The Fall (and Rise?) of UPS in 2025

What Happened?

When UPS doubled down on its “Better not Bigger” strategy yesterday, it became clear that the disruption is on, and UPS needs to change course quickly.? Sure, “Better not Bigger” played like a symphony during the anomaly of the Pandemic, but that market condition was a historic exception.? When supply and demand returned to normal levels, the wheels began to fall off the bus.

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How Did UPS Get to This Place?

While market conditions have been challenging, it’s not like there were no market challenges from 1907 until the beginning of the Pandemic.? Indeed, UPS had weathered many storms without laying off a single person.? To be sure, UPS had been slowly abandoning its roots since becoming a public company in late 1999.? Cornerstones of the culture, such as promoting from within, reading from the policy and legacy books before meetings, simplified profit sharing, and conservatively managing its financial structure began to fade. The stock had underperformed for a decade and a change was needed.? Enter former Home Depot CFO and long-time UPS board member Carol Tomé.? She answered the bell and through a series of bold moves, sent UPS stock price barreling past $200/share by early 2022.? These actions, however, had long-term implications.

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Improve Revenue Quality

Action - Focused investments in healthcare, B2B, and the higher margin areas of B2C – SMBs and returns.? Meanwhile, UPS has limited capacity for lower-margin B2C customers.

Implication -?Margin focus sent profitability soaring during the Pandemic, while the strategic shift away from lower-margin B2C opened the door to new competitors in the fastest-growing part of the parcel market.

Action - During the January 2025 earnings call, UPS announced that it would reduce the less profitable Amazon volume by over 50% by the second half of 2026.?In 2024, Amazon accounted for 11.8% of total company revenue.? I estimate this translates to about 1 in 5 UPS domestic packages having an Amazon smile.

Implication - Hastening this drawdown will embolden the U.S. parcel market leader to further expand their logistics capabilities.? Additionally, those low-margin parcels cover a lot of fixed costs.? One of the first things I was taught as a new UPSer was that volume creates opportunity.? If you have it, you can optimize; if you don’t, you’re stuck.

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Sell off Lower Margin Businesses

Action - Sold off lower margin UPS Freight and Coyote businesses.?

Implication – Improved near-term margins but eliminated key parts of the “sticky” bundling strategy that enabled UPS to prop up parcel margins and fend off regional competitors.

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Lower Cost Structure

Action - Eliminated some archaic processes.

Implication -?UPS's decision-making was too slow, and cutting through some of the bureaucracy was a big win, allowing UPS to do more with less.

Action - UPS began laying off management employees at unprecedented levels

Implication - In the process of “trimming the fat” a lot of meat was trimmed as well in the form of tribal knowledge and industry relationships.? This cost lever has run its course.

Action - As volumes tapered off, UPS closed 49 operations in 2024 and five more facilities in January 2025, with more to come.

Implication – A golden rule of the “old UPS” was that good times don’t last, but neither do bad times.? By maintaining employees and facilities, UPS was able to recapture growth when the market rebounded.? UPS will be able to leverage technology to do more with less, but people and infrastructure will be harder to replace.?

Action – Agreed to a historic wage increase with the Teamsters.

Implication – While the contract inhibits UPS’ ability to lower its cost structure and pursue non-union delivery options, it does give UPS the ability to aggressively implement technology to partially offset the wage impact.

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Reward Shareowners

Action - Doubled the dividend in 2022.

Implication - ?Shareholders cheered, but this created an unnecessary long-term burden for short-term gain. To put it into perspective, UPS expects to spend around $5.5 billion in dividend payouts in 2025, with Capex dropping to only $3.5 billion. A CapEx less than 4% of expected revenue is keeping the lights on, not growing the company.

Action - UPS has also repurchased about $20B in stock, with more announced for 2025.

Implication – Stock repurchases reward shareholders and senior executives but do little to improve the value proposition of the company.? In the end, you can only financially engineer profitability for so long (isn’t that right, Jack Welch?).? At some point, all firms need to improve the value of their products or services to earn higher margins.

