UPS earnings rise on growing e-commerce shipper demand

Dive Brief:

United Parcel Service (UPS) on Thursday reported 3.2% total revenue growth during the first quarter of 2016, buoyed by increases in business-to-consumer deliveries driven by e-commerce shippers.
UPS posted total Q1 revenues of $14.4 billion, up from $14 billion in the year-ago quarter. Lower fuel surcharges and currency exchange rates slowed revenue growth, UPS said.
Average daily package volume grew 2.8% in the first quarter to 15.18 million shipments, UPS reported, with ground packages—the preferred shipping method for most online purchases—up 3.3% year-over-year to 12.72 million. Next Day Air packages increased 3% to 1.26 million.

Dive Insight:

As speculation mounts that Amazon is planning to build its own full-scale delivery network, many onlookers have questioned the potential impact on UPS. On the one hand, Amazon represents more than $1 billion in UPS business each year; on the other, UPS’s delivery costs are rising and its margins are shrinking due to increasing pressure to meet the growth of e-commerce shipping services.

But UPS’s impressive Q1 results suggest the company is making good on efforts to improve efficiencies on packages delivered to online shoppers. The Wall Street Journal reports that UPS has invested in software to streamline shipping routes, taken on more last-mile deliveries instead of outsourcing those efforts to the U.S. Postal Service, and expanded package pickup locations to pool deliveries.

“Revenue management actions and improved network efficiencies are driving substantial operating profit growth,” Richard Peretz, UPS’s chief financial officer, said in a press release.

While the possibility that Amazon could launch its own shipping service is very real, financial research firm Cowen & Co. contends it does not pose an immediate threat to UPS or fellow incumbent FedEx.

"We believe Amazon will continue to build their delivery network as a complement to UPS and FedEx and not as a replacement," Cowen analyst Helane Becker wrote in a note published Monday, according to Business Insider. Becker believes that Amazon lacks the density and reach of UPS and FedEx, and also argues that retail clients will not support a delivery service owned and operated by a rival merchant, especially Amazon.

"By delivering for other customers, Amazon would be able to tap into sales data and could undercut shippers using their service,” Becker wrote. “Most retailers view Amazon as their largest competition and probably won't want to share this data.”