By Laura Stevens
United Parcel Service Inc. said it has succeeded in raising
prices for e-commerce packages without sacrificing growth as it
tackles one of its biggest challenges: making e-commerce more
profitable.
The Atlanta-based delivery giant said on Tuesday that 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 more
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.
Toys "R" Us Inc. was one of the customers UPS parted way with
during the quarter, according to people familiar with the
negotiations. UPS raised rates, and the retailer moved to FedEx in
February instead of paying those increases. It wasn't clear whether
Toys "R" Us's business was unprofitable for UPS.
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.
Revenue 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 that will accept
deliveries of packages for customers to pick up--to more than
20,000 this year, including adding locations in San Francisco,
Washington, D.C., and Boston. That saves 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 year-end.
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.
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 caution FedEx will also
face scrutiny. "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. The average daily
volume of European exports 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 revenue fell 5% due to currency effects.
The company said it has 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 a 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 a
share 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 is retiring after
nearly 38 years with UPS and will be replaced by Richard Peretz,
currently the 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.
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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