August 17, 2023
Photo: iStock
Will Retail End Up Paying for UPS Drivers’ Fatter Salaries?
Full-time UPS drivers will earn an average of $170,000 in annual pay and benefits at the end of the carrier’s new five-year contract agreement, UPS CEO Carol Tomé said last week during the company’s second-quarter earnings call.
That compares to the current average annual total compensation package of $145,000 for small package delivery drivers, according to UPS’ “Great Employer” section on its website.
All part-time union employees that are already working at UPS will be making at least $25.75 per hour while receiving full healthcare and pension benefits, added Tomé. That’s up about 29% from the $20 hourly rate plus benefits part-timers currently earn after 30 days, according to UPS’ online employer section.
Details on the agreement come as the Teamsters union has begun the process of ratifying the tentative agreement that emerged last month as a strike appeared imminent.
Several analysts, according to Barron’s, predicted package pricing would have to rise to offset the higher labor costs, with a benefit falling to all carriers in the industry.
Evercore ISI analyst Jonathan Chappell wrote in a note that the wage increases will average roughly 5% to 6% a year, higher than his expectations for an increase of 4% in the first year of the contract and 3% going forward. He wrote, “There is the potential for cost per package inflation to exceed our estimates by several hundred basis points through our forecast horizon.”
Stifel analyst Bruce Chan added to the discussion, stating, “Since the domestic parcel industry is essentially a duopoly, we believe UPS’ cost recovery will bolster market pricing for all participants, including FedEx.”
However, Amit Mehrotra, a Deutsche Bank analyst, believes domestic package price increases will be “very manageable” given the current inflationary climate and as UPS benefits from automation, according to FreightWaves.
On the Q2 earnings call, Tomé noted that UPS’ U.S. domestic team managed its largest year-over-year quarterly cost reduction in history as technology optimized labor and package flows. She said, “The investments we’ve made in our automated facilities and technology, like network planning tools or NTT, have enabled greater agility than ever before.”
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Mark Self
President and CEO, Vector Textiles
Gene Detroyer
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
John Lietsch
CEO/Founder, Align Business Consulting
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Discussion Questions
DISCUSSION QUESTIONS: Do you expect UPS’ new employee contract to lead to a spike or more moderate increase in shipping costs for retailers? Will the costs likely be passed on to consumers, or do retailers have ways to mitigate much of the delivery cost pressures?
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In the short term, UPS is taking a profit hit to accommodate higher salaries. It has already warned the markets that margins this year will be crimped by around 100 basis points. Quite honestly, that’s not too bad compared to the damage a strike would have done – indeed, UPS was losing $200 million a day in sales just because of the threat of a strike. Longer term, this wage hike will work its way through into pricing in some form or another; UPS has some scope to increase prices as it’s already very competitive for smaller parcels. However, the extent to which UPS can increase its fees is constrained by other delivery firms, and the growing role of Amazon in logistics – including extending services to retailers who do not sell on its marketplace.
It would be difficult for UPS – or any other company – to absorb this increase and not pass at least some portion to its customers. It makes financial sense and, to the extent that the increases in fees are commensurate with the increase in costs, UPS should not be looked upon negatively. This may, in fact, put another nail in the coffin of free shipping for consumers.
The Shopper will end up paying for this. Given the competitive nature of “visible charges” like shipping, odds are the increased costs will have to be covered by product gross margin increases – so all shoppers will be paying, whether they use the service or not. On the other hand, if everyone is paid a decent living wage throughout the economy Retailers will win as increased income tends to get spent! I like to think of paying good wages across theboard (sorry not to the C suite) as a win win.
Free shipping is still a huge factor in customer selection and purchase. I suspect retailers will need to off-set the expense through cost of goods over fee increases passed on to the consumer.
I have long said that ‘free’ was the most expensive word in retail. And now it just got even more expensive. This has to ripple through the landscape of pricing and fees. It simply has to. The expense of deliveries and returns was already crippling the profitability of many brands and retailers. And here comes a gut punch. The dam cracked when Amazon began to impose modest fees. This news will re-energize a lot more conversations about how to navigate the fee structure within a hyper competitive market.
