Revenue from ground parcel delivery, the primary way e-retailers ship to customers, continued to grow for United Parcel Service Inc. during the second quarter, and executives said it will implement peak-pricing policies for the upcoming holiday season to avoid unexpected demand for its delivery services.
The delivery service reported revenue from ground parcel deliveries of $6.339 billion, up 2.1% from $6.207 billion during the same period last year. That $6.339 billion figure represents 45% of UPS’s quarterly revenue of $14.095 billion. During the same period last year, ground parcel revenue accounted for 43.5% of UPS’s total sales. Through the first half of fiscal 2015, UPS reported ground parcel revenue of $12.700 billion over the first six months, up 3.7% from $12.250 billion during the same period last year.
UPS and chief rival FedEx both raised prices by nearly 5% on average at the start of the year. Both also introduced dimensional weight pricing for ground shipments, which charges customers based on the external dimensions of the product they’re shipping rather than the weight. That meant an increase in costs for many e-retailers, especially those shipping large, lightweight items.
When analysts asked about price hikes, chief commercial officer Alan Gershenhorn said the company can justify them based on UPS’s quality of service.
With the holiday season approaching, Gershenhorn told analysts the company is working with customers to make sure it doesn’t get caught flat-footed by spikes in demand. That includes meeting with major online retailers to encourage them to smooth out their shipping volume, and explaining that they will face surcharges if they go beyond projected volume.
“We don’t discuss the individual customer pricing, but we do have comprehensive peak pricing initiatives underway to increase revenue from the customers that surge and ultimately drive significantly greater cost at peak,” Gershenhorn said, according to a transcript of the call obtained from Seeking Alpha. “We are going to continue to address peak on a customer-by-customer basis, really understanding what their needs are, the value of the solutions and market conditions and price them accordingly.”
On Tuesday, UPS announced plans to expand its Access Point program, which allows customers to pick up their shipments at secure third-party locations as well as all The UPS Store locations if they are not home when their package is delivered. The program is offered today at all 4,400 UPS locations nationwide and at 1,200 other locations such as convenience stores and dry cleaners in five major markets (Chicago, Boston, New York, San Francisco and Washington, D.C.).
UPS executives say they hope to have 8,000 Access Point locations—4,400 The UPS Store locations and 3,600 other locations— operating in more than 100 markets nationwide in time for this holiday shopping season.
“The UPS Access Points locations provide a convenient and secure alternative to home delivery in order to enhance the e-commerce delivery experience for consumers,” CEO David Abney told analysts. “This is an important part of our strategy to offer unique customer solutions and improve e-commerce profitability.
Top500Guide.com data shows UPS is the shipping carrier for 184 retailers in the Internet Retailer 2015 Top 500 Guide and 229 retailers in the Second 500 Guide. With more retailers looking to get their products to consumers even faster, UPS executives say they’re continually seeking new ways to meet that demand.
“There’s a tremendous amount of innovation going on in the retail e-commerce space, including same-day [delivery],” Gershenhorn said. “Currently, the same-day free e-commerce has challenges with consolidating density on single-piece stock economics that create profitability issues. So we continue to monitor the space and look for cost-effective solutions that are profitable that can serve the needs of our retailers.”
Analysts say they’re optimistic about UPS’s fortunes heading into the second half of the year.
“We continue tobelieve UPS is in a solid position to take advantage of the e-commerce trends in the United States and Europe, which should become a more profitable growth engine as the company makes the necessary adjustments to its network, eliminates less-profitable business, and benefits from increased route density,” wrote Nate Brochmann and Kyle Dicke with investment banking and research company William Blair & Co. “We believe peak season profitability should get a little better each year as the company learns from past errors.”
For the second quarter ended June 30, UPS reported:
- Total revenue of $14.095 billion, down 1.2% from $14.268 billion during the same period last year.
- Total shipments of 1.101 billion packages, up 2.1% from 1.079 billion last year.
- U.S. domestic package revenues of $8.808 billion, up 1.6% from $8.668 billion during the same period last year.
- Average daily U.S. package volume up 1.8% year-over-year, driven by 14.6% year-over-year Deferred Air growth. Deferred air freight is used for lower-priority packages that can ship on a space-available basis and costs less than standard air freight.
- International revenue of $3.045 billion, a decrease of 6.4% from $3.252 billion during the same period last year.
For the first six months of 2015, UPS reported:
- Total revenue of $28.072 billion, up slightly from $28.047 billion during the same period last year.
- U.S. domestic package revenues of $17.622 billion, up 2.7% from $17.156 billion during the same period last year.
- Average daily U.S. package volume up 2.1% year-over-year, driven by 13.4% year-over-year Deferred Air growth.
- International revenue of $6.015 billion, down 5.7% from $6.379 billion during the same period last year.