Carol Tomé, chief executive officer of United Parcel Service Inc., is ripping off a Band-Aid in one excruciating shot of pain to fix the courier’s post-pandemic problem with depressed profit margins.
The pain comes in the form of lower revenue, disclosed on Thursday when the company reported quarterly results, and investors aren’t pleased. The shares dropped as much as 20% in early trading, the most since 2008 back when the demise of Lehman Brothers tanked the global market. Shareholders should give Tomé the benefit of the doubt.
She is accelerating a decoupling from Amazon.com Inc., seeking to cut in half the packages that UPS handles for the internet retailer by mid-2026. This is a bold but necessary move. Amazon is UPS’ largest customer, accounting for 11.8% of total revenue, but the profit margin on that business is “extraordinarily dilutive,” Tomé said on a conference call with analysts.
To make up for the volume decline, UPS will shrink the number of sorting facilities, delivery trucks and aircraft, driving $1 billion of cost savings. The result will be a domestic operating margin of at least 12% in the fourth quarter of 2026, Tomé said, up from about 9.2% for 2024. Revenue for 2025 is expected to drop a little more than 2% to $89 billion. In other words, UPS will be a bit smaller but more profitable.
Investors should be pleased that UPS isn’t chasing low-margin volume to fill the network amid small-package growth that’s crawling along at a percentage pace in the low single digits. Instead, Tomé wants to leverage UPS’ “smart” network to win the higher-margin business that requires more complex service. This is the right move in a parcel industry that has changed drastically since the pandemic because of new entrants to the market, an increase in deliveries by large retailers themselves, and a US Postal Service restructuring that hinges on increased package delivery.
Tomé’s hand was forced by the Postal Service, which no longer allows companies like UPS to inject presorted packages at the agency’s final delivery stations. UPS used the Postal Service for final delivery of its SurePost product, a low-cost delivery service aimed mostly at residential e-commerce. Tomé rejected the Postal Service’s offer to sort those packages as part of a higher-cost service, and UPS is now delivering all of those packages itself.
UPS wants to step up its focus on higher-margin segments such as health care and small businesses. It’s also leveraging its investments on RFID tags for all packages by offering “a store replenishment system,” starting with 15 retailers and almost 3,000 stores. These initiatives won’t come close to replacing the Amazon volume but will expand margins.
Although the moves make sense, many things need to go right for UPS to meet its domestic operating margin goal. Investors appear unwilling to wait until 2026 for the full impact of the overhaul to kick in. And two years after that, UPS will be back at the bargaining table with the Teamsters union to renew a labor contract that expires at the end of July 2028.
The last contract negotiations in 2023 were tense and compelled some customers to jump ship to FedEx Corp. and other competitors to avoid a potential strike. UPS had to pay its union workers more than it expected, and it took several quarters to win back the volume it lost during the labor talks. This all took place as parcel demand was declining from the pandemic surge.
FedEx is also hurt by the sluggish parcel demand and increased competition. Its shares fell about 4% on Thursday. FedEx had already started a broad cost-cutting and efficiency plan that’s expected to reduce expenses by $4 billion. FedEx also started combining its Ground and Express networks, which had been operated separately, to match the efficiency of UPS’ unified network. This complicated move increases execution risk.
The bottom line is that it’s a tough market for package couriers, and Tomé is making tough decisions that will pay off in time. Long-term investors should be willing to wait.
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