The hit or investment, depending on perspective, must come from somewhere: profits, taxes, customers or employees. If we assume that the government won’t pay for the it through lower, corporate taxes, and the competitive environment won’t allow a price hike, then it must come from either profits or employees or both. It would appear that in the short term, profits will be used to pay the higher salaries. In the long run, however, UPS may leverage more and more technology to reduce the employee base and spread the salary increases over a smaller employee base. That’s, of course, assuming that the “market” likes higher profits and isn’t willing to fund higher salary increases by lowering profits. This issue represents a much bigger discussion which unfortunately does not get the attention it deserves in our polarized, headline driven world.
Yes. I mean, of course these costs get passed on, to the extent they can be. There are only two places to “park” the higher costs: a hit to UPS’s operating margins or higher costs to retailers and their consumers.
Even if UPS plans to eat some of the Year 1 increases in salary and benefits, it is not in the business of losing money. Surely its financial models provided guidance about how much it could afford to pay over the next five years, and the company avoided a last-minute cliffhanger (or worse, a shutdown) during the negotiations. While UPS is already a giant, there may be further economies of scale to mitigate the pay increases.
Over that five year period, UPS will need to pass most if not all of its increases along to its customers — hopefully in small bites — and retailers will pass at least some of those higher costs along to their customers. After all, despite the “free shipping” battles, retailers aren’t in the business of losing money either.
I can think of few industries where automation and AI can reduce costs, like the logistics industry. As noted in the discussion, UPS was quite successful in Q2. Just wait until we get to driverless long-haul.
Of course, the increases will be passed onto the customer, business, or consumer. But, when the final cost is charged, it will be well mitigated and painless. We are talking pennies.
Consider the wage increase against the delivery of 27 million packages per day and 25 billion per year (2022 report). That means USPS ships around 4,900 pieces per second. Mind-boggling to me.
First rule of supply chains: In the end all added costs get paid by the consumer. UPS won’t taker the margin hit for very long and neither will retailers. Consumers get stuck with the bill because they have nobody to pass it on to.
Good one. The buck stops getting passed when there is no one left to pass it to.
The effect of UPS’ new employee contract on retailer shipping costs is uncertain. It could result in either an immediate price surge or a more gradual increase, depending on contract terms and their influence on UPS operations.
Retailers might pass on some of the increased costs to consumers, but they also must develop strategies to alleviate delivery cost pressures including optimizing supply chains and negotiating with UPS providers. On the other hand, UPS has to absorb some costs to remain competitive.
This doesn’t seem like rocket science: yes shipping costs will go up (phrasing like “large but not significant” seems more like a sales pitch than any kind of meaningful clarification). Consumers, as always, can moderate the pass-thru by not buying things they find too expensive.
It’s high time that we start paying working Americans a living wage. If that means that shipping prices go up a little, so be it.
UPS is betting that the higher labor cost is unavoidable and, over time, will spread to other delivery services competing for that labor. By securing the agreement with the Union, UPS can remove a significant uncertainty to a critical element in its strategy execution. Of course, margins will get hit, but ongoing process improvements and cautious rate increases will find an acceptable equilibrium. The consumer at the end of the supply chain is the one footing the bill; everyone along the value chain passes the buck.
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In the short term, UPS is taking a profit hit to accommodate higher salaries. It has already warned the markets that margins this year will be crimped by around 100 basis points. Quite honestly, that’s not too bad compared to the damage a strike would have done – indeed, UPS was losing $200 million a day in sales just because of the threat of a strike. Longer term, this wage hike will work its way through into pricing in some form or another; UPS has some scope to increase prices as it’s already very competitive for smaller parcels. However, the extent to which UPS can increase its fees is constrained by other delivery firms, and the growing role of Amazon in logistics – including extending services to retailers who do not sell on its marketplace.
It would be difficult for UPS – or any other company – to absorb this increase and not pass at least some portion to its customers. It makes financial sense and, to the extent that the increases in fees are commensurate with the increase in costs, UPS should not be looked upon negatively. This may, in fact, put another nail in the coffin of free shipping for consumers.
