“Here’s the reality. Let’s say you’re in charge of supply chain for a large company and you need to go in front of your boss or your board to say, ‘I guarantee there won’t be a work stoppage.’ They may say, ‘how do you know there won't be a work stoppage?’ There’s no guarantee.” This quote from Carol Tomé, UPS CEO, was delivered in a follow-up interview to the Q1 2023 UPS earnings call on April 25, 2023.
As a supply chain leader for over 25 years, I had to answer questions like this about the parcel carriers daily. Some questions were simple: “How should I ship this?” Others were much more complex: “What’s going on with the UPS strike?” or “How much should I put in the budget for a parcel increase next year?”
If you’re responsible for your company’s shipping operations, here are some more complex questions you can expect to answer over the coming months.
“What the heck are we going to do if UPS strikes?”
Technically, it would be the Teamsters, representing about two-thirds of the UPS workforce, including drivers, pilots, dock workers, and more, whose contract expires July 31. If the two sides do not come to an agreement, the Teamsters have declared there will be a work stoppage beginning August 1.
UPS shippers should be planning for this now. Some pundits have said there will not be a strike and have gone so far as to say the agreement will be reached by early June. In my estimation, if there were to ever be a repeat of the 15-day 1997 strike, this would be the year. Both organizations’ leaders are new to the mix – Carol Tomé for UPS, and Sean O’Brien for the Teamsters – and neither wants to return to their side with a loss.
UPS has been quoted often that a “win, win, win” agreement is their goal. The claim is that UPS shareholders, the Teamsters, and UPS shippers will all share in the “win.” Keep in mind, however, that while the Teamsters generally benefit from a chaotic storyline, the opposite is true of UPS. If they can convince the market that it’s business as usual, they minimize the loss of clients and investor capital. But the truth is that a strike is a real possibility.
UPS reports having a contingency plan but has yet to deliver its customers the full details. What we know is that, as early as this past December, UPS managers were asked to cancel PTO for July and August in case parcels needed to be moved. UPS sales reps are now telling some longtime UPS shippers the company will continue to carry 10% to 20% of their normal volume as a result of these contingencies.
Rather than rely on UPS’s contingency plan, it’s in shippers’ best interests to prepare themselves for the possibility of a 4-to-15-day work stoppage. If the Teamsters strike, a shipper’s potential workarounds will be largely dictated by their specific shipping profile, but here are the basic options:
- Talk to FedEx. FedEx said volumes implemented by March 31 would be the only shipments protected in the event of a strike, but it continues to negotiate with shippers. Even UPS conceded during their last earnings call, “It would be naïve of us to think there wouldn’t be some volume diversion.”
- Ship with USPS. The Post Office must accept and deliver your packages. Unless you are a lightweight shipper, this option will come with a hefty premium, but at least your packages will move.
- Ship with Regionals and Alternative Carriers. The regionals and alternatives should be chomping at the bit to add volume (until their networks are full). Reach out to them now. You may be able to shift volume to them without any incentive tier penalties with UPS, and this could be the push you needed to get the rest of your organization on board with onboarding a new carrier. If you find your company is having trouble navigating minimum commitment and early termination clauses in your UPS contract, reach out to a parcel consultant to explore your options.
- Create a peak-season-like plan. Like peak, you plan for slower transit times by having adequate inventory levels on hand and incentivizing your customers to order early, thereby mitigating the impact of any stoppages.
“What impact does the potential of a strike have on UPS earnings?”
UPS’s comments during the Q1 earnings call hint that they may not have aggressively pursued new business, perhaps as a way to influence the impending negotiations. CEO, Carol Tomé said, “There are many folks that want to ship with us but are sitting on the sidelines waiting to see how the negotiation goes. Our pipeline is very full ($6B) and we’ll have that contract done by the end of July. When we do, we’re going to hit it hard from a sales perspective.”
Also stated during the call, revenue was down 6%, profit was down 22.8%, and the average daily volume was down 5.4%.
What wasn’t down? Revenue-per-piece (RPP) was up 4.8%. As a shipper, this should matter more to you than volume or revenue. UPS’s revenue-per-piece is your cost-per-piece.
