Dive Brief:
- UPS CEO Carol Tomé said the company is largely ready for peak season with its current capacity. Tomé laid out an operating philosophy centered on network efficiency over size —"better, not bigger" she said on her first earnings call Thursday after taking up the CEO role June 1.
- UPS' U.S. daily parcel volume increased nearly 23% year over year (YoY) in the quarter, heavily weighted toward volume from consumer deliveries (B2C volume was up 65% YoY). U.S. parcel carriers have been facing peak-level volumes since March, and UPS has hired an additional 40,000 employees to handle the parcel growth. UPS will expand the reach of its existing Saturday service to cover 75% of the U.S. by this year's peak season.
- At the beginning of the quarter, UPS executives expected Q2 would see less parcel volume than Q1. After breaking company records for volume, the carrier predicts Q2 was the height of U.S. daily parcel volume for the year, but strong demand will continue, Tomé said. The National Retail Federation has relatively low expectations for peak season, but the share of purchasing that goes online could challenge retailers and carriers depending on the state of the pandemic come fall. "We will focus on controlling what we can control," she said.
Dive Insight:
Tomé laid out a philosophy based on tech-enabled optimization and "sweating the assets" UPS already has to more effectively turn the exploding B2C parcel volume. The B2C trend was in effect before the pandemic, but to a lesser degree.
Domestic parcel revenue trailed volume in the quarter leading to a 4% YoY reduction in domestic revenue per piece.
"What we have done in the past is built capacity or bought capacity in the hope that demand would follow, and we would take demand at any cost or any price ... not necessarily nutritive demand," Tomé told analysts on the call.
But going forward, CFO Brian Newman suggested the strategy would change. "As we're not chasing any volume or any package at any price, we think we'll be selective in terms of what goes through the network," he said on the call.
For shippers, a more selective UPS could lead to a tougher climate for rate negotiations.
UPS surcharges of more than $30 per package in some cases have driven up logistics costs for shippers, but Tomé said shippers can absorb or distribute the extra costs.
"If you are a large retailer you can pass those cost increases across the SKU base and the customers don't know ... So there is an opportunity here on the pricing side to do what we need to do," she said.
On the call, Tomé's "better, not bigger" strategy drew comparisons to the precision-scheduled railroading (PSR) operating philosophy that nearly all U.S. Class I railroads have adopted in the last few years.
"PSR for UPS is the name of the game," she said. "We are all in."
PSR principles emphasize streamlining the service offering to concentrate on squeezing the most productivity out of every asset, including the human workforce, which generally shrinks when railroads adopt the philosophy.
Tomé said one of her first actions will be eliminating products still on offer from UPS with low sales — of the 400 to 500 products the company offers, 100 didn't sell at all last year.
"We're going to rationalize our product offerings to make it simpler for our customers," she said.
But PSR has been highly controversial with rail shippers, many of whom see it as a degradation of service and flexibility from railroads in order to serve investors more than shippers.
It's too early to make literal equivalencies between the railroads and UPS with the level of detail that Tomé laid out Thursday, but her enthusiastic endorsement of the concept offers a frame for her tenure as CEO.
