Despite strong revenue growth and a record-breaking number of packages shipped over the holiday season, UPS stocks tumbled nearly 7% after the company shared its 2017 Q4 earnings.
Revenue for the Atlanta-based carrier increased 11% year-over-year, landing at $18.83 billion for Q4. CEO David Abney told investors on the call this increase is one of the highest revenue growth rates in the past decade. For the full year, UPS reported a revenue increase of 8%.
The Atlanta-based carrier delivered a record 762 million packages in the peak season, roughly defined as the time between Thanksgiving and Christmas. UPS delivered 1.5 billion packages in Q4 — an increase of 5.7% over last year.
Despite a record-breaking number of parcels delivered, UPS struggled to keep up with customer demand during the peak season. In response to the challenges, the carrier announced it would be spending at least $6.5 billion to improve its delivery network.
The increased operating costs, along with higher spending on infrastructure, worried investors and analysts, causing UPS stock to drop by 7% after the call.
Record-Breaking Holiday Season for Parcel Carriers
As we’ve seen for the past several years, people are shopping online more than ever. And the 2017 holiday season was no exception.
While more packages to deliver sounds like a boon for carriers, it isn’t quite that simple. More packages means carriers have to expand their fleet, hire more workers, and pay increased fuel costs.
In anticipation of the peak season, UPS invested more than $1.5 billion in Q4 to improve its network through capital, new technology, and automation, according to MarketWatch.
Despite these investments meant to ease the strain and new peak season surcharges to offset the cost, UPS still found itself scrambling to keep up.
Many of these packages are small, lightweight parcels destined for residential areas, which are more expensive for carriers to deliver. And just like retailers, carriers are struggling to keep these added costs from impacting their profit margin.
Delivering those 762 million packages created bottlenecks that meant customers weren’t always getting their deliveries on time — and cost the company $125 million in added operating costs.
UPS to Invest Billions in Delivery Network Improvements
To prevent these bottlenecks from occuring again in the future, UPS announced it plans to spend at least $6.5 billion to improve its delivery network this year. Last year, the company spent $5.2 billion on improvements, according to MarketWatch.
“We are going to have significantly different capacity (by peak season 2018),” Abney told Reuters.
Improvements to facilities, technology, and automation are all slated for 2018, including:
- 14 Boeing 747-8 cargo jets
- 4 Boeing 767s
- 18 new or retrofitted facilities
- 3 US ground hubs in areas particularly overwhelmed by the holiday rush
UPS may also have to factor rising labor costs into its 2018 plan, MarketWatch notes. The carrier is in negotiations with the Teamsters union, which represents its employees. One of the union’s first requests included a ban on drones or driverless trucks.
What Does This Mean for Shipping-Based Businesses?
For businesses and carriers alike, more packages shipped means higher revenue — but also increased shipping costs. For retailers, that almost certainly means more surcharges and higher base rates as carriers implement new pricing models designed to pass along that extra costs.
Carrier pricing will continue to increase substantially every year. We’ve found that on average roughly 35% of what a business spends is in surcharges alone.
Pricing will get more granular, and difficult to track, as UPS and rival FedEx continue to add new surcharges and expand the definition of existing surcharges to include more packages.
For UPS customers, this means a few things for 2018:
- Peak Season surcharges are here to stay
- Packages measuring less than 1 cubic foot are now subject to the standard 139 dimensional divisor
- The largest and heaviest packages will see surcharges the increase much more than the 4.9% average rate increase
How Can I Offset These Extra Costs?
Price hikes aren’t going away, which makes it more important than ever to reduce your shipping costs. Lower overall costs provides you with a competitive advantage — allowing your business to increase market share.
Here are some tips for lowering your shipping costs:
- Monitor and understand your data: Data is a significant point of leverage that you have with the carriers. Knowing your specific shipping profile puts your business in a position to negotiate lower rates. Additionally, data may reveal patterns that your team may have not noticed, and uncover opportunities for efficiencies in your supply chain.
- Negotiate your contracts: Negotiate surcharges in addition to service discounts, and be attentive to discounts that differ from industry norms. We’ve begun to see the carriers adding clauses in the fine print of their agreements that reduce or even negate savings. Carrier agreements are complex and confusing to truly understand, so working with an expert like Reveel can help you prepare.
- Audit your invoices: Make sure you’re actually receiving the service and rates you negotiated. The carriers often put expiration dates on surcharge discounts and very rarely reach out to you to remind you when your discounts will be removed.
Working with an expert like Reveel can help you get the lowest possible rates on shipping. On average, we save our clients up to 20% of their costs through our contract negotiation, invoice auditing and data monitoring services.
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