(Reuters) - United Parcel Service Inc (UPS.N) is doubling down on shipments between businesses as part of a $20 billion overhaul aimed at automating its facilities and offsetting the profit squeeze from lower-profit home deliveries from large retailers like Amazon.com (AMZN.O).
The world’s biggest package delivery firm’s embrace of expensive “last-mile” home shipments of everything from clothes to car tires has squeezed margins as it competes with rival shipper FedEx Corp (FDX.N), which accepts less of that business.
UPS shares fell 2.9 percent to $119.69 on Thursday, after executives boosted long-term earnings targets while maintaining cost-reduction goals and stopping short of saying they would take fewer home deliveries.
UPS is still more profitable than FedEx, Morningstar analyst Keith Schoonmaker said, but added “FedEx may be better at saying ‘no’ to low-profit volume.”
Atlanta-based UPS, now in the early stages of its largest capital spending campaign since the 1980s, aims to rebalance its mix of customers and package volume to include more small business, healthcare and international shipments, Chief Executive Officer David Abney said at an investor conference in New York.
UPS has raised prices for certain residential deliveries to insulate profits, and plans to woo more “high value” home shipments of items like insulin, executives said.
“We are going to be more selective,” Abney told Reuters.
UPS earmarked most of the spending from its three-year capital investment project to automate package processing. That should help it better manage surging e-commerce package volumes and bring the company in line with FedEx, which is wrapping up a roughly $10 billion investment in its mostly automated network.
UPS on Thursday said its restructuring plan will add $1.00 to $1.20 to its adjusted earnings per share by 2022. That includes up to $1 billion in savings from more efficient sorting facilities and purchasing along with a voluntary retirement program.
Some investors, however, want the project to slash more costs.
Margins in UPS’ domestic unit that contributes more than half of company profits fell to 12.1 percent in 2017 from 13.8 percent in 2012 as residential deliveries displaced more profitable business deliveries, which now account for about half of total volume.
UPS, which is already the largest shipper of business-to-business (B2B) e-commerce packages, is adding and enhancing services for that market, which is valued at nearly $1 trillion in the United States.
That is roughly twice the size of the faster-growing, business-to-consumer (B2C) segment dominated by UPS client and budding rival shipper Amazon, which uses its muscle to negotiate lower shipping rates than smaller businesses.
UPS on Thursday said it will support business customers with new products, including an app that helps users like hospitals track deliveries and route them to the right location within their sprawling facilities - reducing lost packages, costs and headaches.
That will augment initiatives such as Ware2Go, a recently launched platform designed to spur more UPS B2B e-commerce deliveries by making it easier and cheaper for small- and medium-sized businesses to shift operations online.
“This current effort is not a repeat of past programs,” Chief Marketing Officer Kevin Warren said.
Reporting by Sanjana Shivdas in Bengaluru and Lisa Baertlein in Los Angeles; editing by Meredith Mazzilli, Shounak Dasgupta and G Crosse