UPS tries to boost delivery to investors Parcels group has struggled to integrate acquisitions and justify its strategy since going public

There have been few better investments than the Dollars 100 of borrowed cash that Jim Casey, a 19-year-old entrepreneur, used to buy twotelephones and a fleet of bicycles in 1907.

Nearly a 100 years later, the messenger service he founded from a tiny Seattle office has grown into the world's largest parcel courier, with a market capitalisation of Dollars 85bn and operations in more than 200 countries. But as United Parcel Service approaches its centenary, the group's investment appeal is no longer so clear.

In the seven years since UPS went public, its shares have struggled to gain momentum, rising 30 per cent compared with a near tripling in those of FedEx, its biggest rival.

Asked at an investor conference this month whether UPS would have been better remaining private, Scott Davis, chief financial officer, replied: "No comment".

Investors' lukewarm attitude towards UPS, known as "Big Brown" after the colour of its trucks, in part reflects the sluggish growth of its mature domestic business, which has lost market share to FedEx. But the biggest source of caution is the group's expansion beyond parcels into a broader range of supply chain services.

Since going public, the group has spent more than Dollars 2bn on about 30 acquisitions, mostly in the heavy freight and logistics sectors.

UPS believes that as globalisation increases the length and complexity of corporate supply chains, customers need the group to handle more than just parcels. Following the acquisition of companies such as Overnite, a truck operator, and Menlo, a freight forwarder, UPS can move everything from the smallest package to heaviest freight almost anywhere in the world by air, sea or land. But integration of the new businesses has proved challenging, with the supply chain services division slumping to a Dollars 19m loss in the third quarter.

"Integration has taken longer than we expected," acknowledged Kurt Kuehn, senior vice-president of marketing. "We've learned a lot in these past five years."

Over recent weeks, UPS has announced plans to cut 1,200 jobs in the supply chain division and an unspecified number elsewhere in the group as it seeks to squeeze more synergies from its acquisitions. Mike Eskew, chief executive, said the group's various businesses must start behaving more like a single entity, with shared back office and marketing operations. But he insisted diversification remained the correct strategy and predicted "big gains" in the supply chain division next year.

According to UPS, 70 per cent of US small package customers have other freight transportation needs, creating an opportunity to win a bigger share of customers' supply chain spending.

"There is strong connectivity between supply chain solutions and small packages," said David Abney, president of UPS International. "It means customers do not have to worry about their freight forwarder and small package company pointing fingers at each other because they are dealing with one company."

UPS's strategy fits somewhere between those of its two biggest rivals: Deutsche Post, owner of DHL, which has built the industry's broadest portfolio of services, and FedEx, which remains more narrowly focused on express delivery.

Netherlands-based TNT, the number four global parcel courier, has moved sharply in the opposite direction to UPS and Deutsche Post this year, selling its logistics and freight management businesses because of low margins and disappointing synergies.

Speaking to the Financial Times, Fred Smith, FedEx chief executive, reiterated his preference for small packages. "The larger the volume and lower the value, the less customers are willing to pay to move goods," he explained.

But Mr Smith acknowledged that customers were asking for a wider range of services and said the group planned to increase its presence in freight forwarding. "You can count on us becoming more meaningful in that area," he said.

In an appeal for patience from shareholders, Mr Davis likened UPS's turbulent entry into freight and logistics to the early years of its international expansion.

Had the group gone public earlier, shareholders may not have tolerated the hundreds of millions of dollars lost in Europe and Asia in the 1990s. Today, international business is UPS's strongest source of growth.

"Nine years ago, you would have thought we were crazy investing all that money overseas," Mr Davis told investors. "Nobody is asking questions about international packages now."