UPS recently released its Q1 earnings. While, at first glance, the company seemed to have performed well (all things considered), with revenues coming in at over $18 billion – nearly $1 billion more than a year ago
A deeper dive, however, paints a different picture.
It seems that, while revenues were up, profitability took a major hit. Digging a bit deeper, it looks like the COVID pandemic has impacted the mix from 50/50 B2B to 70/30 B2C – a much lower margin.
The UPS numbers reflect an industry-wide shift that could single massive changes going forward for all carriers, with significant impacts felt by shippers.
Why is This Happening?
The biggest and most obvious reason is directly related to COVID – as the economic impact of the pandemic continues, B2B activity has slowed while consumers are relying even more on online purchases and deliveries.
However, these trends did not begin 2 months ago, they have been brewing for a while and were only exacerbated by the COVID crises.
It’s long been Amazon’s goal to move away from third-party carrier relationships and begin to take over its own last-mile deliveries. By September 2019, Amazon was already moving 50% of its last-mile deliveries itself.
Earlier that year, Amazon had officially ended its relationship with FedEx. An outcome of this change was that FedEx began moving its SmartPost shipments to its own ground network, changing its cost position.
Another major factor for carriers is the current economic position of USPS, which has been exacerbated by the COVID crises. The Postal Service is on its way to insolvency. While it’s unlikely that it will go under completely, it’s becoming clear they will need to increase prices to remain viable. If and when that happens, B2C shipments that have long been reliant on USPS will inevitably begin to spread across other carriers.
Given these trends, and the likely shift we’ll see in the “post COVID” world of shipping, carriers will most likely need to increase prices. This will impact not only UPS but all the major carriers such as FedEx as well.
With major players controlling much of the market, they have significant pricing power. A possible outcome may be a major player trying to be more aggressive on large shipper pricing to pull market share if there is a real risk of carrier networks operating significantly below ideal capacity for a prolonged period of time.
Operating at a low capacity utilization could hurt margins more than some tweaks around the edges on price when it comes to a complex logistics network with high fixed costs.
Visibility Will be More Important Than Ever
The pricing landscape of shipping is likely to shift considerably in the wake of COVID. Given the complications of apples-to-apples price comparisons between carriers that already existed, the post-COVID world will see this issue compound further.
That’s why, now more than ever, shippers will need to have greater visibility into their shipping operations.
Shippers will need the ability to cut through the murkiness in understanding the capabilities of the carrier across the board. More importantly, they’ll need to rationalize carrier offers, contracts, and proposals and make actual comparisons between them in terms of service and cost.
In addition, it will be more important than ever to optimize spend across the board. This includes a greater focus on identifying surcharges and other costs and find ways to mitigate them.
The power of technology and industry experience will be more important than ever in the years ahead. The tools required to model pricing comparisons, as well as the overall optimization of shipping operations, will be the single most important tool for shippers in the post-COVID world.
As we move forward through the COVID pandemic and its long-term impact on shipping, Intelligent Audit is focused on providing the best insights and tools for shippers to adapt and thrive in our new reality.
Intelligent Audit provides its clients with a global, all-mode transportation audit, recovery, freight payment, and business intelligence reporting partner.