UPS Seeks Higher Profits in Global Market



Mature US Market Leads UPS to Seek Higher Profits in Global Market

By Teruhiko Tanaka
New York, January 6, 2003 -- With a 75% share of its domestic market, United Parcel Service of America, Inc. (UPS) stands as the overwhelming leader in the US small package delivery and express carrier market, but the firm has now begun to seriously embark upon a global strategy. UPS has already completed work on major air hubs in Asia and the United States, and is now seeking growth in its overseas business, a sector which is forcasted to provide high profit growth for the firm.

UPS presently handles an average of 13.6 million parcels each day, a figure which dwarfs the 2.1 million parcels handled daily by US-based FedEx Corporation, a leader in international express deliveries, and also outpaces the 2.7 million parcels handled daily by Yamato Transport Co., Ltd., of Japan. The firm is not yet well known in Japan, but UPS delivery vehicles sporting the firm's chocolate-brown corporate colors are a ubiquitous sight in the United States.

UPS's overwhelming dominance of the mature US market comes with a downside, however, since there is little potential for growth. The US market accounts for approximately 77percent of UPS's revenue, but its growth in the domestic market has slowed since 1999. In 2001, the firm recorded a 0.02percent year-on-year decrease in domestic revenue. Furthermore, from January to September 2002, UPS recorded a 2percent drop in domestic revenue over the same period in 2001.

The firm's recent difficulties can be traced to rival FedEx's entry into the ground-based express delivery market, a move that was heralded in the fall of 2002 when FedEx declared that it intended to handle 4.8 million parcels daily by 2009.

In the words of Mike Eskew, Chairman and CEO of UPS, "If FedEx intends to enter the ground-based express delivery business, we'll take the counteroffensive in the international express delivery business," the latter in reference to the global delivery business that is the mainstay for rival FedEx. Eskew's comments stemmed from a decision for UPS to fully launch a global strategy. In addition, UPS began operating the Clark air hub in the spring of 2002, positioning the new airport in the Philippines as an intra-Asia hub.

The new global focus at UPS has enabled the firm to increase its international revenue by 17.8percent year-on-year during the period from July to September 2002. The firm also recorded a positive operating profit of US$65 million during this period, in contrast with the operating loss of US$4 million it experienced during the same period in 2001.

The global strategy has also been warmly received among investors, whose fears over the labor union element that factors into UPS's domestic operations may be alleviated by the global approach. The firm experienced a labor strike in 1997 that dragged on for 15 days, in which labor negotiations ended just prior to potential intervention by the Clinton administration. UPS also carried out lengthy labor negotiations in the summer of 2002, which prompted worried customers to switch to using rivals such as FedEx, in light of the firm's past labor troubles. At one point, UPS's volumes were down by an average of 4.17 million parcels handled daily.

However, UPS also faces a tough battle in the international market. Despite having a presence in the European market since 1976, UPS has fallen behind rival Deutsche Post, which counts DHL International as a subsidiary. In the Japanese market, the firm has partnered with Yamato Transport since 1990, but the joint venture continues to lack recognition among customers.

Still, an analysis of the 95-year history of UPS shows that the firm has successfully managed to reinvent its business model every 30 years. UPS originally began as a messenger service company serving households, eventually transforming itself into an air-based small package delivery service for both consumer and corporate clients in the US. The firm later expanded into value-added services such as supply chain management solutions. UPS is now repositioning itself as a global business, having gone public in 1999.

The previously conservative corporate culture of UPS has also begun to change with the retirement of previous Chairman and CEO Jim Kelly at the end of 2001. One of the junior female employees at UPS testifies to the previously conservative corporate culture at UPS, saying, "During the Kelly years, women were told to go home and change [into an ankle-length skirt], simply after wearing a knee-length skirt." In contrast with its conservative past, the atmosphere at UPS is starting to change into one that is prepared to take on the task of globalization, with the frank and informal Eskew at the helm as Chairman.


UPS did well globally this past quarter while FEDEX ground grew. But how could we let Airborne get to 215K ground packages per day? We must be asleep in Atlanta!



What's even worse is that Thursday morning I saw on CNBC where the Commerce Dept. released the latest Q numbers and the US economy only grew .07%. If this continues it will be a very rough year IMO for UPS. Let's hope we can put some of the factors dragging on the economy behind us and get things going again.