UPS made 3.1% more revenue on average on ground parcel deliveries during the first three months of the year, as rate increases aimed largely at online retailers kicked in. And UPS repeated that it plans to add additional charges during the upcoming holiday season.
The delivery service reported yesterday that domestic first quarter revenue rose 3.8% to $8.8 billion even though package volume increased only 2.4%. Revenue per package was up 1.3% for U.S. shipments, primarily because of the 3.1% increase in yield per package for UPS Ground.
The company attributed that increase in yield to its base rate price increases and the introduction of dimensional weight pricing effective Dec. 29, 2014, which raises the fees on lightweight packages by charging by how much room they take up in a vehicle. Both UPS and its primarily rival, FedEx, raised their base prices by an average of 4.9% as of the first of the year as well as introducing dimensional pricing.
UPS executives also reiterated their previously disclosed plans to raise prices during peak periods, such as the pre-Christmas period, to cover the cost of added capacity for handling the large volumes of parcels online retailers ship to holiday shoppers. “We’ve got a real comprehensive strategy in place that’s already begun to increase the revenue from customers that surge during the peak season and then also drive additional operating expenses,” chief commercial officer Alan Gershenhorn told stock analysts yesterday, according to a transcript provided by SeekingAlpha. UPS said its fourth quarter profits were hurt by the cost of adding capacity during the 2014 holiday season.
UPS likely will require clients, such as online retailers, to commit to certain volumes during the holiday season, and charge them if they don’t meet their commitment, while also charging a higher rate per package if they go far over their projected volume, says Kevin Sterling, managing director of BB&T Capital Markets, who follows UPS and FedEx. “I believe how it will work is if you commit that you’re going to move 20,000 packages a day during peak season they may charge you if you don’t hit that amount. And if you go over 25,000 they’re going to charge you your contracted rate plus X,” Sterling says.
UPS also disclosed that it had chosen not to renew contracts for what it termed “lower-yielding customers.” While it did not name any, the Wall Street Journal said Toys ‘R’ Us Inc., No. 40 in the 2015 Internet Retailer Top 500, was among them. Toys ‘R’ Us declined to comment on that report, but told Internet Retailer via email, “For business reasons, we transitioned to FedEx in February.”
Sterling says he has spoken with a number of UPS clients that have moved to FedEx, mostly larger and midsized companies, though he would not name them. He notes that FedEx has more pricing flexibility because its deliveries are handled by independent contractors while UPS employs unionized drivers.
It’s no surprise UPS would refuse to renew contracts that are unfavorable to the carrier, says Marc Wulfraat, founder and president of MWPVL International, a logistics and supply chain consulting firm. “This makes perfect sense and is a direct shot back at customers that are not profitable,” he says. “The victims are the usual suspects who have tremendous power due to size.” He would not discuss specific companies impacted by the UPS action.
Wulfraat adds that both UPS and FedEx are raising prices in part because Amazon.com Inc., Amazon.com, No. 1 in the Top 500, has been able to move much of its volume to the U.S. Postal Service after it opened 19 centers for sorting parcels in the way USPS required over the last two years. John Haber, founder and CEO of Spend Management Experts, a consulting firm for shippers, agrees. “Both UPS and FedEx are facing tremendous pricing pressure from the USPS and the regional carriers,” Haber says.
Of the online retailers profiled in the Top 500 Guide, 184 list UPS as their shipping carrier, 139 FedEx and 107 USPS, according to Top500Guide.com.
UPS executives said the company is working with clients to improve how they package products, so that they don’t ship unnecessarily large boxes that trigger higher dimensional weight fees. As a result, they said, the revenue increases that come from the introduction of dimensional weight calculations likely will diminish over time, although they did not say by how much.
“The educated shippers are certainly looking into packaging,” says Ken Wood, president and founder of LJM Consultants, which audits shipping invoices for shippers and helps them negotiate contracts with carriers. “Many are adding additional box sizes. Some are experimenting with polybags, jiffy bags and such.” He adds many are looking into dimensional scales that calculate shipping fees based on package size as well as weight.
Haber says his online retailer clients are facing 10% higher shipping costs on average because of the carriers’ rate increases this year. Wood says web retailers, many of whom ship the under-20-pound parcels that often trigger dimensional weight pricing, are seeing price increases of as much as 33%–and they’re looking for help. “My business has doubled in the first quarter of 2015 versus the first quarter of 2014,” he says.
For the first quarter ended March 31, UPS reported:
- Revenue of $14.0 billion, up 1.4% over the same quarter a year earlier.
- Shipments increased 2.8% to 1.1 billion packages.
- U.S. domestic revenue increased 3.8% to $8.8 billion.
- Daily U.S. package volume increased 2.4%, boosted by Deferred Air, up 12%, and UPS SurePost, up 7.0%. SurePost is a service in which UPS hands off parcels to the USPS for final delivery.
- U.S. revenue per package was up 1.3%, primarily due to a 3.1% increase in yield for UPS Ground.
- International revenue of $3.0 billion, an increase of 2.4%.
- Global operating profit increased 11% to $1.7 billion.