CAMBRIAN GROUP United Parcel Service
strategic report
CAMBRIAN GROUP
CAMBRIAN GROUP
TEAM MEMBERS
Sam Seidman, Lead
Ying Zeng
M.D. Xiaoye Ma
CAMBRIAN GROUP
COPYRIGHT NOTICE © 2011 Cambrian Consulting, LLC. All rights reserved. This material may not be reproduced, displayed, modified or distributed without the express prior written permission of the copyright holder and the Client.
CONSULTANT’S DISCLAIMER Cambrian Consulting, LLC (“Cambrian”) has prepared this report (“report”) at the request of the Client and for the sole use of the Client. This report may not be relied upon by any other party without the express written agreement of Cambrian. The use of this report by unauthorized third parties without written authorization from Cambrian shall be at their own risk, and Cambrian accepts no duty of care to any such third party. Cambrian has exercised due and customary care in conducting this report but has not, except as specifically stated, independently verified information provided by others, including the Client. Cambrian makes no representations or warranty as to the accuracy, completeness or correctness of the information and statistical data contained herein. No other warranty, express or implied is made in relation to the conduct of this report of the contents of this report. Therefore, Cambrian assumes no liability for any loss resulting from errors, omissions, or misrepresentations made by others. Any recommendations, opinions, or findings reflect the judgment of Cambrian at the date of publication and are subject to change at any time without notice. Any recommendations, opinions, or findings stated in this report are based on circumstances and facts as they existed at the time Cambrian performed the work. Any changes in such circumstances and facts upon which this report is based may adversely affect any recommendations, opinions, or findings contained in this report.
CAMBRIAN GROUP
TABLE OF CONTENTS EXECUTIVE SUMMARY
…
…
…
…
…
…
…
…
…...............................
…
….
…
…
…
…
…
…
…
…..
….1
PART I: INTRODUCTION COMPANY OVERVIEW
…
…
…
…
…
…
…
….
…
…
….
…
…
…
…
…
…
…
…
…
….
…
…
…
…
…..
…..
…..4 Business Model..............
…
…
…
…
…
…
…
….
…
…
….
…
…
…
…
…
…
…
…
…
…
…
….
…
…4 Company History..
…
…
…
…
…
…
…
…
…
….
…
…
…
….
…
…
…
…
…
…
…
…
…
…
…
…
…...5
PART II: ANALYSIS COMPETITIVE ANALYSIS
…
…
…
…
…
….
…
…
…
…
…
…
…
….
…
…
…
….
…
…
…
…
…
…
…
…
…
…
….7 Market Definition..
…..
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…..8 Internal Rivalry
…
…
…..
…..
…
…
…
…
…
…
…
….
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
….8 Buyer Bargaining Power.....
…
…
…
…
…
…
…
….
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…..12 Supplier Bargaining Power.
….
…
…
…
…
…
….
….
…
…
…
…
…
…
…
…
…
…
…
…
…
…...12 Entry..................
…
…
…
…
…
…
…
…
…
…
…
…
…
….
…
…
…
…
…
…
…
…
…
…
…
…
…
….13 Substitutes and Complements
…
…
…
…
…
…
…
….
…
…
…
…
…
…
…
…
…
…
…
…
…
….14 FINANCIAL ANALYSIS
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…..16 Overview..
…
…
…...........
…
…
…
…
…
…
…
….
…
…
…
…
…
…
…
…
…
…
…..
…
…
…
…..
…16 Solvency and Liquidity
…
…
…
…
…
…
…
….
…
…
…
…
…
…
…
…
…
…
…
…
…................17 Profitability and Growth......
…
…
…
…
…
….
…
…
…
….
…
…
…
…
…
…
…
…
…
…
…
…....18 SWOT ANALYSIS.....
…
…
…
…
…
…
…
…
…..
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
….
…
…..21 Strengths
…
…
…
…
…
…
…
…
…
…
…..
…
…
….
…
…
…
….
…
…
…
…
…
…
…
…
…..
…
…....21 Weaknesses
…
…
…
…
…
…
…
…
…
…
…
…
….
…
…
…
…
…
…
…
…
…
…
….......................22 Opportunities
…
…
…..
…
…
…
…
…
…
…
…
…..
…
…
…
…
…
…
…
…
…
…
…
…
…
…....
…..22 Threats
…
…
…
…
…
…
…
…
…
…
…
…
…
…
….
…
…
…
…
…
…
…
…
…
…
….......................23
PART III: RECOMMENDATIONS STRATEGIC RECOMMENDATIONS
…
…
…
…
…
…
…
…
…
…
…
….
