Large retailers spurring US ecommerce boom for UPS

UPS is continuing to be significantly affected by the global growth in e-commerce trade, top executives said today, as the company released its results for the first quarter of the year. The Atlanta-based shipping giant saw a 4.3% increase in its package volumes quarter-on-quarter, delivering about a billion items in the three months up to 31 March, 2012.

Domestic e-commerce growth in the United States was a particular positive within the UPS results that saw slower growth in international business than Wall Street was expecting, particularly in Asia.

Headline figures for the quarter included a 4.4% increase in revenue to $13.4bn, driven by a 6.1% increase in domestic shipping revenue to $8bn as average daily volumes in the US increased from 12.67m to 13.24m.

Ecommerce

UPS’ apparent success in ecommerce has come with its ramping up of its standardised e-commerce service, Surepost, in the last year. The contract service, which makes use of the US Postal Service for much of its last mile delivery, has seen major growth in lightweight items stemming from the business-to-consumer segment.

A lot of the growth in e-commerce volumes is coming from larger retailers, UPS said, rather than smaller merchants, as bigger brick-and-mortar retailers look to focus more on their online offerings, while the e-commerce sector itself also sees a degree of consolidation.

The trend is leading to a “big impact” on weight characteristics for UPS shipments as a whole in both ground and air services. Executives said today in a conference call with investors that ground weight per package was down 2%, while air shipment weights were down 4-5% on average.

So while overall at UPS there has been some trade-down by customers into lower-value products, ecommerce has also been boosting air services, particularly Next Day Saver.

“We did see the ecommerce momentum that is clearly pushing our results right now ripple through air and ground,” said CFO Kurt Kuehn.

“A lot of the premium retailers are taking advantage of the time-definite services, we’re also seeing some of that ripple into the Next Day also, and it did create surprisingly strong growth in our Next Day product, the vast majority of that is our Next Day Saver, which has no time of day commitment.”

Scott Davis, the UPS CEO, said UPS was anticipating 2-3% growth in its Next Day volumes as a result of e-commerce, saying: “Clearly the large online retailers are looking for that competitive advantage, and going to the Next Day.”

Surepost, however, has been particularly key to the ecommerce growth at UPS, as “part of a puzzle” of efforts at the company to differentiate its ground products to specific customer needs.

“The Surepost service is giving us, now, a relevance in a very lightweight end of the market that in a lot of cases we weren’t relevant in before,” said Kuehn.

The company said it is continuing to build its e-commerce around the globe, and was currently working on extending technology acquired in the takeover of Benelux e-commerce collection network Kiala last year around the world.

The increasing popularity of the UPS MyChoice service, which allows subscribers to request certain delivery times for their packages, is also helping UPS to compete in the ecommerce sector, the executives said, although the option is not available for Surepost deliveries. More than 7m shipments have now been delivered through the MyChoice service since it began in October 2011.

Larger ecommerce customers

Discussing changes in the B2C customer base, Kuehn said there was a customer shift going on towards larger retailers and from the consolidation of smaller ecommerce players into larger pureplay firms.

“We’re seeing overall greater growth in large customers than small customers, that does tend to reduce yields, but they also bring significant economies of scale,” said the UPS CFO.

“That is a trend very much that is in place, larger customers in general are outperforming, with the challenges small businesses are facing.”

International and freight

Elsewhere in the UPS results, International revenues grew 2.3% to $2.97bn for the quarter, but margins tightened by almost two percentage points to 13.8% and revenue per piece dropped slightly on the back of weakness in Asian markets, where there has been a shift of demand towards intra-regional shipment rather than long-distance.

One of the trends on the international stage has been for US companies to “nearsource” their operations, locating manufacturing in Mexico rather than Asia, where they can keep a closer eye on their supply chain.

Elsewhere in its business, UPS said revenue growth was “flat” in its supply chain and freight divisions, though productivity was improving and in a difficult market the healthcare sector was a particular bright point.

UPS is currently in the process of seeking regulatory approval for its major acquisition of the TNT Express business, with executives stating their confidence that clearance would be granted for the deal to close by the end of the year. However, they said it was “too early” for any feedback from regulators on what might be needed for approval to be given.

Proposals are set to be sent to the European Commission mid-May, with Davis stating today it was “so far, so good” in the process.