UPS delivered a whopping 19% more packages last quarter to homebound Americans — but it's a curse in disguise

• UPS' business-to-consumer deliveries in the US popped by 19%.
• Executives spoke to an "unprecedented shift" to online ordering among consumers as stay-at-home orders throughout the US force many Americans to shop online for essential goods.
• But it's a curse in disguise for UPS as business-to-business deliveries, which are more profitable for the Atlanta-based package giant, dropped.
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Online ordering, spurred by the physical shutdown of most retailers, has led to an unusual deluge of packages for UPS delivery drivers.

"We're getting flat out hammered right now," UPS delivery driver Brian Lee told CNN last week. "No one wants to go to the store, everyone buys everything online."

On Tuesday, UPS confirmed that upswing in packages in its quarterly earnings report. In the US, the Atlanta, Georgia-based package giant delivered 8.5% more parcels to customers in January, February, and March 2020 than the same three months last year. The rise in healthcare deliveries and an "unprecedented shift" toward online ordering drove the package uptick, UPS said.

Drilling in further, business-to-consumer deliveries popped 19% this quarter, said UPS chief sales and solutions officer Kate Gutmann on a Tuesday call to investors. Business-to-business deliveries fell by 2%.

Chief financial officer Brian Newman added that, as of late March, some 70% of UPS deliveries were residential — an unusually high proportion.

Much of that increase could also be tied to Amazon, which is experiencing Christmas-like demand during a typically slow period. UPS said the Seattle retail giant comprised 11.6% of its revenue compared to 2019.

As physical retailers shutter, Amazon has gobbled up even more market share in essential goods like household supplies and groceries. Oppenheimer's Jason Helfstein is even estimating that Amazon's first-quarter revenue will total $78.6 billion, up more than 30% from 2019.

But, for UPS, the uptick in online ordering is a curse in disguise

Business-to-business deliveries are higher-margin business for UPS. As a result, operating profit for UPS slashed by nearly one-half to $364 million in the US in the first quarter. Its adjusted operating margins fell to 3.5% from 6.6% last year.

Deliveries to businesses, rather than homes, generate more profit for UPS because businesses tend to have more packages in a single stop, and because they tend to be more closely grouped together — compare, say, parking one's van to make deliveries in an office park to driving and stopping throughout a suburb.

Chris Wetherbee, senior research analyst at Citi, told Business Insider that an average UPS delivery at a business translates to 3.2 to 3.5 packages per stop. For a consumer, though, the average delivery is around 1.5 packages per stop.

"Think about a Teamster employee stopping the truck, getting out, running up, dropping off package, running back, getting in the car, driving again, and doing that over and over again — as opposed to stopping and getting a whole pallet and dropping it off," Wetherbee said.

CEO David Abney emphasized to investors on Tuesday that his company's ability to quickly move assets ensured the company was equipped to handle the coronavirus' upending of global supply chains. For instance, UPS was able to scale air cargo in China as the economy there began to reopen in March, and on-time deliveries have endured throughout the crisis.

The call was the last of Abney's 46-year tenure at UPS as he's retiring. The company also announced it would halt stock buybacks and cut spending, but that its goal to get 100% of eligible volume through automated sort by 2022 was unchanged.

For Carol Tomé, who will take the role of CEO on June 1, balancing the shift from commercial deliveries to residential deliveries may endure as a key financial challenge. Some experts are predicting that the consumer norm of more and more online ordering may continue past the coronavirus pandemic.

The uptick in residential deliveries of, say, groceries or cleaning supplies translates to a slash in deliveries to stores that might normally sell those things. As the former increases, the latter will decrease — and margins for delivery giants like UPS will tumble as a result.

"I think there's some bigger picture questions about what this means for the long run of these companies — have we gone past the tipping point where B2C is going to continue to be a substantially larger piece of the business going forward?" Wetherbee said. "And how will they adapt to that?"