…
…
…
…
…
…
…
…
…
…
…
….25 International Delivery............
…
…
…
…
…
…..
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…25 Supply Chain Solutions..............
…
…
…
…
….
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…...25 UPS Capital.................................
…
…
…
…
….
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…...26
CAMBRIAN GROUP
Potential Collusive Behavior...........
…
…
…
….
…
…
…
…
…
…
…
…
…
…
…
…
…
…
…27 APPENDICES
…
…
…
…
…
…
…
…
…
…
…
…
…..............................
…
…
…
…
…
…
…
…
….
…
…
….29 SOURCES......
…
…
…
…
…
…
…
…
…
…
…
…
…..............................
…
…
…
…
…
…
…
….
…
…
…...32
CAMBRIAN GROUP
EXECUTIVE SUMMARY United Parcel Service is the largest package delivery company in the world. The package delivery segment can be divided into two groups, international and domestic delivery. In addition, UPS provides various services to businesses, including freight forwarding, returns and financial transactions, which are collectively called supply chain solutions. While supply chain solutions only accounted for 18% of revenues in 2010, this segment really demonstrates what UPS’s true talent is, namely tracking items as they are shipped, and not losing/misplacing any packages. Currently, UPS is aggressively trying to enter international markets, while at the same time broadening the range of value added services they offer, primarily for the domestic market. In addition, both UPS and Fed Ex are facing a department of justice investigation into potential collusive behavior, when the two companies simultaneously decided to stop working with third-party shipping consultants. Cambrian’s strategic recommendations are as follow: International Expansion: UPS should try to capture a large market share in the Chinese market, even if this is not initially profitable. This will involve intense competition with rivals, mainly Fed Ex, as well as with local delivery services. UPS should strive to build extensive infrastructure, so that they can control costs and provide service to a larger geographic area, as they successfully did in the US delivery market. Supply Chain Solutions: The Company should continue to expand the range of services they offer to small businesses. They should make these services more accessible/ widely known through advertising and non-technical descriptions of the available services. UPS Capital: UPS should not expand their financing services to include loans that are not fully collateralized by assets in the UPS
CAMBRIAN GROUP
network or government-guaranteed. Their strength is not at assessing borrowers, and they need to remember this. Antitrust Lawsuit: UPS should vigorously defend itself against AFMS’s lawsuit and the Department of Justice Investigation. Continuing to work with third-party consultants presents a serious risk to the company’s business model.
CAMBRIAN GROUP
PART I INTRODUCTION
CAMBRIAN GROUP
COMPANY OVERVIEW Business Model The specific industry that UPS operates in is called Air Freight and Logistics. In this industry, UPS is the dominant player. They have a market cap of over $73 billion, which makes them significantly larger than Fed Ex, the next largest company in the industry, with a market cap of just under $30 billion. In this industry, economies of scale, with regard to the necessary infrastructure, are very important. Much of UPS’s advantage stems from the large network of air hubs, trucks, and drivers, which allow them to deliver a package anywhere (in the US at least), in a timely and efficient manner. In addition, name recognition is very important. UPS certainly has a very strong and recognizable brand name and logo. These create large barriers to entry as demonstrated by DHL’s experience attempting to enter the US delivery business. In 2008, DHL lost nearly $1 billion in this market, and subsequently in 2009, they shut down their domestic delivery business. As a result, the competition facing UPS comes from Fed Ex, as well as from some of the smaller foreign delivery companies that will compete with their expanding international business, but not from new entrants in the industry. Currently, about a fifth of UPS’s revenues come from international delivery. This is the segment that they’re very deliberately trying to expand. Just recently, they completed a new air hub in Shanghai that has the capacity to handle a virtually unlimited volume of packages. Of course Fed Ex is pursuing international growth just as aggressively, particularly in China. At UPS, regardless of whether a package is shipped by express airmail or ground mail, it is delivered through the same infrastructure, and so is brought to you by the usual driver. In contrast, at Fed Ex, the express and ground mail is routed through different systems, and so a different driver will deliver the package depending on the type of delivery used. UPS’s method is generally regarded as more efficient, and in addition, there is a
CAMBRIAN GROUP
customer service benefit, since customers report appreciating having the same driver for all their deliveries. UPS is a notoriously good employer. The UPS drivers are unionized, and UPS renewed their labor contract well before the previous one expired, to avoid any contract disputes that might interrupt service. This is very much in contrast with Fed Ex’s employment model, where all their drivers are independent contractors who are not directly employed by the company. There have been a series of lawsuits challenging the legality of Fed Ex’s independent contractor model. There has always been much debate as to which company’s employment method is more effective.
