United Parcel Service (UPS) is facing significant turmoil as its stock plunged more than 15% on Thursday, January 30, 2025, following the company's announcement of substantial delivery cuts to Amazon, its largest customer. The dramatic 15% drop led to shares closing at $114.90, marking UPS's biggest fall to date, and raising concerns among investors about the future viability of the company.
The shipping giant revealed plans to cut delivery volumes to Amazon by over 50% by the second half of 2026, citing the shift as part of its strategy to focus on more profitable business segments. UPS CEO Carol Tome remarked, "Amazon is our largest customer, but it's not our most profitable customer. Its margin is very dilutive to the U.S. domestic business." This admission has sent shockwaves through the market, as UPS looks to bolster its profit margins.
UPS's decision came as part of broader cost-saving measures intended to reduce operational expenses by approximately $1 billion. Tome stated, "We are making business and operational changes... to become a more profitable, agile, and differentiated UPS." These changes reflect the company's recognition of the growing competition it faces from Amazon, which has rapidly expanded its internal logistics capabilities. Amazon has built its own delivery infrastructure, leading to reduced volumes sent through UPS and other carriers.
On the call with investors, Tome outlined the company's commitment to streamlining its U.S. network, aiming for efficiency as demand for premium shipping services remains tepid. The announcement follows two consecutive quarters where UPS missed revenue expectations, with the company reporting $25.30 billion for Q4, falling short of the anticipated $25.42 billion.
Delivery cuts are significant, considering Amazon accounted for approximately 11.8% of UPS’s total revenue—around $10.7 billion—in 2024.
Despite the dip, UPS managed to surpass profit expectations, indicating its capability to remain profitable even as it navigates these turbulent waters. "This was UPS taking control of our destiny," Tome reiterated, emphasizing the necessity of adapting its business model to current market demands.
Amazon, through its spokesperson Kelly Nantel, expressed respect for UPS's decision, noting, "We certainly respect their decision. We’ll continue to partner with them and many other carriers to serve our customers.” This implies a cautious rebalance of the delivery partnership as both companies recalibrate their operational strategies.
Market reactions to the announcement were swift and severe. UPS stock tumbled to its lowest levels since July 2020, dragging FedEx shares down by 2.6% as well. Analysts like Jonathan Chappell of Evercore ISI remarked, "The agreement with Amazon to reduce volumes by more than 50% is a surprise," pointing out the long-term risks associated with UPS's dependency on Amazon.
Additional insights from UPS's earnings forecast indicate 2025 revenue is predicted to be $89 billion, down from prior projections of $91.1 billion for 2024 and significantly lower than the consensus estimate of $94.88 billion. This bearish forecast has compounded the anxiety among investors.
The uncertain future looms large as UPS tries to address both short-term challenges and long-term profitability. UPS has leaned more heavily on more lucrative delivery sectors, such as healthcare, small business, international deliveries, and business-to-business services. Over the past few quarters, it has benefitted from increased volume from discount retailers like Temu and Shein, signifying its strategy to diversify its clientele as it moves away from the Amazon dependency.
Following layoffs of 12,000 employees earlier this year, the company has been aggressively pursuing measures to tighten its fiscal operations. The momentum toward profitability indicates UPS is aware of the need to adapt to become less reliant on lower-margin e-commerce deliveries.
Investors will be eager to see how UPS navigates this challenging environment and whether the cuts to its Amazon business will lead to the desired improvement in profit margins. Will these strategic shifts stabilize UPS's financial outlook, or will the repercussions of this decision lead to greater challenges? Only time will reveal the true impact of these developments.