UPS Faces Challenges with Lower Margins Due to New E-Commerce Clients

United Parcel Service (UPS) cut its 2024 operating margin target following an influx of low-margin shipments from e-commerce clients like Shein and Temu. This change resulted in a significant fall in their stock and affected rivals like FedEx. UPS also reported lower-than-expected second-quarter profits.

United Parcel Service (UPS) has lowered its 2024 operating margin target, attributing the change to an influx of low-margin shipments from new e-commerce clients speculated to be Shein and Temu. These clients have overwhelmed UPS's network with slower, less profitable deliveries.

The world's largest package delivery firm's shares plummeted 13% during midday trading, also causing a 2% drop in rival FedEx's shares, after missing second-quarter profit expectations set by Wall Street. While UPS did not officially name the new clients, their description aligns with Shein and Temu, known for sending inexpensive goods directly from Chinese factories to U.S. consumers using the most economical delivery methods.

Shein and Temu collectively send around 600,000 packages to the U.S. daily, significantly impacting the air cargo and last-mile delivery industries. UPS CEO Carol Tome acknowledged the unexpectedly high volume during a conference call with analysts, noting a shift from premium air services to more affordable ground and SurePost services, where UPS hands off 60% of packages to USPS for final delivery.

E-commerce giant Amazon remains UPS's largest client. The addition of more low-margin business occurs as UPS prepares to replace FedEx as the main expedited air service provider for the USPS starting in October. Despite these challenges, UPS expects a new five-year USPS contract to be profitable in its first year, focusing on high-margin shipments, including business-to-business and temperature-controlled healthcare deliveries.

UPS reported an adjusted profit of $1.79 per share for the quarter, falling short of analysts' estimate of $1.99, and lowered its full-year adjusted operating margin forecast. The company has recently cut 11,500 jobs to save $1 billion and anticipates cost pressures easing in the latter half of the year.