Be The Investor ResearchUPS Is Exiting Low-Yield Amazon Volume Into a Tougher Fight for Premium Shippers
UPS has completed its Amazon volume reduction and is targeting small businesses, health care and business deliveries. The risk is that FedEx and Amazon pursue the same profitable customers, weakening price and volume gains.
UPS has completed the planned reduction of lower-yield Amazon packages, but the harder phase of its strategy is only beginning. The company now needs to replace enough volume with small-business, health-care and business-to-business shipments that produce better economics. FedEx is pursuing many of the same customers, while Amazon may become a more direct competitor.
The scale of the transition is significant. UPS said about 2 million Amazon packages a day had left its network, although Amazon still represented 9% of revenue. In the second quarter, U.S. average daily volume fell 3.3% from a year earlier, largely because of that planned reduction. U.S. revenue nevertheless rose 6% as revenue per package increased 9.3%. This means price and customer mix, rather than volume, carried the domestic business.
That model works if UPS can keep improving the value of each package. It becomes harder if rivals bid aggressively for the same accounts. Large shippers can negotiate discounts or shift packages among carriers, and Amazon's logistics network gives customers another option. UPS's agreement to handle box-free, label-free returns for TikTok Shop shows how the company is trying to win specialized work where service matters as much as price.
There is early counterevidence to a purely bearish view. UPS reported 4.3% year-over-year growth in average daily volume from small and medium-sized businesses in the second quarter. Management also said it knew of no customer volume lost to Amazon at that point. Those facts suggest the company is gaining some targeted business even while total domestic volume declines.
The next results should show whether this is a durable mix upgrade or a temporary price effect. Small-business volume, health-care revenue, U.S. revenue per package and domestic margin will reveal whether better shipments are replacing enough of the lost network density. UPS has already removed the low-yield volume. The investment risk is that competition makes the replacement volume more expensive to win than management expects.