News / With final-mile 'between a rock and a hard place', UPS turns back to USPS

© Alexey Novikov

US consumers may feel confused over who delivers their online purchases arriving in UPS packaging.

A lot of these parcels used to be handed to them by a postman, but this changed early this year, when UPS took its low-cost parcel service delivery in-house – but soon the postman may be back.

The integrator used to feed a lot of its low-priority, low-yield traffic under the UPS SurePost banner to the US Postal Service (USPS), an arrangement that ended earlier this year. After an announcement by Postmaster General Louis Dejoy last autumn that parcel carriers that used the USPS would have to pay more for final-mile service, the partnership unravelled.

UPS floated a 9% increase in SurePost pricing near the end of 2024, which met with push-back in the market.

This spring SurePost was gone, replaced by a new offering called UPS Ground Saver, and the integrator had practically taken final-mile service in-house in a move to bolster network density and use of its network to raise revenue per package.

Now UPS is back in talks with USPS – under new management after Mr DeJoy’s departure in March – about final-mile delivery of Ground Saver parcels.

During the presentation of the integrator’s second-quarter results, CEO Carol Tomé confirmed that the two sides had re-connected to discuss a potential arrangement, saying: “There’s new leadership there; they have excess capacity, so we’re working through a number of different positions on Ground Saver.”

What caused the change of heart, only months after UPS had taken this traffic in-house? It turns out that shouldering the SurePost volume produced more delivery stops than anticipated for UPS drivers, undermining network efficiency, although volume actually dropped 24% in the quarter. Ground services overall saw a 6.6% retreat in volume.

And according to Ms Tomé, the hit on network efficiency dented results by $85m.

The US government’s decision to withdraw de minimis exemption from parcels arriving from China in early May was another factor. It reduced average daily volume between the US and China by 35% – a worse blow than UPS top brass had anticipated, said CFO Brian Dykes.

Increased competition also hurt Ground Saver. With delivery times 1-2 days longer, it targets direct-to-consumer brands and online retailers, a segment of the market that is sensitive to the large integrators’ continuous increases of ancillary charges.

“This is where rates matter. It is the lowest-price package delivery. Retailers have tight margins,” commented Cathy Morrow Roberson, founder and head analyst of Logistics Trends & Insights.

She added that the parcel delivery market had become more diverse, giving shippers looking for cheaper solutions a range of options.

OnTrac, one of the leading regional parcel carriers that has striven to build a nationwide network, launched a service called Ground Switcher in May that squarely targets UPS customers, offering them a discount if they shift volume from Ground Saver.

UPS’s Q2 result beat analysts’ expectations, but it was not a pretty picture: revenues were down 2.7% year on year, largely due to declines in package volume and rising cost pressures. Ms Tomé described the environment as “very volatile”, blaming tariff uncertainty and weak manufacturing sectors as the primary headwinds.

The company’s stock price faltered after the earnings call, in which management had offered no guidance on revenues or operating profit for the full year.

“The range of scenarios is wide enough to drive one of our 18-wheelers through,” Ms Tomé quipped.

To Ms Roberson, these issues – as well as the fact that UPS has not announced peak season surcharges so far (unlike FedEx and the USPS) – suggest management is grappling with challenges.

“It’s not that the company is going to go under, but they’ve got some internal issues,” she said.

As far as Ground Saver is concerned, the company seems to be caught between a rock and a hard place. It has sought to reduce low-yield volumes to raise yield per package, yet it figured it needed to bulk up volume for the sake of network utilisation – only to discover that this entailed more costs than anticipated.

The situation is somewhat reminiscent of the integrators’ experience with Amazon: both UPS and FedEx had embraced Amazon traffic but subsequently decided to phase it out.

Moreover, a return to USPS would entail higher costs for final-mile delivery than previously, Ms Roberson noted.

She sees the fundamental problem as the way the market has evolved. The integrators don’t like B2C traffic. Their focus is on the more lucrative B2B segment, but that market has been under pressure for year, as manufacturing indices amply reflect.

“They want B2B to recover, but that won’t happen. B2C is stronger, but it started to soften a bit,” she said.