Sometimes when companies make decisions to try to increase their revenue, they do not work as intended, as it was the case with United Parcel Service (UPS) when, earlier this year they announced that they would no longer be working with Amazon. Since the ecommerce has its own delivery drivers as well as contracts with the main delivery companies in every country that they operate in, the terms are not always favorable for the external delivery companies. For UPS, these terms were no longer making enough of a profit and so they decided to forego the one-tenth of UPS’ revenue that it provided and go a different route.
Their original intention was to cut the number of deliveries that they made for Amazon by 50% in over a year and a half, because, as, UPS CEO Carol Tomé said in an interview with Bloomberg Television “They are our largest customer, but they are not our most profitable customer.”
The UPS Amazon break, not a clear cut win
Foregoing one tenth in revenue is not an easy decision, and it comes with a lot of unpopular measures to adjust the scale of the operation. In this particular case, UPS will be cutting 20,000 jobs, closing down 73 facilities and rethinking their operation to make it use less human labor. These changes account for the loss of revenue from Amazon, but they are also meant to make the company more profitable overall despite the revenue change.
In the company’s earnings call after the changes were made, Tomé said “We are executing the largest network reconfiguration in our history.” […] The Amazon deliveries UPS is dropping are “not profitable for us, nor a healthy fit for our network” and the increase in automation will “lessen our dependency on labor [and] reduce the capital requirements needed to run the network.”
The numbers were confirmed by CFO Brian Dykes, who declared that half of the buildings to be closed are in the eastern U.S and that this is a part of the push for modernization the company has been on for a time now, which also involves consolidating and closing 200 sorting facilities over five years.
Roughly 400 facilities across the company’s network are expected to see some level of automation, which leadership says will enhance efficiency and reduce reliance on manual labor. However, these developments have raised concerns for the Teamsters union, which represents a significant portion of UPS’s workforce and recently secured a landmark labor agreement for its members.
Teamsters President Sean O’Brien said in a statement “If UPS wants to continue to downsize corporate management, the Teamsters won’t stand in its way. But if the company intends to violate our contract or makes any attempt to go after hard-fought, good-paying Teamsters jobs, UPS will be in for a hell of a fight.”
Although these decisions all seem good for the bottom line of the company, it might have come to bite them, as just after the announcement, the new tariffs by President Donald Trump threatened the whole shipping industry as consumers and companies tried to adjust to the new 10 to 145% tariffs on all imports. Since this affects mostly consumers that use shipping companies, in one way or another, fewer shipments were done in February and March due to the uncertainty, causing UPS to have to rethink their strategies.
Tomé explained that, while international shipments make up just a small fraction of UPS’s overall volume, around 2%, routes from China to the U.S. remain the company’s most lucrative. As activity along that corridor declines, UPS anticipates increased demand for shipments originating in China bound for other global markets, as well as rising volume from Europe, Thailand, and Vietnam. Looking ahead, UPS projects a 9% decrease in domestic shipping for the second quarter, along with a slight dip in overall revenue.
“The world hasn’t been faced with such enormous potential impacts to trade in more than 100 years,” Tomé said. “The only thing we’re certain of is we don’t know which, if any, of our scenarios will play out. There’s so much uncertainty around China, now it’s been announced. We don’t know actually what will happen. We don’t know if it will fit. There are many things we don’t know.”