A Stronger UPS Reinvents Itself

It’s been more than two years since United Parcel Service Inc.--and the nation’s economy for that matter--were badly disrupted by a 15-day Teamsters strike. UPS Chairman James Kelly still dislikes talking about the walkout, but admits the strike was a turning point for the giant shipper.

“It was a wake-up call,” Kelly said, recalling how the strike sparked enormous frustration among thousands of companies--especially small businesses--that rely on Atlanta-based UPS to move their goods. “They had a right to be upset. When we came back, we recognized that we had to reestablish customer confidence.

“We all worked a little harder after that,” he said during a recent visit to Los Angeles.

A little, indeed. UPS is stronger now than before the walkout, with its shipment volumes, revenue and profit all higher than pre-strike levels. One reason: UPS has best exploited the surge in online shopping and handles about 55% of the e-commerce goods being shipped to consumers.

Big Brown, as the company is nicknamed because of its fleet of chocolate-brown trucks, also has patched up much of the customer goodwill and employee morale that suffered during the strike.

Many customers who chastised UPS in public and vowed never again to rely on just one shipper are today feeling secure with UPS’ service. “We’re hearing less and less” of those complaints, Kelly said.

Worker morale got a big boost in November when UPS--which had been owned by its managers, employees and retirees--raised $5.5 billion in the biggest initial public stock offering in U.S. history, a sale that enriched many of those workers.

Moreover, UPS is trying to transform itself from being mainly a package shipper into a diversified transportation powerhouse. It’s already spent more than $10 billion in recent years to invest in computers, wireless devices and digital networks that will help propel its growth.

All those gizmos enable UPS and its customers to keep constant tabs on their shipments. But they’re also helping the company become a force on the Internet, in electronic-funds transfers for businesses and in “logistics”--providing firms with warehousing, packaging and shipping services.

UPS is doing a better job of pricing its services to keep its profit growing and is shedding unprofitable services and customers, analysts said. The company also is rolling out new ventures, such as opening stores that would help consumers pack and ship their parcels and that would serve as sites where customers can pick up packages. The move is a direct threat to such established postal-service chains as Mail Boxes Etc.

UPS has no choice but to reinvent itself. Though it’s strong and profitable, the company is waging a fierce battle with FedEx Corp., Airborne Freight Corp. and other transport rivals that are launching their own ventures aimed at grabbing some of UPS’ leadership in the delivery business--both domestically and overseas.

UPS “is a transportation company, and it typically doesn’t grow any faster than economic growth,” which is now about 5% to 6% a year, said Matthew Collins, an analyst at investment firm Edward D. Jones & Co. in St. Louis.

To do better than that, it needs to take market share from FedEx, Airborne and the Postal Service’s existing business and to jump on new opportunities, he said.

Even so, UPS enjoys an enviable position because of its sheer size and the breadth of its far-flung system, which serves more than 200 countries.

“Although there is plenty of competition, UPS frankly is on the offensive, not the defensive,” said Scott Flower, an analyst with Salomon Smith Barney in New York. UPS, he noted, has “an integrated air-and-ground [delivery] network that will pose significant competitive issues for companies like FedEx.”

The fact remains that shipping boxes is still the bulk of UPS’ business--about 80% of its revenue comes from deliveries between businesses. Yet “management clearly knows how to make money” with that core service as it waits for its new ventures to mature, Collins said.

Indeed, UPS’ profit last year, excluding a one-time charge, surged 34% from the previous year to $2.3 billion, as revenue climbed 9% to $27 billion. And much to UPS’ delight, its fastest-growing delivery unit was its U.S. next-day air service that competes with the likes of FedEx. That unit’s average daily volume jumped 11% from a year earlier.

UPS has disappointed some investors, though, as evidenced by its stock price. After going public at $50 a share, the stock climbed as high as $76 but quickly dropped back. However, the stock gained $4.13 a share Friday to close at $63.75 on the New York Stock Exchange.

One reason: Some investors expected a bigger surge in UPS’ fourth-quarter 1999 average daily package volume--a key indicator of how many e-commerce packages the company delivered during the Christmas holidays. The figure for U.S. shipments rose a solid 5.6% from a year earlier, to 13.1 million packages, but some corners of Wall Street had hoped for an even bigger spurt.

Some analysts said that because UPS remains primarily a transportation company, it’s hard to justify a higher price for its shares. They already trade for a rather pricey 27 times UPS’ expected per-share earnings for 2000. FedEx, by contrast, has a price-to-earnings multiple of just 18, and Airborne’s is only 12.

“These other new areas” that UPS is entering “will play a larger role in the future, and then maybe we can be more justified about getting excited about the stock,” Collins said.

And it’s ironic that steering UPS to that future is Kelly, 56, a stocky, blue-eyed UPS lifer whose accent reveals his New Jersey roots. Kelly started as a UPS driver in 1964, steadily moved up the management ranks and became chairman and chief executive in 1997.

Kelly, in fact, manifests the bridge that connects the unorthodox, rigorous operating style that UPS followed for 90 years with its aggressive new push into technological fields that require a more facile, adaptable management.

UPS’ 80,000 drivers still must abide by rules set down decades ago that govern how they dress, wear their hair and even how they hold their keys. But UPS’ 344,000 employees and its investment in technology also are helping the company better profit from the boom in e-commerce.

Case in point: When asked what might lie ahead for UPS, Kelly said the company is mulling whether it can deliver packages to customers’ homes at precise times they request, rather than requiring recipients to wait for the driver to arrive on daily rounds.

That in itself is a tall order, because UPS moves about 2 million residential packages a day and 13 million overall.

“Somebody asked me the other day: ‘What are you going to do to get rid of those yellow stickers?’ ” Kelly quipped, referring to those stickers UPS drivers leave on front doors to let customers know they’ve come by.

“We have to figure out a way to do those things . . . at a price that people are willing to pay” and at a cost UPS can justify, he said. “But the value of delivering to homes is increasing” because of the Internet, making it easier for UPS to invest in the effort, he added.

Only a few days after Kelly spoke, FedEx launched its own home-delivery ground program that will provide such services as--you guessed it--deliveries by appointment and during evening hours. It was a direct shot across the bow of UPS and its lead in moving goods that consumers order on the Internet.

UPS’ response? FedEx’s program won’t be available nationwide for at least two or three years, and, in any case, UPS isn’t going to be pushed into launching a me-too program until it’s ready, said UPS spokesman Ken Sternad.

“Our actions will be driven by the marketplace,” Sternad said, “and we’re moving as fast as we can.”

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The Book on Big Brown

United Parcel Service Inc., which recently went public after 93 years of private ownership, is the nation’s largest package delivery concern. A look at the company:

Headquarters: Atlanta

Chief executive: James Kelly

Employees: 344,000 1999 Delivery volume: 3 billion packages and documents

Trucks and ground vehicles: 149,000

Airplanes: 575

Facilities: 1,700

1999 revenue: $27 billion

Stock market value: $77 billion