UPS Is Still Haunted by Ghosts of Christmas Past

Big spending to fulfill Christmas deliveries on time proves costly for UPS

Precaution proved very costly for UPS over the holidays. Haunted by a disastrous 2013 holiday-delivery period, the company spent lavishly to make sure its network wasn't overwhelmed with boxes—and that seasonal investment weighed heavily on profits.

While UPS moved 1.3 billion packages in the fourth quarter, an increase of 8.1 percent from the year-earlier period, all those deliveries generated just $453 million in income, a decline of 61 percent. Profit margin shrank from 7.8 percent a year ago to 2.8 percent. "It was important to fortify the trust of customers and protect our brand, and from that perspective, UPS was successful," said David Abney, the chief executive officer, on a conference call Tuesday morning.

Beset in 2013 by a tide of last-minute shipments and a smattering of winter storms, UPS failed to get an estimated 1.3 million parcels delivered by Christmas Eve. The company spent $500 million in the following months to buttress its infrastructure. UPS also hired 100,000 temporary workers over the holidays to handle a shipping surge.

Ultimately, the company went too far to make sure it didn't let customers down. "Twice burned, twice wise," CFO Kurt Kuehn said.

E-commerce and a rash of free-shipping offers from retailers panicking over the prospect of missing holiday sales targets have proved both a boon and a problem for shipping companies. While demand is strong, it's becoming increasingly difficult to accurately forecast and meet that demand. On its peak day last year, UPS delivered—or tried to deliver—35 million packages, more than double the volume on an average day.

Airlines and hotels face a similar challenge, but those businesses have the advantage of tinkering with prices by the second, according to momentary demand. Advance booking means airline and hotel also know in advance how many employees will be needed on the job for any given day. As a take-all-comers business, UPS doesn't benefit from either of those dynamics.

Until it fine-tunes its forecasting, the company might have trouble delivering a fine fourth quarter to Wall Street. But UPS already has a plan for next year: raising prices by 2 percent to 3 percent across the board.

(Correction: An earlier version of this article misidentified UPS Chief Executive David Abney's title. Due to a transcript error, Kurt Kuehn's quote was also attributed incorrectly.)

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