For the first 30 or so months of her tenure, UPS CEO Carol B. Tomé had the wind at her back. For the past year, however, a gale force storm has been blowing right at the company. The question is whether she can steer Big Brown through an environment bereft of tailwinds that may have spawned a false sense of security.
From mid-2020 to early 2023, UPS (NYSE: UPS) fired on all cylinders, propelled by massive and unsustainable spikes in delivery demand from the pandemic, fat rate and yield increases, big operating margins, unprecedented dividend hikes, and relatively muted competition. A legacy Teamsters contract that took effect in 2018 enabled UPS to sidestep much of the post-COVID labor cost inflation that hit its chief rival, FedEx Corp. (NYSE: FDX). Business was so good that UPS could afford to cap volumes from large enterprise customers, even telling them to look elsewhere for capacity.
Wall Street loved it. UPS shares, which traded at $103 a share in mid-February 2020, climbed to $224 in less than two years, a stunning ascent for a mature company in cyclical, low-margin businesses like transportation and logistics.
The second version bears no resemblance to the first. Volumes have reverted to the mean, receding to pre-pandemic levels. Flat demand and overcapacity has stripped UPS and other carriers of pricing power, a scenario that will likely extend through 2024 and beyond. Business that UPS may have turned away two years ago is now being heartily welcomed. “We’re now seeing UPS seek package volumes with a desperation unlike anything we’ve ever seen,” said Rob Martinez, founder and chairman of Shipware LLC, a parcel consultancy.
Other headwinds subsumed the prior tailwinds. A new Teamsters contract ratified last August burdened UPS with onerous cost increases in the pact’s first year. Amazon.com. Inc. (NASDAQ: AMZN), UPS’ largest customer, formed a stand-alone shipping service with designs on higher-margin small to midsize businesses that UPS covets. The U.S. Postal Service rolled out a two-to-five-day delivery service called Ground Advantage that competes with UPS on the ground. A bevy of last-mile providers sprang up to deliver low-priced goods moving through fast-growing Chinese retailers Shein and Temu. That means less business for UPS and other incumbents.
UPS’ results clearly indicate that parcel carriers are no longer able to influence demand for their services, said Satish Jindel, founder and president of ShipMatrix, a consultancy. “Gaining volume in a flat market requires lower prices to take market share from other carriers, and that is tough as those carriers will seek to protect their volume,” Jindel said.
UPS can gain volume and revenue but will need to sacrifice profit margin in the process, according to Jindel. UPS is “caught between a rock and a hard place, and this market dynamic will not ease for [the] next two or even three years,” he said.
Given this very different set of circumstances, Wall Street has taketh what it had previously giveth. As of Thursday, UPS shares traded at $142.41 a share.
UPS did not respond to a request for comment about this story.
The turbulence of the past three-and-a-half years may have come to a head on Tuesday when UPS released weak fourth-quarter results whose saving grace was that they were an improvement over the low-water mark of the third quarter. Every metric was down year over year. The first half of 2024 will also be subpar, especially the current quarter when labor costs remain elevated, industrywide volumes continue to be flat, and the company faces tougher comparisons from the 2023 quarter. In response, the company said it would eliminate 12,000 management and contract jobs, a move that could result in nearly 14% of all managerial jobs going away but could save about $1 billion in 2024 alone. (Ironically, FedEx almost a year to the day made management cuts that ended up being similar in size.)
Even the relentlessly optimistic Tomé could not spin the 2023 saga, calling it “unique, difficult and disappointing.” Earnings improvement will be a second-half story, the company said, as labor cost pressures ease, inflation in general continues to drop, and management cost reductions take effect. At projected volume gains hovering around 1%, a brighter outlook will likely not come from higher demand.
The projected staff cuts are not new news in the Tomé era; in the second half of 2020, more than 11,000 nonoperations middle management employees were offered voluntary separation packages. However, the cumulative effect of the multiyear reductions, while valid to the extent that it shrank executive bloat, has raised questions about the hollowing out of a management philosophy that set UPS apart from most organizations and played a key role in its vaunted operational execution. There are also concerns that the “better, not bigger” mantra that undergirded Tomé’s efficiency drive may have cut too much muscle along with the fat.
