Changing Consumer Behavior

More and more people are no longer willing to pay more for an overnight delivery service. They would rather wait another day for the goods to be delivered, instead of paying a premium for quicker delivery. This change in customer preferences and attitude appears to be permanent, regardless of the economy.

Companies Exporting More

UPS anticipates that most high-tech companies expect to export more cell phones, tablets, and other electronics over the next several years to growing middle-class populations in developing nations. The Barack Obama administration has a goal to double exports by 2015. Scott Davis, UPS chief executive officer, is on the President’s Export Council and has touted free trade agreements as critical for boosting U.S. exports and the economy. A free trade agreement between the USA and Panama will soon go into effect, following on the heels of such agreements with Colombia and South Korea. Some analysts expect that high-tech product sales and shipments are expected to grow by 22 percent in India, the Middle East, and Africa over the next three to five years. Those same analysts expect such sales increases to range from 18 percent in Brazil and 19 percent in the rest of South America to 15 percent in Eastern Europe, 13 percent in Korea, and 8 percent in China and in other Asian nations.

Many executives are planning to modify its distribution networks to handle more volume at East Coast ports once a wider Panama Canal is opened to bigger ships around 2015. Quite a few companies plan to shift from air to ocean freight when that happens, so many East Coast ports are heavily investing in dredging and other projects to be able to accept bigger ships. Both FedEx and UPS have already seen a shift in demand for shipping products cheaper, such as by sea, rather than premium-priced express air services, because of the weakening global economy.

Internet and Catalog Purchasing

About 40 percent of total UPS shipments are from businesses-to-consumers, compared with about one-third from a few years ago. It expects these shipments, typically from large catalog or Internet retailers, to grow to half of all packages during the holiday season. Consumers are expected to do more and more online shopping. UPS and its smaller rival FedEx can benefit twice when consumers shop online: UPS ships the gift to the receiver, and it also ships the unwanted presents that are later returned. Online sales are expected to grow at four times the pace of traditional retail sales in 2012. This trend is helping UPS’s earnings despite weakness in trade between businesses. Business-to-business shipments are typically between a manufacturer and a retailer, and are closely tied to industrial production.

Competitors

As indicated in Exhibit 7 , UPS competes with USPS and FedEx. Another large competitor is DHL International. Exhibit 6 reveals that UPS generates more revenue per employee than either the USPS or FedEx. Note how low the USPS is on revenue per employee.

USPS

USPS incurred a record loss of $15.9 billion for its fiscal year 2012, which it blamed primarily on a mandate to set aside billions of dollars for a retirement heath fund. The USPS loss included $11.1 billion in defaulted payments it owes to “prefund” health benefits for future retirees. Postal officials have complained for years about these prepayments, which are required by Congress, to pay for future retirees. The USPS points out that other federal agencies do not have similar mandates for prefunding.

The $15.9 billion loss was more than triple the $5.1 billion in loss the USPS posted in the prior year. Fredric Rolando, president of the National Association of Letter Carriers, recently blamed the congressionally mandated prefunding for the bulk of USPS’s financial woes. The USPS is highly unionized.

USPS has been struggling with declines in mail revenue for a variety of reasons, including everyone’s transition to e-mail. To combat massive losses, USPS plans to cut 150,000 workers through 2015, reduce existing staffers’ work hours and hike the price on first-class stamps by 3 cents to 49 cents. USPS officials are considering a scale back of delivery service to five days, ceasing its low-volume, low-revenue, Saturday service. The notion of five-day service however is intensely unpopular in Congress and unlikely to prevail.

EXHIBIT 7 Comparing UPS to Rivals

EPS, earnings per share.

Unlike other federal agencies, the USPS does not technically receive taxpayer support, though it has borrowed $15 billion from the U.S. Treasury.

FedEx

Headquartered in Memphis, Tennessee, FedEx is the world’s number-1 express transportation provider, delivering about 3.5 million packages daily to more than 220 countries and territories from about 2,000 FedEx Office shops. FedEx owns and operates a fleet of about 690 aircraft and more than 50,000 motor vehicles and trailers. To complement its express delivery business, FedEx Ground provides small-package ground delivery in North America, and less-than-truckload (LTL) carrier FedEx Freight hauls larger shipments. FedEx Office Stores offer a variety of document-related and other business services and serve as retail hubs for other FedEx units.

FedEx is spending $100 million to build a new 134,000-square-meter international express and cargo hub, to be up and running at the airport in Pudong, China, by 2017. FedEx said it will be capable of handling 36,000 parcels and documents per hour. The new facility’s annual sorting capacity may reach more than 90 million items, meeting the demand in the next 20 years.

Shanghai is forecast to become the world’s top air cargo hub by 2015, with a throughput of more than more than 5 million tons. Major domestic airlines have based 80 percent of its freight capacities at the Pudong airport, which now ranks number 3 by cargo turnover, after Hong Kong and Memphis.

FedEx is expanding its services across the USA, Canada, and Mexico. The company is expanding its Priority next-day services in its FedEx Freight segment by opening a new service center in Rochester, New York, that will cater to 13 U.S. and Canadian markets dealing in cross-border shipments to and from Toronto and Montreal. In Mexico, FedEx recently added two new service centers—one each in Culiacán and Silao—to strengthen its freight network in northwestern and north central part of Mexico. FedEx is building a new hub in Guangzhou, China, for catering to 100 new Chinese cities within the next five years.

As for acquisitions, FedEx completed the take over of Polish courier company, Opek Sp. z o.o., and French B2B Express transportation company, TATEX, both in mid-2012. Then FedEx acquired Rapidão Cometa, a Brazilian transportation and logistics company. These acquisitions should provide FedEx greater operational efficiencies, provide a competitive edge, generate significant long-term synergies, support international business growth, and drive higher profitability.

DHL

Headquartered in Germany and privately held, DHL is a gigantic package delivery company that constitutes the express delivery and logistics business segments of its parent, Deutsche Post. DHL is a leader in the worldwide market for express delivery services, operating through four divisions: Express, Global Forwarding and Freight Forwarding, Mail, and Supply Chain. (Mail service in Germany is handled by the Deutsche Post brand; DHL handles all of the Global Mail business). DHL’s Express courier service network spans more than 220 countries and territories using a fleet of 32,000 vehicles and about 250 aircraft. DHL’s supply chain division maintains some 23 million square meters (almost 250 million square feet) of warehouse space.

The Future

UPS is on the hunt for businesses similar to TNT Express in Europe that it recently acquired. Similar businesses in Asia, Australia, South America, and Africa would enable UPS to extend its services globally. More than half of UPS’s revenues still comes from the USA, yet 95 percent of the world’s population lives outside the USA. More and more people are buying and selling online, which is a key positive trend for UPS in the future. A key threat however is that rival FedEx is aggressive and savvy and also on the hunt to make acquisitions. FedEx does not like being number 2 in the global packaging business. UPS needs a clear strategic plan going forward.