UPS Lowers 2024 Margin Target as E-commerce Giants Flood Network

United Parcel Service (UPS) has adjusted its financial outlook for 2024 in response to a significant influx of low-profit shipments from new e-commerce customers. The company, which delivers an average of 24.3 million packages daily across over 220 countries, has experienced a shift in its delivery dynamics that has impacted its profitability.

On July 23, 2024, UPS announced a reduction in its 2024 operating margin target, causing its shares to decline by 13%. This news also affected its competitor FedEx, whose shares dropped by 2%. The adjustment came after UPS missed Wall Street's expectations for its second-quarter profit.

While UPS did not explicitly name the new customers, industry experts have identified them as likely being Shein and Temu, two rapidly growing e-commerce platforms. These companies, known for shipping inexpensive goods directly from Chinese factories to U.S. consumers, have significantly impacted the delivery landscape. According to a June 2023 U.S. Congress report, Shein and Temu collectively send nearly 600,000 packages to the United States daily.

Carol Tome, CEO of UPS, explained that the volume from these new customers "blew up on us. Their demand was much higher than we had anticipated." This surge has led to a shift from premium air services to more economical ground and SurePost services, where UPS collaborates with the U.S. Postal Service for final delivery.

The company, founded in 1907 as a messenger service in Seattle, has been adapting to changing market conditions since the end of the pandemic-induced e-commerce boom in late 2021. UPS has implemented cost-cutting measures, including the recent elimination of approximately 11,500 jobs, aiming to save around $1 billion.

"We have shown that we can drive costs out and we can continue to do that."

Looking ahead, UPS is preparing to replace FedEx as the primary expedited air service provider for the U.S. Postal Service in October 2024. The company expects this five-year contract to be profitable from its first year, despite FedEx's previous challenges with the same work.

UPS remains committed to enhancing its service offerings. The company is "laser focused" on adding higher-margin volume, including business-to-business and temperature-controlled healthcare shipments. This strategy aligns with UPS's history of innovation, as it was one of the first companies to use electric vehicles for deliveries in the 1930s.

The company has revised its full-year adjusted operating margin forecast to 9.4%, down from the previous range of 10.0% to 10.6%. Despite these challenges, UPS continues to leverage its extensive network and advanced data analytics to optimize delivery routes and maintain its position as a global leader in package delivery.

As UPS navigates these changes, it also maintains a focus on sustainability, having set goals to reduce emissions and increase the use of renewable energy. This commitment to environmental responsibility, combined with its strategic adaptations, demonstrates UPS's efforts to balance profitability with long-term sustainability in a rapidly evolving e-commerce landscape.