Josh Taylor, a former UPS executive who today monitors the company for Shipware as its senior director of professional services, said he’s heard about service concerns from a handful of UPS customers. “UPS’ service challenges could stem from its aggressive cost cutting,” Taylor said in an email. “In the past, UPS had planned redundancies to ensure excellent service despite the inevitable hiccups in the network.” Those backup systems have thinned out, he said.
In addition, UPS’ decision to eliminate money-back guarantees on ground deliveries at the start of the pandemic allowed it to reduce planned redundancies without worrying about the consequences of forking over millions of dollars in refunds, according to Taylor. At the same time, UPS’ operating teams “haven’t been given any wiggle room in their planned performance, so we’ve started to see sporadic corner-cutting measures like missed pickup scans,” he said.
According to one source, a former UPS sales executive, the company’s sales force is being “required to do more work than ever.” This includes filing daily reports on all sales-related activity and making a minimum of six in-person visits per day, the source said. “This is causing a strain on many in UPS’ sales force, which is less tenured than it has been in recent decades due to previous downsizing of many high-producing, knowledgeable, and tenured employees,” the source said.
The cuts have sparked more than a few social media missives from current and former UPS employees, a remarkable development for an organization where public dissent has historically been absent.
“There is a massive amount of culture and knowledge that has walked out the door over the last five years and the only people who seem to care are those that are no longer there for the firm,” Scott Lord, who spent more than 18 years at UPS, almost all in marketing director roles, wrote on LinkedIn. Lord now runs his own consulting firm.
Mike Mangeot, who retired from UPS after 30 years in various communications roles, was equally blunt, saying current leadership’s promise of a transformation that would spawn a better UPS “has not emerged.” Recent initiatives have “gutted a generation of good, productive employees who knew how to run” the company, Mangeot wrote on LinkedIn.
The cuts, according to Mangeot, should be focused on senior management at UPS’ Atlanta corporate headquarters. “There are layers of high-dollar presidents and vice presidents whose activities have little to do with running the daily business or achieving business goals,” he wrote on the platform.
Keith Poveda
Having retired a few days ago after 32 years of service in management with UPS, I can confirm the author’s assertions and provide additional color.
I started my career when UPS was privately held and headquartered in Delaware. After the move to Georgia and subsequent public offering in the late 1990’s, senior leadership began to dedicate an increasing amount of time around social causes (exponential) and “new thinking” around poorly conceived ideas that did not appear to be vetted at scale by operations or business development groups, let alone customers. Many of these decisions included layoffs of management from Operations, Business Development and back-office functions which significantly depleted the ranks of skilled and experienced management that was part of the leadership development pipeline.
Historically, senior management started as hourly employees and experienced a series of cross-functional rotations and promotions to develop acumen. This formed a pool of highly capable management with demonstrated competencies from which individuals would be selected to become senior management in the corporate office. Once the folly of these forays were recognized by senior leadership, many positions previously cut were re-staffed. For those UPS veterans, you may remember self-directed work groups (Empowerment) and business development’s project Emerge. The net result was greater penetration of the UPS customer base by competitors and diminished management capability due to the inexperienced management hired and promoted to restore staffing.
It was during this time that the management pipeline undertook a significant change. No longer would senior management start as hourly employees, the new paradigm would limit traditional career pipelines in favor of hiring management off the street into corporate roles. Many young management would rise within their particular vertical with limited or no experience in the Regions and Districts which comprise the UPS organization. The net result, silo walls became thicker as the layer of management became more senior in the organization; good ideas from the Districts never saw the light of day because off the street management had limited ability to apply context to the ideas; Amazon, FedEx, USPS and regional carriers began to flourish.
Prior to the changes cited above, UPS operated under the Jim Casey triad (same as Jack Ma) of “Customer First, Employee Second, Shareholder Third”. One clarification needed is that as a privately held company, management represented nearly 100% of shareholder ownership. The individual considerations cited above created a seismic shift that damaged moral in the company. It was clear to many long time members of management that UPS senior leadership priorities had changed. Now it was “Customer First, Shareholder Second and Employee Third).
