Written by Josh Taylor
UPS recently announced the pending sale of its UPS Freight division to TFI International (“TFII”) for $800 million. Given UPS’ history and their new “better, not bigger strategy,” it’s a move we all should have expected and, with the impending acquisition, a move that should cause UPS customers to reevaluate their UPS contracts and terms.
A Brief History of UPS Freight: The One-Stop-Shop That Wasn’t
Wanting to become a “one-stop-shop” for ground freight services, UPS acquired Overnite Transportation Company in 2005 for $1.25 billion. For UPSers, dreams of integrated networks and unprecedented efficiencies were being realized that would cement UPS as the dominant U.S. carrier for another 100 years.
In reality, UPS gained Overnite’s strong network on the East Coast, West Coast and in the South but continued to interline much of the volume sent to the interior of the country. Integration and rebranding were slow, but the acquired business helped UPS counter the threat from FedEx, which five years earlier had rebranded RPS as FedEx Ground, and was merging its Viking Freight and American Freightways acquisitions into FedEx Freight.
UPS account executives leveraged UPS Freight as a loss leader by offering “bundled agreements,” pricing contracts purported to reward parcel shippers with better incentives if they also used UPS Freight. Unfortunately, most bundled contracts were structured with LTL Freight commitments, not bonuses, penalizing the parcel discounts of many loyal shippers after UPS Freight service issues sent them back to their previous LTL carriers. Even 15 years later, UPS Freight cannot maintain the shipment delivery consistency and high level of service provided by the UPS (and FedEx) parcel network.
Margins remained slim at best for the next decade. More than ten years in, rebranding and technology integration remained incomplete, fueling the belief that UPS never gave UPS Freight the resources it needed to succeed. Relations with the Teamsters union became strained, culminating in a virtual shutdown in October 2018 when UPS publicly declared it was clearing all LTL freight from its systems in case the union voted against their last, best, final offer. (There was no more money to be had, claimed UPS, which reported record profits around $1.5 billion that same quarter.) Dreams of integrations and efficiencies were slipping away.
In 2015, UPS acquired Coyote Logistics for $1.8 billion. As a non-asset based freight brokerage platform, Coyote quickly became the Fresh Prince to UPS Freight’s Carlton. It was cooler, more profitable and didn’t dance like Eddie Murphy mocking a teenage Courteney Cox. Most importantly, it got UPS a cut of shipping revenue without having to touch a pallet or sign a union contract. Originally focused on truckload, Coyote quickly expanded into LTL shipments.
By the end of 2020, the dreams Big Brown had for UPS Freight had proven largely unobtainable, except by FedEx. FedEx Ground and FedEx Freight were successfully coordinating deliveries and optimizing volume in their respective networks, something UPS could never get right. Transportation Topics rated FedEx Freight as the #1 LTL carrier in the U.S. with over $7.24 billion in 2020 revenue, while reports from FedEx suggested an operating margin around 10%. Despite ranking fifth by most estimates, UPS Freight managed just 44% of FedEx Freight’s revenue ($3.15 billion) while posting an operating loss of $463 million. By selling now, UPS expects to recognize a “non-cash, pre-tax impairment charge of approximately $500 million on its statement of consolidated income” for 2020, effectively offsetting its 2020 losses.
“Better, Not Bigger”: Why is UPS Selling UPS Freight?
Before Carol Tomé took over as UPS CEO in June 2020, UPS tried to be everything to everyone. Prioritizing quarterly top-line revenue growth had delayed network investments and justified lopsided customer relationships. Tomé immediately refocused UPS on margins, instituting a plan to get “better, not bigger.”
After operating at a loss two of the past three years, no one should be too surprised that UPS Freight was on the chopping block. After all, UPS still profits off LTL shipping through Coyote Logistics, and maintains a certain level of trucking capability through UPS Supply Chain Solutions. At the same time, TFII is getting an excellent deal on a top-5 LTL carrier at or near the bottom of the pandemic market. As industrial business ramps up and rates increase, UPS may feel more like the Minnesota Vikings than the Dallas Cowboys after the Herschel Walker trade.
