UPS (NYSE:UPS) shareholders may be thinking, “Well, it’s about time.” The shipping giant is considering offering a same-day delivery option, though whether it would be an in-house operation or run via a third-party partnership is still undecided.
Considering that same-day delivery has become an essential service for retailers looking to meet consumer demand for near-instant gratification on purchases, it’s almost scandalous that UPS hasn’t launched it already.
An essential service
Last-mile delivery is a critical component of the sales process for retailers now. While two-day delivery largely became the norm after Amazon.com made it a key (and free) pillar of its Prime membership program, the e-commerce giant continued to push the envelope, adding one-day and same-day delivery — and even, in some markets, delivery of certain items within an hour.
It’s not as though UPS hasn’t known that this was the direction the logistics industry was heading. Rival FedEx (NYSE:FDX) offers limited same-day delivery in select markets. As recently as 2016, Big Brown was exploring the opportunity by investing in same-day delivery companies like then-start-up Deliv, which was acquired by Target (NYSE:TGT) last year. (Target also bought quick-ship specialist Shipt.)
Some retailers have taken matters into their own hands. Target and Walmart (NYSE:WMT) have been using their stores as fulfillment centers for years as a means of competing against Amazon, which has had to build out a massive network of distribution centers, but now the retailers are on a distribution center expansion trajectory too.
Walmart, Home Depot, Kohl’s, and others have announced plans this year to build out fulfillment center hubs that are closer to consumers, allowing them to accelerate their delivery services.
It was against this backdrop that UPS revealed at its investor day conference this month that it is exploring whether and how to offer same-day delivery.
Resistance from the inside
It’s admittedly not an easy problem to solve. Deliv, DoorDash, Instacart, Shipt, and Uber Technologies all use contract drivers to make their quick deliveries. UPS, on the other hand, relies upon some 300,000 unionized drivers who would undoubtedly resist a move to begin outsourcing work to freelance non-employees, let alone non-unionized drivers.
Notably, UPS’s SurePost service, which it operates in conjunction with the U.S. Postal Service for last-mile delivery, has seen an increasing amount of shipping volume redirected back into the UPS network. In the first quarter, UPS said 41% of SurePost’s volume was given back to its drivers to increase delivery density and route efficiency.
UPS has also been focusing on profitable growth, and same-day delivery is expensive to operate, which is why many retailers currently contract out the service.
The carrier has been raising prices, and has hit many of its biggest customers with sizable rate increases, delivery surcharges, and volume limits. In fact, UPS has been focusing on its small and medium-size businesses (SMB). Revenues from that segment boomed for it during the pandemic.
To take more market share in that space, UPS has added to the areas where it offers Saturday and Sunday delivery — it plans to be doing Saturday deliveries in 90% of the country by October. Last-mile options, including same-day delivery, could be an important part of how it increases its share of the high-margin SMB market.
As it focuses more on that segment, it also forecasts a total of 15% to 20% revenue growth from 2020’s $85 billion to a range of $98 billion to $102 billion in 2023.
“We don’t have this all the way figured out, but we have a team of people looking at it,” CEO Carol Tome said during UPS’s investor day on the topic of same-day delivery. “There’s an opportunity there that will be very different than what we’ve done in the past.”
Time to get a move on
UPS has had at least five years to work on a same-day delivery solution, but still doesn’t know what it wants to do. While it has enjoyed tremendous growth over those years, it has relied more on price increases and surcharges than innovation to generate excess free cash flow and profits.
During that time, the delivery market has changed rapidly in ways that threaten to leave UPS at a disadvantage. While the logistics giant says it may be finally embracing same-day delivery there aren’t many easy choices for it.
Their increased focus on high-margin business is a welcome development, but same-day delivery isn’t cheap and not very profitable, which could weigh on the margin gains the carrier has been making. Yet unlike others, UPS can’t readily contract out the service to third parties because of likely internal resistance.
It’s a conundrum UPS may just continue to punt further down the line, leaving investors to think never is better than late if the solution undermines the profitable growth it has recently started enjoying.
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