High Stakes For Home Delivery

UPS and FedEx are wrestling with the challenge of making e-commerce more profitable. Investors are waiting eagerly for that earnings package to arrive.

- Ryan Derousseau

INVEST 

THIS TIME OF YEAR, American shoppers are more likely to have pumpkin spice coffee on their minds than holiday gifts. But United Parcel Service and FedEx are already gearing up for the December rush—when their shipping volume skyrockets, and social media carols of complaints about late deliveries become as commonplace as mistletoe and menorahs.

That annual ritual shows how much FedEx and UPS have come to depend on e-commerce and home delivery, which now account for around half their operating profits. But what Amazon and Etsy and their ilk give the delivery giants with one hand, they take away with the other: Online shopping has eaten into their margins and forced them to rebuild their supply chains—while exposing them to consumer wrath. This year, with holiday deliveries expected to hit another record, investors will be watching UPS and FedEx to see which one is best at keeping up.

For deliverers, the downside of the e-commerce boom is that home deliveries are relatively unprofitable. Home drop-offs typically involve just one or two items; in contrast, businesses ship to one another in bulk, reducing cost per delivery. And there’s always someone waiting for shipments at a warehouse or corporate HQ. Not so for residential customers, where a homeowner out walking the dog could force a driver to make multiple, profit-shrinking trips.