Company History The company that would eventually become UPS started in 1907 under the name American Messenger Company. The company was founded by Claude Ryan and Jim Casey; they initially delivered letters or packages either on foot or bicycle. In 1919, after much expansions, including a merger with a competing package delivery company, the name United Parcel Service was adopted. In 1924, UPS developed a conveyor belt system that helped sort packages. UPS branched into international Delivery in 1976, when they entered the European market. Over the next decade, UPS expanded their international sector, until they had extended service to cover the Middle East, Africa, and the Pacific Rim. Recently, UPS has made a point to be on the forefront of technological advancement in their industry. This can be demonstrated by the use of electronic devices by all drivers, which track their deliveries and can update them on potential traffic conditions or changing schedules. UPS introduced their Supply Chain Solutions in 1992, with the acquisition of Haulfast and Carryfast. UPS Capital was established in 1998. In November 1999, UPS became a publicly traded company. In 2001, UPS acquired Mail Boxes Etc the largest shipping/postal services franchisor in the world. 3,000 of their stores were converted into “The UPS Store,” outlets. UPS has made several other acquisitions in an attempt to fill holes in their current business model, for example buying Challenge Air in 1999, to make UPS the largest air cargo carrier in Latin America. Other recent major acquisitions include the purchase of Menlo Worldwide Forwarding in 2004
CAMBRIAN GROUP
to become a part of UPS Supply Chain Solutions, and the 2005 purchase of LYNX Express Ltd, an independent parcel carrier in England.
CAMBRIAN GROUP
PART II ANALYSIS
CAMBRIAN GROUP
COMPETITIVE ANALYSIS Force
Strategic Significance
Internal Rivalry
High
Buyer Bargaining Power
Low to Moderate
Supplier Bargaining Power
Low to Moderate
Entry
Low
Substitutes and Complements
Moderate
Market Definition Under the 2007 North American Industry Classification System (NAICS), UPS operates in the market of Couriers and Express Delivery Services (Code 492110). The Standard Industrial Classification (SIC) defines the market in which UPS operates as Air Courier Services (Code 4513). However, UPS places heavy emphasis on ground delivery services and provides superior supply chain solutions for both corporate and small businesses.
Internal Rivalry UPS confronts two main rivals in the industry, USPS and FedEx. However, UPS is more similar to FedEx since they both provide express deliveries of urgent letters and packages domestically and internationally. Whereas for USPS, Express Mail service generates only part of their revenue and is the only segment that competes with FedEx and UPS. USPS monopolizes the
CAMBRIAN GROUP
non-urgent mail delivery services market since they are subsidized and supported by the government. UPS and FedEx are not allowed to compete with USPS in the first class mail service market. DHL Express was another major competitor in the express mail and package delivery services market until February 2009, when it shut down its US delivery operations. There are smaller players in the market that serve certain geographic regions or specialize in moving huge cargos and packages. Furthermore, there are a handful of companies that handle same-day deliveries such as A1Express and Jet Delivery. Nevertheless, UPS and FedEx dominate the market and form a tight oligopoly. Economies of scale allow UPS and FedEx to reach out to almost every city in the States and emerging regions in the world. Over the past five years, UPS was able to outperform FedEx in terms of annual revenue and profit margins.
