By Laura Stevens
United Parcel Service Inc. said it succeeded in raising prices
for e-commerce packages, while at the same time growing the
business, in what may be the beginning to a solution to one of its
biggest challenges: making e-commerce more profitable.
The Atlanta-based delivery giant said it did this in part by
changing the way it charges for ground packages, pricing them by
box size instead of solely by weight, in an effort to get e-tailers
to either use smaller boxes or pay up for the space. The company
also declined to renew contracts with "a couple of substantial
customers" whose business wasn't profitable enough for UPS, Chief
Financial Officer Kurt Kuehn said in an interview. He declined to
identify them.
In addition, UPS raised prices across the board and increased
fuel surcharges. Improving e-commerce profitability "is a big
priority for us, and it's a combination of product design, improved
convenience, reduced costs and some revenue management," Mr. Kuehn
said.
Revenues for U.S. ground packages grew 5.3% to $6.36 billion in
the first quarter. That helped buoy total U.S. domestic package
operating profit, which rose 10.5% to $1.02 billion.
Regarding the box size price increase, "It's not our goal to
just increase costs to customers. It's to have a win-win where they
reduce their materials, expense, and we get to reduce our operating
expense," Mr. Kuehn said. He said the revenue growth from that
pricing change will level out over time.
The results were good news for UPS, which has struggled with
inherently less profitable e-commerce deliveries as the company
delivers single, lightweight packages to houses scattered
throughout a neighborhood. UPS said Tuesday it's increasing the
number of Access Point locations--retailers who will accept
deliveries of a package for customers to pick up to more than
20,000 this year, including adding locations in San Francisco,
Washington, D.C., and Boston. Those save it money because it can
deliver multiple packages to just one stop.
UPS is also continuing its rollout of Orion, a proprietary
routing system designed to shave miles off drivers' routes, aiming
for 70% of its U.S. drivers to use the system by the end of the
year.
Also during the quarter, UPS experienced higher growth in
business-to-business shipments as UPS targeted the health care,
tech and industrial sectors and benefited from shifting trade
patterns as manufacturers increasingly skip the middleman and ship
directly to businesses.
"We are seeing more and more industrial and manufacturers
actually going direct to businesses, so there is some change in the
flow of goods even within the internet commerce," Mr. Kuehn added.
In the long-term, though, he said business-to-consumer shipments
will grow the fastest.
UPS also touted big European growth in the wake of FedEx Corp.'s
announcement it would acquire Dutch package-delivery company TNT
Express NV this month for $4.8 billion. The move was an end run
around UPS, which was blocked by regulators from acquiring TNT in
2013 but laid much of the ground work for the deal.
UPS executives say they've moved on, but cautioned FedEx will
face similar scrutiny.
"I will just remind everyone that the FedEx/TNT deal--that is a
complex deal and we expect that regulatory agencies will be as
stringent on this deal as they have been on previous deals," said
Chief Executive David Abney.
UPS is investing almost $2 billion over five years as volume
growth in Europe takes off, executives said. European export
average daily volume has more than doubled over the past decade,
they added, and the company is moving to add more capacity in the
market.
International gains were "driven by impressive growth in Europe,
up more than 9%, and we expect strong volume growth there to
continue," added Mr. Kuehn. Operating profit in the company's
international package business increased nearly 14% to $498
million, even as revenues fell 5% due to currency effects.
The company said it's hedged both its exposure to the euro and
the British pound for the next couple of years, which should keep
results stable.
The full-year outlook remains unchanged, with expected per-share
earnings of between $5.05 and $5.30. U.S. package volume is
expected to grow about 3%, with revenues growing at a slightly
faster pace.
Shares were up 3% in recent midday trading at $100.59.
UPS posted earnings of $1.03 billion, or $1.12 per share, up
from $911 million, or 98 cents a share, a year earlier. Revenue
grew 1.4% to $13.98 billion. Analysts had expected earnings of
$1.09 on revenue of $14.27 billion, according to Thomson
Reuters.
The company's supply chain and freight division's operating
profit rose 2% to $151 million.
Separately, the company said that Mr. Kuehn was retiring after
nearly 38 years with UPS and would be replaced by Richard Peretz,
currently corporate controller and treasurer.
Mr. Kuehn, who has held the title of CFO for eight years, was
the company's first investor relations officer following UPS's 1999
initial public offering. He started with UPS as a driver while
still in college.
Incoming CFO Mr. Peretz started as a customer service
representative with UPS during college and has held a number of
internal leadership positions related to finance.
Write to Laura Stevens at laura.stevens@wsj.com
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