Give UPS a Get-out-of-Jail Free Pass
Shares of United Parcel Service have headed steadily lower as disgruntled investors who were displeased by the company's 'less-than-adequate' handling of a last-minute surge in holiday shipments punished the company. FedEx was also plagued by similar problems, and its shares have not been spared from the sell-off either.
The delivery delays that plagued both companies largely came as a result of factors that were beyond the carriers' control. Higher-than-expected freight volumes flooded their networks as Cyber Monday set a new record with a huge 20.6% jump in online retail sales compared to the same period in 2012. According to IBM Digital Analytics, online sales in the final weekend prior to Christmas surged a dizzying 37.5%.
Although the carriers bore the brunt of the criticism, many of those tardy deliveries were not their fault in any way. Several industry experts, including Jerry Hempstead of Hempstead Consulting, pointed out that inclement weather, such as the severe snowstorm that hit the South and East and struck UPS' large hub in Louisville and FedEx's hub in Memphis, Tennessee, was the main culprit. Mr. Hempstead spent decades as a company executive at Airborne Express and DHL. According to him, foul weather does not stop shipments from coming in, yet the trucks that are supposed to deliver the goodies to customers cannot get to their locations, which leads to an overloaded network.
UPS responded quickly to the logistical disaster by adding 55,000 temporary workers, while FedEx took on an extra 25,000 workers. UPS also chartered 23 more planes and a fleet of extra trucks to manage the huge surge.
Investors should not forget that both companies suspended their service guarantees for the period spanning December 17- 26. Bad weather cancels any guarantees specified in the tariffs. Some e-tailers, such as Amazon , were exceptions to this trend and made unconditional delivery promises through Christmas, including guarantees on orders placed as late as 11 pm on Dec. 23.
E-tailers such as Amazon are in a good position to interlink their systems so that any information about potential delays is available to all of them in good time. Most brick-and-mortar retailers usually do this orally, with both dispatchers and sales reps informing their customers about possible pinch points.
Many e-tailers tend to have unrealistic expectations about how well carriers can fulfill delivery commitments, especially in the event of foul weather. Although large online retailers have access to detailed information about possible events that could delay deliveries to their customers, competition in the space is so fierce that few are willing to divulge this kind of information to their customers and risk losing sales to their competitors.
Amazon will of course be keen to avoid a repeat of this situation in the future, as otherwise customers could quickly cut their ties with the company and start patronizing physical stores for their Christmas shopping. Nevertheless, it's highly unlikely that Amazon will stop doing business with UPS because of the latest let-down. In all honesty, it would not be rational to expect UPS or FedEx to invest billions of dollars to ramp up their delivery fleets and buy hundreds of new delivery trucks that will only be used for one month of the year. In-sourcing some of the deliveries during peak months looks like a viable option for Amazon. Maybe its drones will help handle some of the excess volume spikes in the future.
Amazon's growth favors UPS
The phenomenal growth in Amazon's business, as well as the secular trend of increased online shopping by consumers, has been playing into UPS' hands. UPS is a major force to reckon with in executing ground deliveries in both the U.S. and Europe. The inexorable rise in global trade is also growing UPS' business admirably. UPS and FedEx are recognize