Annual Revenue ($ billion) 60 50 40 UPS
30
FedEx
20 10 0 2006
2007
2008
2009
2010
CAMBRIAN GROUP
Net Income ($ billion) 5 4 3
UPS FedEx
2 1 0 2006
2007
2008
2009
2010
Profit Margin 10.0% 8.0% 6.0%
UPS FedEx
4.0% 2.0% 0.0% 2006
2007
2008
2009
2010
Although USPS Express competes with UPS and FedEx, it does not handle time delivery for urgent packages as well as the other two companies. USPS has a huge load of non-urgent mail to handle everyday. Their tracking system is not on par with that of UPS or FedEx. UPS and FedEx focus on technology to ensure safe and accurate delivery of packages. But still, USPS has its price advantage when it comes to delivering light urgent letters. For items under two pounds, it is always more cost efficient to chose USPS. But the tradeoff is the reliability. For a 1-pound over-night urgent document to
CAMBRIAN GROUP
be delivered from Claremont, CA to Edina, MN, USPS charges $30.15, UPS charges $55.61 and FedEx charges $32.18. Yet, not all USPS Express Mails get delivered to deserted regions on time. For non- urgent packages heavier than two pounds, FedEx Ground and UPS Ground will be cheaper than USPS Priority Mail, e.g. for a 10-pound package to be delivered from Claremont to Edina, USPS Priority costs $27.25, USP Ground costs $18.17 and FedEx Ground costs $16.61. Clearly, it really boils down to the customer preference – reliability or cost efficiency. Evidently, UPS mainly competes with FedEx since they are more similar. They offer similar services at similar rates. Since they formed a tight oligopoly, it is unlikely that they compete on prices. Instead, they adopt different branding strategies and business models so as to differentiate themselves. UPS’s golden shield logo comes across as being reliable, secure and strong. FedEx’s embedded right-pointing arrow within the logo exemplifies its fast and accurate delivery due to their technology. UPS has about 428,000 employees working six days a week with 7.9 million customers in over 200 countries and territories. There are roughly 95,000 package cars, vans, tractors and motorcycles and a fleet of 280 planes that facilitate the delivery process. FedEx on the other hand, has about 280,000 employees and independent contractors worldwide and about 70,000 vehicles and 670 aircrafts for delivery service. Evidently, UPS owns the road with an additional 25,000 vehicles while FedEx dominates the sky with almost three times more the fleet of UPS. UPS’s market share in US domestic ground shipping is above 60%. To further differentiate itself from FedEx in terms of auxiliary services, UPS announced in 2007 the UPS Delivery Intercept that allowed customers to intercept and reroute packages before they were delivered. In the same year, FedEx added Direct Mail and Print Online Services to allow people to print and ship business documents online, saving the hassle of collating and stapling hundreds of copies of documents. In addition, UPS entered the logistics services in 2004 by acquiring Menlo Worldwide Forwarding, a leader in the supply chain management market. Since then, UPS Supply Chain Solutions offered services including warehousing, tracking and financing. In 2009, UPS Freight, Supply Chain Solutions and other auxiliary businesses generated $7.4 billion, 16.5% of UPS’s revenue. Over the past year, this segment continued to grow.
CAMBRIAN GROUP
Although UPS and FedEx provide similar services, they are different in numerous aspects. If UPS capitalizes on its unique focus on supply chain solutions and generous human capital compensation plans, while expanding more aggressively into the emerging markets, it will remain different and competitive in the long run.
Buyer Bargaining Power There are many buyers in this market; both individual and business customers need the express delivery service to have their urgent documents shipped to another city or country. Since UPS and FedEx both do a fantastic job in terms of delivering and offering customer service, people do not have preference on which to use since both are considered trustworthy. In addition, for a one-off shipment, rates for a given delivery time could be readily obtained through the two firms’ respective websites, information is fully available and individual customers could not bargain for discounts on shipping. In addition, demand in this market is fairly inelastic. Since people care for safe and timely delivery more than price, few people spend extra time searching for alternative couriers. However, business customers, who do repeated business with the company and have contractual agreements, do have a slight advantage since they could switch courier depending on which company offered a better deal. The two firms may then offer discounted rates and superior customer services to compete for these lucrative contracts. Hence, the individual buyers in this market have low bargaining power while the corporate customers have slightly more bargaining power. The presence of third party shipping negotiators further increases buyer power for the business customers who utilize them, since they presumably lower the search costs and transactions costs of shopping between delivery companies.
Supplier Bargaining Power The suppliers in the express delivery market come in many forms. There are ones that supply the package envelopes and boxes for deliveries; there are also ones that supply the vehicles and aircrafts. Both supplier segments
CAMBRIAN GROUP
are vital in UPS’s business, yet they do not have significant bargaining power for numerous reasons. First, the packaging material suppliers reside in an industry with low product differentiation and they add little value to UPS’s service. There is no dominant player in the packaging material market. Essentially, any paper product company will be able to supply UPS with envelopes and boxes. The fragmented industry offers them little supplier bargaining power when negotiating with UPS for better deals. The vehicle and plane suppliers do not have supplier power either. Both the automobile and aerospace industries were hit during the 2008 financial crisis and are slowly recovering. At this point, it is reasonable for both Boeing and Airbus to keep UPS as a valued customer to capture as much profit as possible. Instead of jacking up the price of the planes, the two aircraft manufacturers may even slash prices to secure a contract with UPS. In this case, UPS possesses the buyer’s power. Other suppliers for UPS include labor and oil companies. These two groups have more bargaining power. UPS is proud of its commitment to its workers. Unionized workers have been treated very well and they have their contracts renewed one year before expiration. This gives labor unions more power when a financial crisis hits. UPS will not be able to layoff people that easily. Oil companies also have moderate degree of bargaining power since the vehicles and aircrafts need the fuel for operations. High oil prices directly drive up the operating costs for UPS, for instance, UPS spent $4.13 billion on fuel in 2008, a 39% increase from 2007. Since oil is hard to be substituted, especially for the operation of aircrafts, UPS faces moderate bargaining power from its oil suppliers whenever oil prices escalate. Nevertheless, in recent years, UPS has started investing in “green” vehicles for its massive worldwide fleet. Currently, UPS has 1914 vehicles that operate on alternative fuel. The gradual shift to green transportation will make UPS slightly less dependent on the oil suppliers. But for now, UPS is still vulnerable to oil price fluctuations.
