Why the UPS Sale of Its Freight Division Signals Opportunity for Small Parcel Shippers
It’s understandable when some things that companies announce are not taken at face value. We’ve all learned, for example, to ignore the large parcel carriers’ claims that their annual GRIs equate to an average increase of 4.9%.
But UPS’s statements about the reasons it is selling its freight business to the Canadian Carrier TFI tell the story pretty well. It’s that UPS has recognized its core business is parcel shipping. And, that it’s facing a fast-changing marketplace that needs the company’s full attention.
From the UPS website:
“We’re excited about the future and the opportunities this creates for both UPS and UPS Freight as part of TFI International Inc.,” said UPS Chief Executive Officer Carol Tomé. “The agreement allows UPS to be even more laser-focused on the core parts of our business that drive the greatest value for our customers.”
The decision to sell UPS Freight was reached following a thorough evaluation of the UPS portfolio, and aligns with the company’s “better not bigger” strategic positioning.
There are some obvious reasons UPS would want to divest itself[JM1] from the freight business. The first being it’s not very profitable. According to Freightwaves.com, UPS Freight is expected to post a $463 million operating loss for 2020. It posted a $75 million profit in 2019 and a $26 million loss in 2018.
It’s also worth noting that UPS Freight’s core was built around UPS’s 2005 acquisition of LTL carrier Overnight Express for $1.3B. UPS’s commitment to freight has led to plenty of investment in terms of money and time, so no one could say the carrier hasn’t tried.
The Shipping World’s a Different Place
But there is arguably more change happening in the small parcel market right now than at any point in the past. So, as any smart logistics company (which UPS unquestionably is) would do, the carrier is putting energy into protecting the most valuable parts of its business. The challenge is that UPS is also facing more competition than ever.
For one, Amazon’s presence has been firmly established. It’s seemingly overnight built an amazing small parcel delivery network. Many of UPS’s 2021 GRIs (such as those placed on deferred air services) were clearly aimed at addressing customers’ growing demand for delivery levels that can help retailers compete with Amazon’s Prime 2-Day Delivery.
There’s also increasing competition from regional parcel carriers and countless other parcel consolidators (that provide similar USPS-hybrid solutions just like UPS’s SurePost) that are aggressively working to steal market share from UPS.
The volatility of the last year as a consequence of the pandemic and the growth of ecommerce has been a struggle for both shippers and carriers to deal with. A money-losing freight division aside, UPS is clearly still finding its way from a pricing standpoint — as its 18 rate change announcements since last March indicate.
So, what should shippers make of all this?
Simple. Consider it an opportunity.
You may be wondering what this means if you have a bundled carrier agreement for LTL and Parcel right now. The quick answer is that the new TFI/UPS Freight entity have committed to continuing a direct partnership for the next five years. So, clients with bundled agreements should not expect disruption to their legacy agreements.
But, every shipper should use the present competitive pressures facing all small parcel carriers to find ways to improve the rates and service within its delivery network. This includes evaluating how and where you are using UPS, FedEx, and other providers by reviewing rate agreements and carrier service performance. Given all that’s going on internally for the carriers, and all of their rate updates from the past year, now may be the best chance in a long time for shippers to take advantage of challenging market conditions for the small parcel carriers to secure a better service agreement.
UPS is a company that provides great service. Shippers need UPS, and right now, the carrier might need you more.