January 31, 2025
(Bloomberg) -- United Parcel Service Inc. suffered its biggest one-day share drop after shocking the market by slashing business with the world’s largest online retailer.
The move to scale back shipments for Amazon.com Inc. by 50% is designed to allow the courier to focus on more profitable clients. Carol Tomé, UPS’ chief executive officer, defended the shift as necessary for margin growth.
“We are taking control of our destiny,” she said in an interview with Bloomberg Television. “They are our largest customer, but they are not our most profitable customer.”
While Wall Street frets over the sudden loss of volume, UPS’ surprise decision reflects a move toward more-profitable deliveries even if that means fewer of them — “better, not bigger,” as Tomé puts it. Backing away from Amazon also brings UPS more in line with FedEx Corp., which has long viewed the e-commerce giant as more of a rival than a customer.
The catalyst for UPS came in recent weeks with a little-seen fee change by the US Postal Service. The price adjustments, which excluded Amazon, upended the economics of parcel delivery for other package handlers.
While big couriers such as UPS specialize in express shipments, they have relied on the post office for last-mile delivery of budget-priced parcels, especially to far-flung rural locations. In 2024, for instance, a commercial carrier could pay the Postal Service $2.79 to do the final mile of delivery on a 12-ounce package like a golf shirt.
That model began to crack when the Postal Service hiked fees on UPS beginning Jan. 1, part of a broader push by the agency to stem persistent losses. Suddenly, the same golf shirt package would cost UPS $5.10 to send through letter-carrier routes, an 83% increase, said Glenn Gooding, president of consulting firm iDrive Logistics.
“When you inject big price increases in a marketplace, you open the door to” change, Gooding said.
While UPS isn’t the only carrier affected by the rate hike, Amazon, which also uses the Postal Service for last-mile delivery of small parcels, is exempt because it’s considered a different type of customer, said Gooding. That will make it easier for Amazon to absorb the packages UPS no longer wants. “Amazon is uniquely positioned to be the biggest benefactor from this,” he said.
Citing the steeper costs, UPS allowed its contract with USPS to lapse as of the end of last year. But the switch poses a challenge for the Atlanta-based company, which now must put more packages on its own trucks with drivers earning union wages — unlike FedEx and Amazon.
Tomé is seeking to trim exposure to commodity-grade parcels, including those delivered on behalf of Amazon, and focus on more-profitable business such as health-care shipments. But there’s no guarantee that will make up for the lost volume.
UPS is targeting a highly fragmented, very competitive and lower growth segment that makes up just 25% of the industry, according to Ravi Shanker, a Morgan Stanley analyst with an underweight rating on the stock. “The market will see this as a show-me story,” he wrote Thursday in a research note.
Investors signaled unease with Tomé’s strategy and latest revenue forecast, which came in below analyst expectations and last year’s results. The stock plummeted 14% to close Thursday at the lowest level since July 2020. It was little changed Friday.
The shares have lost half their value since early 2022 and are close to where they traded when Tomé took over as CEO in June 2020. After riding a spike in demand for home delivery early in her tenure, UPS has suffered from falling margins and higher costs.
Three months ago, UPS seemed to be turning a corner. The stock surged 10% on Oct. 24 after it posted the first year-over-year growth in adjusted earnings per share after six quarters of declines. But there was a troubling sign: Low-margin shipments were flooding its network by utilizing the company’s budget-minded SurePost option.
As long as UPS could dump off some of those packages to the Postal Service, its earnings were shielded. When it no longer could, the outlook grew much more opaque.
Ups and Downs
Last year, Amazon made up 11.8% of UPS’ total revenue of $91.1 billion. The revised agreement to halve shipping volumes, which will be in full effect by June 2026, comes as the two companies’ contract was up for renewal.
Tomé told anxious analysts on a conference her company will soon provide a glimpse of its outlook for 2026. “We’ll figure out a time to do that this year. Maybe at the end of the first quarter,” she said.
UPS’ decision marks the latest wrinkle in a nearly 30-year and sometimes contentious corporate relationship with Amazon.
Over the past several years, Amazon has quickly developed its own fleet of aircraft and delivery trucks. But as its business has grown, it has also needed to keep shipments flowing through other couriers like UPS. That reached a crescendo during the pandemic, when demand for home delivery sent parcel traffic to all-time highs. But since then demand for shipping has softened as consumers have returned to brick-and-mortar stores and sought to spend more on services than goods.
FedEx, which uses non-union crews, began to part ways with Amazon six years ago.
Tensions between Amazon and UPS have been less evident, but grew strained more than a decade ago. Amazon craved additional capacity to meet surging e-commerce demand, while UPS was reluctant to make big investments for capacity that was only needed in the busy holiday quarter.
The tipping point came in 2013 when capacity constraints and bad weather resulted in Amazon shoppers not getting gifts in time for Christmas. Amazon’s short-term fix was to dole out gift cards to make amends with angry shoppers.
Longer-term, it started building out its own last-mile delivery system to reduce its reliance on long-time partners like UPS. Amazon used its own network to deliver more than two-thirds of customer orders in the US in 2023 using non-union drivers at lower pay rates, according to the latest figures the company has released. The UPS break will likely drive that even higher.
--With assistance from Romaine Bostick, Alix Steel and Peter Vercoe.
