UPS unveils plan to boost margins on B2C deliveries

UPS Inc. today officially took the wraps off a four-year initiative that the company said will forge a profitable path for business-to-consumer (B2C) parcel shipping, a segment that has grown faster than UPS could have imagined and that to date has failed to achieve the margins of its traditional business-to-business (B2B) operation.

The "transformation" initiative, unveiled in New York, is an aggregation of multiple measures that began last year when the company expanded its network of high-volume sortation hubs. From 2018 through 2020, UPS will add 350,000 to 400,000 pieces per hour of domestic sort capacity, which is about 7 times the sort capacity it brought on last year, according to the company. Seven U.S. sort "super hubs" will come on line through 2022, UPS said. By then, all of what UPS referred to as "eligible" U.S. volumes will be sorted through these types of facilities.

A key objective, UPS said, is to get ahead of its B2C business, which now accounts for more than half of the Atlanta-based company's volumes and which shows no signs of abating. UPS also said it will aggressively court the small to mid-size customer (SMB) segment, and will focus more attention on B2B e-commerce, an area that in general has been overshadowed by the immense emphasis placed on penetrating the B2C category.

"Part of our message is that we are going to bring higher-quality revenue from more SMBs, B2B online commerce growth, and other actions to re-balance the mix of customers and package volume that goes into our network," Steve Gaut, a UPS spokesman, said in an e-mail today.

UPS' plan is to achieve greater operating leverage for its U.S. business—which is expected to generate the bulk of the expected improvements—by identifying as many delivery consolidation opportunities as possible. More consolidations, it is hoped, will offset the margin-killing process of delivering one package to one house at a time, and lessen the need to rely heavily on the U.S. Postal Service (USPS) for end-customer deliveries.UPS, like many parcel delivery firms, uses USPS' universal-delivery infrastructure to bring packages to areas where it would be too costly for UPS to dispatch a driver and package car.

Under an example cited by Gaut, UPS' database determines that a regular ground delivery and a delivery made by the Post Office under its partnership with UPS are bound for the same destination on the same date. UPS would then re-direct the original USPS delivery into its ground network rather than having USPS deliver it, Gaut said. "In this way, we have higher efficiency and profit per piece since we drop two packages at one stop, rather than only one, and then paying USPS to (deliver) the other one," he said.

As the UPS program evolves, it could mean less business for the USPS program, known as "Parcel Select," which has been extremely successful. USPS has warned that the three primary users of Parcel Select--UPS, FedEx Corp. and Amazon.com, Inc.--have been developing their own last-mile networks that could reduce their reliance on Parcel Select. The Teamsters union, whose 256,000 members of UPS' package unit are about to vote on ratifying a five-year contract—have made no secret of their desire to see UPS sever its relationship with the Post Office and turn over those deliveries to UPS' union drivers.

UPS projected today that U.S. package revenue will grow by 40 percent from 2017 to 2022, with cross-border e-commerce volume growing by 28 percent over the next three years.