RPP is up because of record-setting rate increases to start the year. Those increases were implemented with a higher than normal “keep rate” by UPS, meaning most shippers are taking on the full brunt of the rate increase. Looking past Q1’s volume/revenue/profit report, these measures are poised to rebound immediately once the need for these bargaining chips expires.
Q1 Earnings Call Quick Guide:
· Total Revenue
o Q1’23 = $22.9B
o Q1’22 = $24.3B
o Revenue down 6%
· Operating Profit
o Q1’23 = $2.5B
o Q1’22 = $3.3B
o Profit down 22.8%
o Q1’23 = 11.1%
o Q1’22 = 13.6%
o Margin down 250 bps
o Q1’23 = $15.0B
o Q1’23 = $15.1B
o Revenue down 0.9%
o Revenue Per Piece (RPP) up 4.8% (2023 = $12.60, 2022 = $11.10)
§ Why? A combination of base rates, customer mix, and fuel. Higher “keep” rate on 2023 GRI (lower discounts for shippers!).
· Average Daily Volume
o Down 5.4% in Q1’23 (19.7M to 18.6M per day)
§ The decline is equal for both B2B and B2C
o SMB’s account for 29.6% of ADV, up 120 bps over last year
§ Why? This suggests UPS is leaning into SMBs because they do not negotiate discounts to the appropriate levels, resulting in higher margins.
· Full Year Outlook & Guidance
o January volume down 3%, February volume down 5%, March volume down 7%
o ADV expected to be down 3% YoY
o Revenue expected to be on low end of guidance - $97B
o Margin expected to be 12.8%
o 56% of full year profits to come in second half 2023
“What does the rest of this year look like?”
While UPS adjusted its guidance to the “downside” case for the rest of the year, what matters most to you is what it means to your business. What do you need to plan for and what will the impact be on your budget? Your customers aren’t going to blame UPS for high freight costs or undelivered packages; they’re going to blame you. As Shipware Co-founder, Rob Martinez, stated to FreightWaves in February, “Few think UPS will actually strike, but the logistics manager’s job is to have a contingency plan in place.”
And it’s not just UPS; FedEx also plays a role here. Parcel pricing at the two shipping giants has evolved in virtual lockstep for the past two decades. In Q1’23, however, FedEx has been noticeably more generous with discounts, winning parcel volume from shippers fearing a UPS strike. UPS acknowledged the attrition and vowed to win it back once the new contract was signed. That should be good news for shippers.
If UPS does “hit it hard” in August, shippers should feel confident that the pandemic-fueled era of nearly one-sided carrier conversations may be coming to an end. Once UPS and the Teamsters reach an agreement, capacity concerns should ease, competition should return, and the balance of power should shift in shippers’ favor.
When asked about the second half of 2023 during their Q1 call, UPS echoed a familiar talking point: “Our service is better than any competitor in the marketplace. Value is defined by what the customer is willing to pay, and they are willing to pay for our services.” This suggests that part of UPS’s sales plan when the Teamsters negotiation is complete is to highlight their service levels in comparison to competitors. What you should know, as a shipper, is that how carriers report on service levels is not standardized and varies from carrier to carrier, making direct comparisons difficult. While UPS regularly claims broad superiority, the reality is more nuanced. FedEx Ground, for example, is consistently faster on average to more locations, while UPS delivers more consistently on its promise to deliver slower. What’s more important is how each carrier and service fits into your unique shipping profile and whether or not they meet your customers’ needs.
While service levels are nice-to-knows, they are actually so similar that they should not be a focal point of your next carrier negotiation. Instead, analyze your shipping data to uncover any spend inefficiencies, opportunities to reduce costs, and areas where time in transit can be optimized.
Paul Yaussy is a Senior Professional Services Consultant for Shipware, where he consults and advises clients on transportation cost-reduction strategies. Paul joined Shipware in April 2021 after more than two decades in logistics management roles, most recently at JOANN Stores, where he distinguished himself as a transportation cost-reduction specialist and was responsible for leading the team that routed over $80M in parcel, truckload, intermodal, and LTL freight.