UPS's 'Better, Not Bigger' Strategy Hits Snag with Margin Worries

UPS's decision to cut Amazon's delivery volume by 50% from 2025 to 2026 is in line with its business strategy, according to CEO Carol Tome. The company aims to move away from chasing volume growth and focus on higher-margin offerings such as healthcare, small businesses, and B2B e-commerce.

Under the 'better, not bigger' approach, UPS is investing in productivity-enhancing technologies like automation, smart facilities, and technology upgrades to create a more efficient network. This will enable site rationalizations and increase revenue per piece while reducing cost per piece.

However, the market has been concerned about the impact on margin performance. Since the announcement, UPS stock has declined 10.5%. The company's implied full-year adjusted earnings guidance was raised, but its implied margin guidance was lowered to just under 9.5%, which is lower than previously forecast.

The concern lies in the quality of earnings, particularly with fuel surcharges. UPS increased its fuel surcharge by $1.173 billion in the first six months, while third-party fuel surcharges went up by $80 million and fuel expenses rose by $664 million. This increase in revenue expectations is mainly due to higher fuel surcharges, which may not be sustainable.