Entry To compete in the express delivery market, a potential entrant would require a significant amount of capital. The barriers to entry are fairly high.
CAMBRIAN GROUP
First of all, UPS and FedEx have achieved economies of scale and it is much easier for them to collude in implementing a short-term predatory pricing strategy to drive potential entrants out of business. Also, the express delivery service is not that highly differentiated. The core of the business is to deliver packages in a timely and accurate manner. UPS and FedEx have both taken advantage of their learning curves and achieved efficiency and specialization in the process. Any entrants will need a huge amount to time to accumulate such experience to become competitive. These entrants also have to incur high customer acquisition costs in terms of brand building, marketing and advertising to make customers switch from the reliable UPS or the fast FedEx services. In addition, the mere fixed cost of buying real estate, vehicle and aircraft is substantial, not to mention the additional cost associated with warehousing and inventory management. Furthermore, purchasing rights to landing and accessing gates in airports is another expenditure entrants need to incur. Potential entrants may only focus on providing services within a small region, since it is unlikely that they establish the scale of network and coverage like those of UPS or FedEx in a short period of time. But then they will have to compete with regional couriers or USPS. Either way, it is not an easy market to break into.
Substitutes and Complements There are no direct substitutes for express delivery services. Although the Internet facilitates communication between people and drastically cut down the demand for paper mail communication between friends and families, as well as between businesses, it cannot replace the express delivery service since people are increasingly ordering goods online, and still at times have the need to send physical packages. With the launch of eBay and Amazon, people’s purchasing behavior has changed drastically. This creates another market for the express delivery service providers. Nevertheless, few substitutes exist to compete with the two major firms. UPS and FedEx have established positive brand images and have won trust from customers with their superior tracking system and on-time deliveries. Even though people pay a higher price for a UPS or FedEx service, they are paying for the extra safety insured by the two couriers. People’s willingness to pay for such reliable services is higher than that for an untested courier.
CAMBRIAN GROUP
However, when new local couriers start to offer cheap and efficient deliveries in the region, they gain customer’s trust and preference over time. These smaller players know the local routes better and charge the service at a much lower rate. This is what UPS has encountered in China. Hundreds of local couriers have thousands of workers making deliveries on motorcycles. These workers are young and know the region well enough to perform the delivery task well. They come and pick up packages at any time and within a few hours the package is delivered to its destination. Such low cost couriers could be seen as a substitute for UPS’s service. UPS will have to continue to work on its branding in emerging markets and win the trust of the people. On the other hand, UPS has already done a marvelous job in offering its Supply Chain Solution as a complementary service to its customers. UPS is well known for its ability to track items and communicate back to both customer and shipper in a timely manner. This technology should not be constrained to the delivery industry only. Most manufacturers and consumer good producers need to handle sophisticated supply chains. With globalization, many firms are outsourcing parts of their business or offshoring their production to other parts of the world. Consequently, being able to track supply chains in an efficient manner is instrumental for manufactures who aim to meet end customer demands as quickly as possible while keeping warehousing and inventory cost low. UPS could utilize its technology and experience to provide similar solutions to the manufacturing industry. This approach provides UPS with another revenue stream while assisting the firm to brand itself as a leading high-tech provider.
