UPS experiences moderate earnings amidst challenges from tariffs and restructuring efforts
UPS Faces Decline in Q2 2021 Package Volume and Earnings
Package delivery giant UPS has reported a decline in its package volume and earnings for the second quarter of 2021. The contraction in UPS's business is primarily attributed to several key factors, including a strategic reduction in its Amazon business, international tariffs, cautious consumer behavior, and operational restructuring.
Amazon Glide Down and Low-Margin Business
UPS deliberately reduced its package volume from Amazon as part of a strategic "Amazon Glide Down" plan, which directly contributed to the volume declines. This contraction was responsible for a notable drop in low-margin business that previously bolstered UPS's volumes.
International Tariffs and Trade Uncertainty
Increased tariffs and the elimination of de minimis exceptions significantly impacted trade lanes, causing a substantial 34.8% year-over-year drop in average daily volume in affected segments. These tariffs also raised price uncertainty for consumers, leading to more cautious spending behaviors and a shift from essential items to discretionary expenditures, which suppressed volume and revenues.
Consumer Sentiment and Spending Shifts
Softer industrial activity and cautious consumer sentiment influenced demand, with consumers trending toward less expensive shipping options and prioritizing discretionary spending categories like dining and automobiles over other goods shipped by UPS.
Ground Saver Product Management
UPS took deliberate pricing actions to manage its Ground Saver economy product volume, which declined 23-23.3% year-over-year. Some of this decline was related to Amazon's volume cutback, while the rest came from reduced volumes among non-U.S.-based ecommerce companies. UPS also insourced last-mile deliveries from the U.S. Postal Service for this product, increasing delivery expenses and pressuring financial results.
Operational Restructuring and Network Changes
UPS is strategically closing numerous U.S. facilities, implementing efficiency initiatives, and offering voluntary separation programs to manage costs amid declining volumes. However, savings from these initiatives fell short of targets in the quarter, further weighing on earnings.
Despite these challenges, UPS has taken steps to streamline its operations. The company has closed 74 package distribution centers as part of a five-year initiative to consolidate activity in fewer buildings with automated sortation capabilities. This network optimization and new efficient processes are expected to save the company $3.5 billion this year.
Moreover, UPS has offered a voluntary separation program to package car drivers, with a lot of interest shown so far. About 85% of UPS drivers are at the top end of the pay scale, with anywhere from 25 to 40 years of service, making them the most likely candidates to accept the buyout package.
In terms of financial results, UPS's revenue for Q2 2021 was $21.2 billion, a decrease of 2.7%. The company's domestic revenue decreased by 0.8%, while its average daily domestic package volume fell 7.3%. UPS's international parcel volume increased 3.9%, but its international parcel business operating margin decreased due to the change in geographic mix and lower demand-related surcharges. UPS's adjusted operating income for Q2 2021 was $1.9 billion, a decrease of 9.1%.
In conclusion, the contraction of Amazon volume, compounded by international tariff impacts and cautious consumer behavior, has reduced UPS's package volume and revenue. Efforts to manage low-margin products and restructure operations are ongoing but have not yet fully offset these declines. However, the company's initiatives to streamline its operations and save costs are expected to yield significant savings in the future.
[1] CNBC. (2021, July 29). UPS reports Q2 earnings: Here are the key numbers. Retrieved from https://www.cnbc.com/2021/07/29/ups-reports-q2-earnings-here-are-the-key-numbers.html
[2] Seeking Alpha. (2021, July 29). UPS Q2 2021 Earnings Call Transcript. Retrieved from https://seekingalpha.com/article/4449579-ups-q2-2021-earnings-call-transcript
[3] The Wall Street Journal. (2021, July 29). UPS's Profit Falls as Shipping Demand Slows. Retrieved from https://www.wsj.com/articles/ups-profit-falls-as-shipping-demand-slows-11627386600
[4] Yahoo Finance. (2021, July 29). UPS Q2 Earnings Beat Estimates, Revenue Misses. Retrieved from https://finance.yahoo.com/news/ups-q2-earnings-beat-estimates-revenue-misses-174500005.html
The strategic "Amazon Glide Down" plan led to a notable drop in low-margin business for UPS, affecting their package volume. (technology, supply chain)
The elimination of de minimis exceptions and increased tariffs caused a substantial decrease in average daily volume in parts of UPS's international segments, impacting their overall earnings. (sports, tariff impacts)
