease – and margins for delivery giants like UPS will tumble.

“I think there’s some bigger-picture questions about what this means for the long run of these companies – have we gone past the tipping point where B2C is going to continue to be a substantially larger piece of the business going forward?” Wetherbee said. “And how will they adapt to that?”

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