CAMBRIAN GROUP
FINANCIAL ANALYSIS Overview
Billions
On February 1, 2011, United Parcel Service (UPS) reported very impressive results for the fiscal year 2010 (ending 12/31/2010). During FY10, UPS reported total revenue of US$49.545 billion, up 9.4% from US$45.297 billion in FY09, while total operating profit rose by 54.5% from US$3.801 billion in FY09 to US$5.874 billion in FY10. UPS posted a net income of US$3.488 billion in FY10, up 62.1% from US$2.152 billion in FY09. UPS’s performance improved significantly driven by the recovery of the overall economy. The company has managed to recover fairly well in FY10, as its revenue almost reached its 2008 high, and operating income and net income surpassed their 2008 levels. $60 $50 $40 $30 $20 $10 $0
2010
2009 Revenue
2008 Operating Income
2007 Net Income
2006
CAMBRIAN GROUP
Solvency and Liquidity 2010
2009
2008
2007
Debt / Asset
0.76
0.76
0.79
0.69
Debt / Equity
3.18
3.14
3.70
2.20
Current Ratio
1.96
1.49
1.13
1.20
Long-term Debt/ Equity
1.30
1.13
1.15
0.62
CAMBRIAN GROUP
At the end of FY10, UPS’s total debt was $25.55 billion. Over the past four years, UPS has maintained approximately this level of debt. Since there was little fluctuation in the company’s asset level, the company’s debt/asset ratio has been very stable. However, UPS’s leverage ratios are relatively very high, compared to those of FedEx, specifically, UPS had a debt/equity ratio of 0.76 at the end of 2010. Although UPS managed to lower its debt/equity ratio from 3.70 in 2008 to 3.18 in 2010, it is still very high comparing to its rival. Regarding its long-term solvency and capital structure, UPS has been loading up its long-term debt for years, reaching a total of $10.49 billion at the end of FY10. The pattern is very clear when we look at its long-term debt/equity ratio. At the end of 2010, their long-term debt/equity reached 1.30, compared to FedEx’s ratio of 0.11. Despite their high leverage, UPS’s interest coverage ratio and annual interest expense/EBIT, which test how well a company can cover interest payments by earnings, is around 6%. Because the interest coverage ratio is still at a relatively low level, the interest payments do not pose a problem at present. Regarding short-term liquidity, at the end of 2010, UPS has a very impressive current ratio of 1.96, which has grown at an increasing rate every year since 2007 as a result of decreasing current liabilities. Moreover, its current liability has been cut in half compared to its level in 2007, because of a significant drop in the current maturities of long-term debt, valued $355 million in 2010 down from $3,512 million in 2007. This drop was due to the issuance of new debt and refinancing of existing long term debt in both 2009 and 2010.
Profitability and Growth In FY10, UPS achieved significant growth, as revenue and net income increased 9.4% and 62.1%, respectively, year-over-year. A large portion of this growth was attributable to the international package sector, in which total revenue grew 14.8%. Such growth is driven by increases in the average daily package volume in the international package sector, which rose 13.6% year-over-year, whereas the average daily package volume for US domestic packages grew only 1.80%. UPS has properly recognized that the economy will recover more quickly internationally than it will domestically and has moved to position itself to better take advantage of this.
CAMBRIAN GROUP
In 2010, UPS began operating its new intra-Asia air hub in Shenzhen, China, allowing UPS to better compete with FedEx in China. Also, UPS has established new relationship with local partners in other key emerging markets of Vietnam, Malaysia and Indonesia. Such expansion and partnerships enabled UPS to expand the coverage of its global networks. The profit margin and operating margin both improved significantly from FY09, as operating margin and profit margin reached 11.86% and 7.04%, respectively.
CAMBRIAN GROUP
Operating Margin
Prot Margin
This impressive performance can also be attributed to better pricing and improved productivity. Average revenue per piece increased 4.2%, while revenue per piece on US domestic packages alone increased 3.8%. The better position in pricing enables the company to gain more profit per domestic package.
CAMBRIAN GROUP
Finally, due to the increase in productivity, the company is able to post only modest increase in operating expenses. As a result of the beneficial factors, all of its business lines have seen significant increases in operating income. The operating income of domestic package, international package and supply chain &freight increased 57.8%, 39.3% and 101.7%, respectively.
SWOT ANALYSIS Strengths Reputation and Brand Strength Highly recognizable trucks and logos. Also has physical store locations in high density areas. Has a very strong reputation for reliability, at least in the domestic market. Infrastructure and Logistics Largest package delivery company in the world. Delivers 15 million packages a business day on average. This also allows for spreading fixed costs over a larger number of orders. UPS utilizes its infrastructure more efficiently than its competitors, allowing all types of deliveries, whether express or ground to all travel through the same infrastructure. This allows each individual truck or facility to have much higher volume. The extensive infrastructure necessary provides large barriers to entry in the industry, as evidenced by DHL. High customer satisfaction Customers prefer having the same driver regardless of express/local delivery. UPS’s package tracking tool makes their service highly reliable
CAMBRIAN GROUP
Labor Good employee relations. Signed labor contract well before expiration, so no risk of labor disputes Higher Margins Improving operating margins as a result of fixed cost leverage on a higher volume of packages delivered. Also has more non-express ground deliveries, which produce higher margins, than its rival Fed Ex.
