Logistics News: Among eCommerce Boom, UPS Struggles to Drive Big Gains to Bottom Line

Despite Huge Volume Gains, Variety of Forces Keep Margins Down; Our Analysis of eCommerce Growth and Its Share of Total Retail

he eCommerce train continues to roll down the track at very high speeds - but giant parcel carrier UPS faces big challenges in leveraging that growth into big profit gains for itself.

That according to an article in the Wall Street Journal last week, which noted that "Because of the ubiquity of free shipping, fierce competition from other delivery services and Amazon's power to drive down shipping costs as it gets even more enormous, UPS' average revenue on each Internet-related package it handles is dropping" - even as UPS has to continue to spend big to keep up with that volume growth.

SCDigest Says: On top of those margin and profit challenges, UPS must also continue to make major technology and infrastructure investments needed to keep up with the rapid growth in volumes, low margin or not. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

And UPS may be gradually losing eCommerce market share. According to parcel software provider ShipMatrix, UPS delivers about 42% of e-commerce goods in the US, down from the company's estimate of 55% in 1999, though of course it continues to lead the sector.

And more competition is coming. As SCDigest reported last week, the US Postal Service is currently aggressively reducing many of its parcel rates, especially for large shippers, in a move to gain marketshare. (See Even as they Increasingly Partner for Branded Services, UPS and FedEx Say Recent Major USPS Price Cuts Not Fair.)
Meanwhile, Amazon has been testing use of its own parcel delivery trucks in a few US markets, with reports the company has plans to provide its own parcel services in the top 40 US metro areas, completely cutting out UPS and FedEx there (Amazon has neither acknowledged nor rejected those reports).

But there is no denying the overall growth of eCommerce sales, which obviously ties directly to parcel volumes. There are a variety of eCommerce statistics and estimates in the market, but SCDigest prefers to use eCommerce sales as calculated by the US Commerce Dept., but then compare those numbers to an adjusted set of "relevant" retail sales.

That adjustment means taking total retail sales excluding automotive sales, a number reported by the Census Bureau, and then also subtracting out restaurant sales, gasoline stations sales and a few other smaller categories that can't really be offered through eCommerce.

As shown in the table below, that approach translates into about $2.98 trillion for the total relevant retail market in 2013, versus eCommerce sales of $261 billion, or about 8.8% of the total. That is a higher percentage than is often reported, because the dominator others use, including the Census Bureau itself, includes these other areas of retail spend that aren't really relevant for comparison. The government recently estimated eCommerce as representing just 5.9% of total retail in Q2 of this year, for example.

eCommerce Growth and Share of Total Relevant Retail Sales in US
Sales in $billions, meaning for example total adjusted retail sales = $2.98 trillion in 2013
Year	Total Relevant Retail Sales	Ecommerce Sales	Ecommerce %of Retail	Ecommerce Year over Year Growth
2001	1,969,213	25892	1.3%	NA
2002	2,035,141	33764	1.7%	30.4%
2003	2,117,789	41962	2.0%	24.3%
2004	2,252,845	52996	2.4%	26.3%
2005	2,388,621	68177	2.9%	28.6%
2006	2,516,632	86103	3.4%	26.3%
2007	2,599,859	105755	4.1%	22.8%
2008	2,612,142	114725	4.4%	8.5%
2009	2,531,560	121016	4.8%	5.5%
2010	2,611,479	142536	5.5%	17.8%
2011	2,744,441	167642	6.1%	17.6%
2012	2,877,965	191971	6.7%	14.5%
2013	2,988,183	261600	8.8%	36.3%
Source: SCDigest, from US Census Bureau Data

Of course, that eCommerce share of the total continues to rise based on year over year increases that range from the mid-teen percentages to more than 30% some years, with the exception of the recession period of 2008-09. That translates into a cumulative average growth rate of 21.2% from 2001 to 2013.

That is surely driving top line growth at both UPS and FedEx, but at UPS at least it isn't goosing the bottom line nearly as much as the top. Profit margins on UPS deliveries in the US have been flat for three years, as the company's average revenue per parcel has also been flat for four years, and at $9.41 is not much above what it realized in 2007, before it dipped for the two recession years. 

All told, UPS' US eCommerce business was about $11 billion in 2013, the company says, a key factor in seeing total company revenue hit a record last year.

One irony is that UPS itself was essential for this rapid rise in eCommerce over the past 15 years. No one else had the capacity and network to support such deliveries across the US.

But eCommerce moved from being mostly a business-to-business phenomenon to mostly B2C - which involves far more expensive deliveries to individual residences versus dropping off often multiple parcels at one stop at a business. While UPS adds an extra charge for that home delivery, some of the upside is given away in negotiations with etailers.

The introduction of free or heavily discounted shipping by Amazon and others in the 2000s also played a key role in UPS' profit challenges. Historically, shipping was usually a profit center for catalog houses, with costs to customers comfortably above rates form the parcel carriers, meaning negotiations on those rates was often not that cut throat.

But with free shipping, etailers are instead losing money on those transportation costs, in a sector that has a wide variety of profit challenges already. That led many to much more ruthless negotiations that in the end often hit UPS margins.

Amazon itself can be especially hard nails. The Wall Street Journal article quotes a former FedEx executive as saying "If they're making 5%, I'd be amazed," relative to UPS' profit margins on delivering Amazon Prime orders.

On top of those margin and profit challenges, UPS must also continue to make major technology and infrastructure investments needed to keep up with the rapid growth in volumes, low margin or not.

After a fiasco last Christmas season, in which a last minute huge surge in on-line buyers overwhelmed UPS's ability to deliver tens of thousands of order before Christmas day, UPS announced earlier this year that it was increasing spending on new technology and extra manpower by 21% to $2.5 billion in 2014, investments that must be made just to keep up.

So all told, an interesting challenge for "Brown" - as Amazon continues to be a powerful ,powerful force.