The recent earnings call from UPS brought several important details to light about changes to the marketplace the company is facing (see United Parcel Service Inc (UPS) Q1 2020 Earnings Call Transcript).
Unsurprisingly, UPS cited the global pandemic as a major factor hurting the carrier’s profitability, which it reported was down 45% year over year as of March 31, 2020. “Over my 46-year career at UPS, I have never seen the level of demand variability in the markets we serve and among our customers that we are now experiencing,” UPS CEO David Abney said.
For U.S. residential shipper-customers, the most notable takeaway from UPS during the call was its statement that to deal with the extreme market shifts, the carrier’s approach with future pricing will be handled “customer by customer.”
The comment was made in response to a question about how UPS is dealing with the broader market shift to more residential deliveries and the competitive pressure it is facing, specifically that from the USPS, and potentially from Amazon. Kate Gutmann, UPS Chief Sales and Solutions Officer, first noted a goal of increasing pricing in the U.S. residential market by 2.2%. Gutman then stated, “We’ve decided to selectively through customer-by-customer pricing increase that and then achieve that 2.2%.”
B2C deliveries are on average lower weights with higher frequencies of stops. These factors put extreme negative pressure on the carrier’s margins. During the call, UPS President of U.S. Operations George Willis confirmed the company is experiencing that exact type of shift in its business by stating miles driven were up 10% and stops were up 15%, while the average weight of packages had declined.
What Does This Mean for Residential Shippers Right Now?
Having an understanding of how UPS is positioning itself in this moment is important. Brian Byrd, Vice President of Operations at Transportation Impact, has these observations that shippers should take note of when it comes to their agreements and future rate negotiations.
- The rise of B2C shipments and the elimination of Guaranteed Service Refunds has led to a shift to less premium services — and therefore less profitability for the small parcel carriers. This is confirmed by what we see in our own clients’ data. If this shipper behavior becomes the “new normal,” then it’s likely carriers will become even more stringent in protecting margins on residential shipments. This could mean less room to negotiate related fees and discounts, such as the residential surcharge, fewer reductions in service level minimums, less DIM allowances, etc.
- A similar conclusion can be inferred from the currently depressed diesel and jet fuel spot pricing. It’s likely carriers will offer fewer fuel discounts in future negotiations or quickly adjust their fuel tables (it won’t be to the shipper’s benefit).
- It’s clear market demand is very fluid for the parcel carriers right now, as confirmed by the UPS CEO in the earnings call. This means shippers should expect pricing and market-appropriate discounts to be dynamic as well. Variability makes pricing difficult for carriers, so it’s likely UPS will be a little tighter with its rates and discounts in the near future until more stability returns. Because it has become common for carriers to implement mid-year pricing increases and tariff changes for certain accessorials, it’s reasonable to anticipate a 2020 mid-year announcement focused on residential-related surcharges, as the carriers will be pushed to make adjustments to protect margins.
One Last Note:
Our team at Transportation Impact is watching this fast-changing situation very closely. We are actively involved in several large contract negotiations and see the strategies UPS and FedEx are employing with shippers to maximize their opportunities to increase margins.
Now is the best time, in a long time, to renegotiate your rate agreements with FedEx and UPS. The carriers are trying to get more volume into their networks. So, despite how the carriers appear to be positioning themselves in light of the market volatility, now is a great opportunity for shippers to save money on their parcel agreements.
Contact us at email@example.com for a no-obligation analysis of your current small parcel agreements and a detailed report on how you can reduce your rates.