Weakness Exposed to macroeconomic factors In 2009 there were rapid fluctuations in shipping demand, which created uncertainty. Exposed to fluctuations in oil prices. This is somewhat moderated by ability to pass on higher costs to customers through surcharges. Complex customer contracts Pricing is based on numerous factors and surcharges. Even professional shipping departments find the contracts difficult to understand. This perhaps allows for less direct competition with Fed Ex on price, but could anger customers and margins could be impacted substantially if third party consultants are able to continue negotiating contracts.
Opportunities International Expansion The company recently built an air hub at Pudong International Airport in Shanghai with the capacity to sort 17,000 parcels an hour. UPS is spending a lot of money to
CAMBRIAN GROUP
establish their place in the market for Chinese shipping. They already provide service to most major locations in China. Their size allows them to establish themselves in the market regardless of initial profitability. Further, there is still huge potential for the growth of Internet retailers in China, which is a complimentary good to UPS’s service. Supply Chain Solutions Currently, 18% of revenues come from supply chain and freight businesses. UPS is looking to diversify its operations by further utilizing its ability to provide logistical services. They are also strongly positioned to provide asset based and export credit financing.
Threats Intense Competition for International Market There is substantial competition from local firms and rival Fed Ex for the international delivery market. Could lead to price war. Slow Economic Recovery Potential risk if economic recovery is slower than expected or if other macroeconomic factors are less favorable than estimates. Antitrust Allegations The US Department of Justice is conducting an investigation into a potential antitrust lawsuit against Fed Ex and UPS. The investigation stems from allegations that the two companies cooperated to block out third-party shipping negotiators and consultants. Large risk to the company if they must continue to work with third party consultants.
CAMBRIAN GROUP
PART III RECOMMENDATIONS
CAMBRIAN GROUP
STRATEGIC RECOMMENDATIONS International Delivery % ### "#%!( !#"( ##% & "#$!#* -"! &# !#$ #"!"#%( #!#(# ' #! # (+ &%!*#!"!! ## & #! ! !#"* #! #"!%'*&"" #%(' #! # (* ! $!!".%!( " #! + $!! #(* "!""%(#!( # #!#" !#* "# #( + #" * " ! !# !" "&# " *"&" # * (" "+ & #(# # !&# $!!"*" #( $"# "# ! %&! ! #!#! "!%"*"&" ! % "!%# !! $ ! # "+ " $ $#)#! "# #( " "# $!& !"#!$#$!* "#(% # + #" *#($# !$ ##"# #(# ! "" ! $"% $ "+ &#( $"# "$!###!"# #!"#!$# #"*%# !%!"! $ # #"" !# % $ + # * $! ###" #" !#( ! !" !#(*!#%# $!!"+ &%!*#!! ! # ! $## !!#(! # !(""#! #" !#"#(! # + " $%!#"%( #" & !#"* ") ## #(!#"# !%#%!"+ (" $ !#$!( ") #! ! $##! "!%"*" #"#$!"!# ( # ! (# $!!"+
Supply Chain Solutions -""$ ( " $# "! #!! &# ("" !""%! &#+ "# $#)&##(!"##* ( "# "!%"* "#" $#" #! ! " $" ""+ &"# " %!(#% ! % ,# "(# $ !"# "! # " #! #"!%"#( ! %+ &%!*" # "! # " "!%" # %! $" $ # ! *"$" $ #"!%"*" &"*& ! ##+##" " $" "" & !"&# $#! $ # # #$($ !"# + $
/0
CAMBRIAN GROUP
