UPS’ Fork in the B2C Road

 

 

How does UPS Inc. manage the seismic shift from steady-Eddie B2B commerce to the volatile and less-margin friendly world of B2C? Bill Greene, lead transport analyst at Morgan Stanley & Co. and one of the scene’s more astute observers, says UPS can try to maintain its margins and risk losing market share, or maintain share –at the expense of margins—by sticking with an aggressive pricing stance. Greene says UPS should pursue market share, even if it means a short to medium-term hit on margins. 

Unlike the B2B segment where UPS and its rival FedEx Corp. enjoy a virtual monopoly, the B2C market is more competitive. Besides FedEx, the U.S. Postal Service is a major player and becoming more formidable. In addition, there are smaller players that, while they could never directly challenge UPS, could affect pricing on the margins. Greene reckons that if UPS pursued market share growth by offering cheaper capacity to the market, it could take share from USPS, FedEx, and the smaller players. Growth at UPS's competitors would become more expensive, Greene said. This could force competitors to pull back on their own capacity investments, and would remove incentives for potential entrants like Amazon.com to build delivery capabilities.

If managed correctly, UPS could ramp up revenue growth from market share gains while discouraging rivals from re-investing in their networks and new entrants from taking the plunge, Greene says. This, in turn, could improve UPS’ B2C delivery density, the lack of which today is the biggest impediment to the company’s profit outlook in B2C.

Such a move is not without risks, Greene acknowledges. UPS’ margins would fall (the only question would be by how much) and investors seeing margin compression could flee the stock. It would not be an easy choice for UPS management, Greene says, but it may be preferable to the alternative, which is to keep rates high in a bid to preserve margins. What should also be recognized is that FedEx, with its independent contractor driver network, is in a better position to attain suitable margins on B2C deliveries than UPS’ unionized system and the higher labor costs that accompany it.