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The USPS Fights Back

The Post Office has perhaps dealt the largest blow to UPS by effectively eliminating the arbitrage opportunity that allowed UPS and others to extract high margins on low-value shipments. The USPS eliminated Parcel Select Lightweight, raised rates on Parcel Select Destination Entry, and removed ounce-based pricing.? At the same time, the USPS dropped 1-to-4-ounce parcel rates for customers using their Ground Advantage service.

At this point, it’s unclear what the net result will be on UPS.? One thing is certain, it will accelerate the B2C market share shift from UPS.? SurePost and Mail Innovations were fast-growing B2C solutions that took advantage of the USPS rate structure.? The 50% of SurePost volume being delivered by the USPS ?is being pulled into the UPS network and rates are going up 6-10%.? Of course, the 50% that is not already in the UPS network is likely rural and super rural volume, which are high-cost packages.?

The biggest impact of the USPS changes may be on Mail Innovations, which doesn’t touch the UPS package network but contributes strong profits to Supply Chain Services.? Tomé ?indicated on the earnings call that the “Operating margin in SCS in the first quarter is anticipated to be low to mid-single digits due to pressure from purchase transportation costs related to our Mail Innovations business.” ???In addition, the January 1st 25% rate increase for Mail Innovations parcels is sure to scare away some shippers

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What’s Done is Done

A shot arrow can’t be pulled back. For example, unwinding the dividend would create tremendous blowback from the institutional shareowners who own most of UPS’s stock. While people and infrastructure can be restored, it won’t be easy and will be expensive. Most importantly, the new competitors who have risen to embrace the eCommerce-driven B2C volume are in it for the long term.

Amazon is already the market leader, Walmart and Target are making significant investments, the regional small package carriers are consolidating, and UPS’ old nemesis, FedEx, has combined its express and ground businesses to dramatically lower their cost structure.? Additionally, new technology-based service providers are making it easier than ever for shippers to match specific shipments with specific carriers.

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What Now?

While UPS has dug a hole for itself, it would be incorrect to assume its best days are gone forever.? UPS still has world-class facilities, some of the best logistics minds in the industry, a loyal customer base, and the best service providers (albeit more expensive) in the world.?

Tens of thousands of UPSers are immersed in the details of the business every day. Sweating the details has never been a weakness at UPS. Stepping back from the details, I see five high-level, game-changing actions that can restore UPS to its glory days.

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1.????? Revisit your “why” and reestablish your culture.? If UPS is just a job for your people, you’ve lost.? It’s what people do when nobody is looking that makes all the difference.? Reestablish the founder’s culture by reading from the policy and legacy books (these books contain stories that exemplify the UPS culture and policies that form the foundation of the company and never go out of style – e.g., “We pay our vendors promptly. We insist upon integrity in our people. We delegate broad authority to our managers.”? The culture was the secret sauce at UPS; earn it back.

2.? ? ? Pragmatically reinvest in the innovation engines that were dismantled during the Pandemic.?UPS has been great at lowering the denominator in the profit equation, but creating customer value that grows the numerator is the only way to sustain long-term growth. Encourage and incentivize a rapid learning culture.

3.????? Stop the financial engineering before it’s too late.? You can only lay off so many employees, close so many operations, do so many stock buybacks, and add so many accessorial charges.? Reinvest in growth.? Take the small hit to your stock price now or suffer a GE-size hit in the future.

4.? ? ? Keep the pedal down, growing the healthcare, B2B, SMB, and returns business,?understanding that FedEx, Amazon, DHL, and others also see these same opportunities.? Aggressive investments in AI productivity solutions, robotics, and automation will be critical.

5.????? Consider partnerships and/or acquisitions that broaden your revenue streams beyond logistics.? The retailer logisticians and gig delivery companies can win in parcel delivery without having to make money in parcel delivery.? They also have access to customer purchasing behavior.? This data is the fuel powering the AI revolution.? UPS needs to level the playing field.

UPS is a proud company with a long history of improving lives through its services. The company can still avoid becoming another victim of disruption, but escalating commitment to a failing strategy is not the path forward. It’s time to change course.