The Shopper will end up paying for this. Given the competitive nature of “visible charges” like shipping, odds are the increased costs will have to be covered by product gross margin increases – so all shoppers will be paying, whether they use the service or not. On the other hand, if everyone is paid a decent living wage throughout the economy Retailers will win as increased income tends to get spent! I like to think of paying good wages across theboard (sorry not to the C suite) as a win win.
Free shipping is still a huge factor in customer selection and purchase. I suspect retailers will need to off-set the expense through cost of goods over fee increases passed on to the consumer.
I have long said that ‘free’ was the most expensive word in retail. And now it just got even more expensive. This has to ripple through the landscape of pricing and fees. It simply has to. The expense of deliveries and returns was already crippling the profitability of many brands and retailers. And here comes a gut punch. The dam cracked when Amazon began to impose modest fees. This news will re-energize a lot more conversations about how to navigate the fee structure within a hyper competitive market.
The hit or investment, depending on perspective, must come from somewhere: profits, taxes, customers or employees. If we assume that the government won’t pay for the it through lower, corporate taxes, and the competitive environment won’t allow a price hike, then it must come from either profits or employees or both. It would appear that in the short term, profits will be used to pay the higher salaries. In the long run, however, UPS may leverage more and more technology to reduce the employee base and spread the salary increases over a smaller employee base. That’s, of course, assuming that the “market” likes higher profits and isn’t willing to fund higher salary increases by lowering profits. This issue represents a much bigger discussion which unfortunately does not get the attention it deserves in our polarized, headline driven world.
Yes. I mean, of course these costs get passed on, to the extent they can be. There are only two places to “park” the higher costs: a hit to UPS’s operating margins or higher costs to retailers and their consumers.
Even if UPS plans to eat some of the Year 1 increases in salary and benefits, it is not in the business of losing money. Surely its financial models provided guidance about how much it could afford to pay over the next five years, and the company avoided a last-minute cliffhanger (or worse, a shutdown) during the negotiations. While UPS is already a giant, there may be further economies of scale to mitigate the pay increases.
Over that five year period, UPS will need to pass most if not all of its increases along to its customers — hopefully in small bites — and retailers will pass at least some of those higher costs along to their customers. After all, despite the “free shipping” battles, retailers aren’t in the business of losing money either.
I can think of few industries where automation and AI can reduce costs, like the logistics industry. As noted in the discussion, UPS was quite successful in Q2. Just wait until we get to driverless long-haul.
Of course, the increases will be passed onto the customer, business, or consumer. But, when the final cost is charged, it will be well mitigated and painless. We are talking pennies.
Consider the wage increase against the delivery of 27 million packages per day and 25 billion per year (2022 report). That means USPS ships around 4,900 pieces per second. Mind-boggling to me.
First rule of supply chains: In the end all added costs get paid by the consumer. UPS won’t taker the margin hit for very long and neither will retailers. Consumers get stuck with the bill because they have nobody to pass it on to.
Good one. The buck stops getting passed when there is no one left to pass it to.
The effect of UPS’ new employee contract on retailer shipping costs is uncertain. It could result in either an immediate price surge or a more gradual increase, depending on contract terms and their influence on UPS operations.
Retailers might pass on some of the increased costs to consumers, but they also must develop strategies to alleviate delivery cost pressures including optimizing supply chains and negotiating with UPS providers. On the other hand, UPS has to absorb some costs to remain competitive.
This doesn’t seem like rocket science: yes shipping costs will go up (phrasing like “large but not significant” seems more like a sales pitch than any kind of meaningful clarification). Consumers, as always, can moderate the pass-thru by not buying things they find too expensive.
It’s high time that we start paying working Americans a living wage. If that means that shipping prices go up a little, so be it.
UPS is betting that the higher labor cost is unavoidable and, over time, will spread to other delivery services competing for that labor. By securing the agreement with the Union, UPS can remove a significant uncertainty to a critical element in its strategy execution. Of course, margins will get hit, but ongoing process improvements and cautious rate increases will find an acceptable equilibrium. The consumer at the end of the supply chain is the one footing the bill; everyone along the value chain passes the buck.