While Tomé’s better, not bigger strategy has done wonders for UPS’s share price, how it applies to UPS’s “customer first” mantra is less clear.
During UPS’s Q3 2020 investor call, Tomé stated she had “heard from customers that speed and ease are most important.” However, despite advances made in 2020 to close the time-in-transit gap, UPS remains slower on average than FedEx on the ground, often by as much as two days for residential ground shipments. Instead of addressing this disparity – which would help SMB sellers compete with the online giants – Tomé announced on the same call that she was reducing planned capital expenditures for 2021.
UPS capped shipping volume for many sellers during the 2020 holiday season and has reportedly delivered letters to long-time, loyal customers unilaterally cancelling their incentives and forcing them to accept rate increases well over 20%. For many, this falls short of the “partnership” they had come to associate with UPS and reframes the intentions behind better not bigger.
How Will the Sale of UPS Freight affect UPS Freight Customers?
Most current UPS Freight users should benefit from TFII’s acquisition. While TFII is relatively unknown in the U.S., it is a significant player in Canada and has a strong history of successful acquisitions. Morgan Stanley reports that the LTL portion of UPS Freight will operate independently within TFII as “TForce Freight.” (UPS Freight dedicated truckload will join TFII’s truckload segment.) TForce Freight will also continue serving UPS’s ongoing LTL distribution needs, and UPS will provide freight volumes and other services to TForce Freight for at least five years. Since UPS Freight workers will go with the freight business to TFII, most users can continue working with the same sales and operations teams they’ve worked within the past.
Because UPS Freight was used as a loss leader, any shipper with this arrangement will see significant rate increases as TFII works to boost margins from breakeven to 10% over the next three years. Morgan Stanley highlighted similarities to XPO’s 2015 Conway acquisition and anticipates few risks for TFII with this approach.
How Will the Sale of UPS Freight affect UPS Parcel Shippers?
It’s too early to understand the details, but some UPS parcel shippers could experience increased rates. UPS Freight LTL spend is still bundled into many UPS parcel contracts, and it’s unclear how, or if, UPS plans to address this.
A presentation posted by UPS on January 25 promises only that the commercial agreement with TFII will “allow customers to continue using UPS Ground with Freight Pricing,” the operational twin to UPS Hundredweight. Unfortunately, this provides no insight into how UPS parcel agreements will be impacted if their incentives are tied to UPS Freight spend.
Even without a loss leader or the need to prop up an unprofitable business unit, don’t expect UPS to accept lower rates for Ground shipments in the near future. With capacity constraints still driving the seller’s market and Tomé’s focus on immediate margin improvement (perhaps to the long-term detriment of the company), expect UPS to continue curating the volume it wants in its system.
How Can I Tell if the UPS Freight Acquisition Will Affect Me?
To determine if your contract might be affected, check the Committed Services section toward the end of your agreement. If it mentions UPS Freight LTL services, the amount you, as a shipper, spend on those services could be used to determine your portfolio tier (aka, revenue band) in the Portfolio Tier Incentive section. If your contract has an enterprise tier incentive, even more parcel discounts are tied to your UPS Freight spend.
Unsure if you will be affected or how you should address it with UPS? Contact the experienced, knowledgeable experts at Shipware for help.
Josh Taylor is Senior Consultant for Shipware, a parcel consulting firm that specializes in cost reduction and recovery services. Prior to his work at Shipware, Josh spent more than 17 years at UPS, including as an account executive from 2007 to 2009, when UPS began bundling parcel and LTL spend into parcel shipping contracts. Moving into Pricing and Revenue Management Strategy, Josh was relocated to UPS’s headquarters in Atlanta, where he ended his UPS tenure in Global Product Innovation and Project Management. With broad industry knowledge, Josh helps Shipware’s clients reduce costs and improve customer satisfaction by optimizing all parts of your supply chain. Josh welcomes comments and can be reached at JTaylor@shipware.com or 612-655-1199.