#!"!%"""# !! " $" """( ! % ""!( #! " #&"# !% "# &!#(%% !""! # " #!"!%"+ ! %" ## ! # &!#(&' # #"!%"#( ! &#( $#)(" $" ""+ "! #(1 # !53432$ & # ! # #! $ ( $# "+ ## !#"%!#" #""*. 1!#2 "#"*/ #(!%!( $ !"$"%%!#" #"* # ! #%%!#" #"+ &"#$!" $# "#"*" ("0$"# !" $ #""$"*. "#" "#& !& ! ##!+/% ###"!%" !( $ ( $# "! # &( & * "# & ("%!( (* ! #% %!#" # # !#%# #!$!! # +# &"#"" #&##" *&&&+# & "#"+$ "+ * ! %" "(# & $# #%"!%"* - $#$### %!" $" "" & ! #""!%"& $ &$ # &"##!" #!%!#" #"+
UPS Capital #""$"# #! $ ( " $# "*& ! %"%! $" "!%"+ ( ! %' !#!# ( & &" (# '# # $"# !" ! !#"+ " " !$! #(#' !#, !# # # ##"* ! $% #"*"$"! " + (" ! ""#,"
* &#( ! %!## "* #!)(""#"## !$!! #(&# # #& !*"$"&! $" ! ,#! "#""#"+ # (-""#! #"# ! % "#"!%"* #"""" !#!""*#"" " # #!" ! + &%!*% ## #! "!#!$( #!)(!""#"( * ! $! #( %! # ! )# "*# (" #!(' "# (!#!""+ ! !* "# #! #"'"# # &# "# ! % "(" $! + # *#""%" #!$"# !"! % # ! $#"" $!" #*& #( $"# " "+ ! !* " $ # $# #) #! !# " "&#" $" """ % ## " !"$ (""" "###"""" !! &!"# #!!# ! )# "*#& $%"# ! ## ' #
56
CAMBRIAN GROUP
" #$$" .$% ) $" *1%" $, $#&") ! "$ $$$ $)% "#$ $" $$ # $# + $$$ !$$ ! ), '&"+# #$) $ %$ & )"$"# + $## ') "$ $ #$"& %#+ " $ #"&# $)%"" $ )!" &+$)# $ ' '" $" $)# % ,
Potential Collusive Behavior & "4232+ '#%$'# #$ $ () +" $$!" &# #% $ #"&# $$#!"# "#!! "$ $"$#, $$ ( %$ " %$ $"!"$)#!! #% $ $#+# " !"( , ' $#+$ !"$ $ %#$ $$"%#$&# % &#$$ $ ! $ $ %# $' $$' " #, $" #&!% ) )'" , $ (%# ! ( $"$#'$$"%#$ "#'""$# ! '&"$) $ "#+ % &")$ +& % #! $#+'$+#$ % " %#! ## #%""#, " $ $ '#%$+/ (&"$"$ $"(# ! ( $$ )+ $ #$+#!!"# %#$ ! )#! #$#$ !$ % "#$ $ % # $" $# '$)!"$ $ $!" # $$#!!"'#$ &",0!! #% $ $" ##%# ' " $ !"$# $"($ &$ '#$ #$ "$"%#$ "#, $ +# $# #% $ $# # !" &&" %#& %#"&# #%# #$ #%!! "$, " $ 4227"! "$) " $ )+ " $ 338 #!!"#%# #% $ $, $ +" % 628 #!!"# ' %# #% $ $##&# '"" 368-528, $'##$ $$$ $##!! #% $ $##& $# "$ % $ $ ' #, ##& # $ $ $#")$ $$ "# # "$ ) %$ (.#!" $#, '&"+$ " ! "$ $##%#$$$!"# $# #% $ " #"$# " $ #!" !$$ $' $$' ! #+# $"!" #$"%$%"##%$$ "#"%$ ), $ +$# # ')# '"#$"""# $") $ %#$")+# ' ! ) % !" &%#$'" %$# '" #$+$# #% $ $#' % %# $# ! ) "$#!"$% "" %$#+'" ! )'$ %$#!! #% $ $' % $ "%#$# ' ! ),
47
CAMBRIAN GROUP
" 4229" #!" '$ " ) " & # """'% # % %"" + "' !#" "!* 45)4232) " !! " #" " ! "! % '* ')" !!"""""'% #!"% %"" "' "" )"'% )-$# $ ). "' $! " ! $!" "#!" * %$ )"" "' !#" " $ ' "! $!) & #!" % %"" ")$ "' " !"* " )-!" " ! !"""'/0! " "" $ ' +! !# "%" '" "' !#" " /0"#'#! !#" ")" % " "" "! " !%""! )% " "" ! '! # "! %) ") !" " !#! !*.
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
48
CAMBRIAN GROUP
CAMBRIAN GROUP
APPENDICES Appendix 1
CAMBRIAN GROUP
Appendix 2
CAMBRIAN GROUP
Appendix 3
CAMBRIAN GROUP
SOURCES AFMS LLC vs. United Parcel Service Co. and FEDEX Corporation (First Amended Complaint for damages for Violations of Sherman Act Section 1 and Sherman Act Section 2) Google Finance Yahoo Finance UPS Company website UPS 2010 Company Report UPS 2010 10-K Morningstar Analyst Research Credit Suisse Transports- UPS: A Solid Close to 2010; 2011 Looks Good Standard & Poor’s Stock Report The Street Ratings Report Ford Equity Research Rating Report http://www.law360.com/topnews/articles/219003/doj-probes-ups-fedex-onantitrust-claims http://en.wikipedia.org/wiki/United_Parcel_Service http://www.youtube.com/watch?v=VPZzB7nqVf0 http://thenewlogistics.ups.com/ http://www.youtube.com/watch?v=ay1wC17xzKQ&NR=1
