UPS Plans Major Reduction in Amazon Package Deliveries by 2026

UPS's Strategic Shift in Logistics

In a bold move reshaping the landscape of logistics and package delivery, UPS has announced a strategic decision to reduce the volume of Amazon packages it handles. By the second half of 2026, UPS plans to cut the Amazon volume it delivers by more than 50%. This decision results from an agreement in principle between the two companies, aiming to focus on more profitable segments of the domestic market. According to UPS CEO, Carol Tomé, Amazon, while being the largest customer for UPS, has not proved to be the most profitable. The margins associated with this partnership have been less favorable, requiring a shift in strategy.

Rationale Behind the Decision

Carol Tomé explained that without action, UPS's existing relationship with Amazon might lead to diminishing financial returns. This decision accelerates a longstanding strategy by UPS to diversify its client base and reduce its dependency on Amazon's volume for consistent revenue. UPS is now turning its attention to capturing market share from healthcare product shippers and small- to medium-sized businesses, which offer better margins. By prioritizing these sectors, UPS aims to ensure a more stable and lucrative revenue flow, indicating a significant transition in its business approach.

Despite this major cutback, Amazon has developed its logistics network extensively. The company has invested heavily in building out its infrastructure to manage customer orders in-house. However, it continues to rely on a mix of carriers to fulfill its delivery requirements. Upon the announcement, Amazon's spokesperson, Kelly Nantel, commented that UPS had indeed prompted this change respecting Amazon's operational needs, and henceforth, they acknowledged and respected UPS's decision. Amazon's logistics partnership landscape will remain varied, retaining many carriers, including UPS, to support its logistics needs.

Amazon's Role and Response

Currently, Amazon-related deliveries make up approximately 20% to 25% of UPS's U.S. network volume, representing around 11.8% of the revenue in the past year. As UPS sets to decrease this number, it's anticipated that while the number of packages delivered will drop, UPS will henceforth undertake deliveries at more profitable rates. The plan involves UPS expecting a year-over-year drop in average daily U.S. volume by about 8.5% by 2025. Conversely, revenue per package is projected to grow by 6%, reinforcing the decision's economic rationale.

In alignment with the broader organizational objective, UPS EVP and CFO Brian Dykes noted that despite a reduction in overall volume, the company will benefit from an improved, higher-revenue customer base. This entails adjusting UPS's logistical network to ensure it meets capacity and demand efficiently, implementing strategic changes where necessary.

A Broader Perspective on UPS's Strategy

Carol Tomé expressed confidence that the reduction of Amazon's package volume is a strategic step that suits UPS's broader vision, which she describes as "landing at the right spot with this accelerated glide down." Her leadership reflects a determination for UPS to take control of its future, tailoring its operations to maximize profitability and sustainable business growth.

The measure to cut Amazon's volume aligns with UPS's ongoing efforts to redefine and refine its business model. This includes integrating more profitable services that uphold the company's long-term financial health. While the adjustments might initially seem stark, they're precisely calculated to usher UPS towards a thriving path of business operations, characterized by higher revenue per package and significant improvements in the quality of their customer engagements.

With Amazon still actively relying on The UPS Store locations for facilitating customer returns, Carol Tomé doesn't foresee more drastic reductions of Amazon volume in the near future. The cooperative history between two giants in their respective industries continues, albeit with necessary restructuring to align with UPS's evolving strategy in the logistics domain.