The appointment of a former Home Depot CFO as CEO (Carol Tome) has been a mixed blessing. She is reputed within the company as recognizing the need for change, but unfortunately, the change that has been taking place has resulted in a financial focus rather than a customer focus. I would argue that the senior leadership’s decisions have further restructured the triad to a two legged stool; “Shareholder First, Employee Second (Teamster)”; Management and Customer are afterthoughts. First year business students need look no further than General Motors or Sears. Once you stop focusing on the customer, your business may achieve a financial peak as a result of optimizing your current model, but it will ultimately be downsized to a smaller competitor in the market…and lower net revenues will follow.
Nobody should write UPS off at this time. While I believe the company is headed towards a financial maelstrom, financials are good overall and there plenty of working capital to implement changes (that I believe to be very obvious) to stabilize and grow the customer base and restore healthy parcel margins for UPS. But then, what is obvious to some, is not to others…which is especially problematic when the majority of senior leadership no longer has direct operational or customer experience on their resume.
That said, those in my generation were the last bottom up cross functional rotation developed management and only a few of us worked our way up into the corporate offices and have the insights needed to course correct. I don’t know how many of my generation are left in Atlanta, but every day that passes without a customer-centric course correction increases the probability that UPS will experience a financial kick in the teeth like Boeing or a bankruptcy like GM.
The clock is ticking…
James
I spent 45 years working for what was once a great company. I worked hard in every job from loading trucks to managing operations. Taking the company public was the beginning of the end for this highly respected company. The constant influx of outsiders being placed on the BOD has changed everything. Most of the current Board has no real understanding of what a true brown blooded UPS employee seeks to keep important.
Working for UPS is extremely hard work and overly stressful at times and all employees whether Union or Nonunion deserve to earn the highest pay in the industry. However once again the company buckled to ridiculous union demands and agreed to a contract that will make it extremely difficult to compete in today’s marketplace. The company should have offered a solid contract proposal that would have allowed the union employees to remain the highest paid but also allow the company to be more competitive to protect everyone’s future. Then, tell the Union if they choose not to ratify this fair offer they wouldn’t need to go to the trouble to strike. The company will lock the gates until they sign the agreement. A strike would not last long and the stock would take a temporary hit but would come back stronger than before.
Cam
Carol needs to go, she and Nardelli almost ruined Home Depot so why would UPS put her in charge of anything. I have great service with UPS and the driver has given me his personal phone number when I have a shipment coming. FedEx drivers have said they have left package at my door when I have footage that they never came to my door. Also friends have had the same situation occur to them.
Dew
Ups should have tried to keep more of amazon volume, especially the bread and butter volume that was so easy to deliver, now they are hurting for volume.
John Galley
The past year globally has had the same effect on many in the logistics business. This being said other companies have refrained from draining their staffing levels and implemented aggressive sales campaigns to attract business previously abandoned by UPS FedEx and others. The growth of many mid size and not so mid size companies have spurred the interest of many larger customers to gravitate away from the giants. Customers do not enjoy dealing with companies that do not respect customer or employee/contractors.
The rest of 2024 will see UPS institute more reductions in staff and in dramatically reducing service levels whilst asking their customers for higher rates.
A company that disrespects employees/contractors when business gets tough will always end up Disrespecting and therefore loose customers.
Curt S
You’re leaving out the decisions to eliminate their freight and now logistics sectors of their business that might have enabled them to continue to be a one stop shipping option to certain costumers. Better Not Bigger is just a slogan to justify what will ultimately be seen as a bad initiative and bad plan by a bad choice in CEO. Who knows though?
Freight Zippy
UPS long term prognosis may be cloudy. While they are on the top of the heap currently, the recent revelation that Amazon handles more packages is telling.
With Amazon soon starting to offer package delivery services to shippers ,UPS must truly fear this new competition.
While we all have seen the UPS Teamster paycheck showing an outrageous pay, some shipper has to foot that bill.
The question is with the huge accessorial charges UPS uses to pay those lavish union drivers are shippers willing to look at a new competitor to save money?
In addition the new competitor has more infrastructure than UPS and Fed Ex Ground plus current business that places their fleet on almost evert street every day.
The tremendous UPS contract allows the Teamsters Union to win the contract battle. However once shippers move business to Amazon the Teamsters lose the war!
Jeff E.
My interactions in the past few months with UPS have been horrible. The lack of concern for the customer is shocking and the tech that should be helping customer service is so bad it makes the experience even worse. Even a call to try to help them is a waste of time. Amazon stripping their volume from UPS should have been a wake up call.