UPS expected to recover from holiday snafu

UPS may have ruined Christmas for some of its customers after hundreds of thousands of its packages arrived late, but analysts expect the company will work aggressively to preserve its reputation and prevent future problems.

The Sandy Springs-based shipping giant is already making plans for the 2014 holiday season. Observers expect UPS to weigh new approaches on everything — from staffing to prices for last-minute holiday shipping — in a bid to avoid blunders next year.

That’s particularly vital for a company that trades on its brand as a dependable, trusted shipping firm.

“UPS is among the highest quality transport service providers in the industry, and I think they’re acutely aware of how important their service reputation is to their brand,” said Benjamin Hartford, an analyst with Baird Equity Research. “The consumer is willing to forgive and forget once, particularly in today’s society and culture. But you do a back-to-back holiday, and there could be a real issue.”

UPS said a bevy of factors contributed to the late shipments: A contracted holiday shopping season due to a late Thanksgiving left less room for error; storms caused backups early on; predictions underestimated the growth in e-commerce; and UPS said it had “internal execution issues.”

The company issued a statement saying it is “implementing operational changes that we believe will reinforce our customers’ confidence in UPS.”

Hartford expects UPS to be “exceptionally proactive” in fixing problems by issuing reimbursements, investing in infrastructure and figuring out how to prevent future mishaps.

“They’ve got a one-time pass, so to speak,” he said. “I have a high degree of confidence UPS will get it right” next time, minimizing any risk of significant damage to its reputation.

For UPS, the cost of the problems over the holidays — analyst estimates range from $15 million to $100 million —

are expected to be blips in its multi-billion dollar business.

It's no easy task to execute perfectly through the peak holiday season, with consumers expecting to hold the products in their hands within a few days or a few hours of placing orders for delivery.

UPS said the surge in last-minute online shopping was “unprecedented and exceeded our projections.”

“Shopper patterns are changing,” said David Landau, vice president of logistics software firm Manhattan Associates. “The reality is they’ll probably change even more next year. … It is disrupting the plans that retailers set out before.”

That makes it more difficult for retailers and delivery firms like UPS to predict what consumers will buy, how much, where and when — and where they should keep the inventory.

Manhattan Associates, along with its competitors and retailers, “are looking at new and better ways of forecasting,” Landau said.

Analysts said UPS likely suffered from inadequate staffing and capacity, and its sheer size meant it was more affected by delivery promises from retailers, which led to too many late orders.

Yet the solutions are not necessarily simple. Adding staff or infrastructure with too much cushion could cut into profit margins. Earlier deadlines for shipping in time for Christmas could cause UPS — or the retailer — to lose business or lose sales.

And online shopping is only expected to grow.

“I don’t think people are going to stop ordering,” said Standard & Poor’s analyst Jim Corridore. “I don’t think e-commerce is going away, and UPS and FedEx are the key fulfillers in that trend.”

With all that in mind, retailers, online vendors like Amazon and shipping businesses like UPS and FedEx are all tasked with finding better solutions to an issue growing bigger and more complicated.

It’s yet to be seen how it may affect relationships between retailers and UPS and FedEx. Amazon said it is “reviewing the performance of the delivery carriers.” The company refunded shipping charges for affected shipments along with giving a $20 gift card.

Hartford also expects UPS to respond with a marketing campaign and to look at changing the way it prices shipping during peak periods in a way that could cost procrastinating shoppers more.

The goal, Hartford said, would be to smooth out orders in the days and weeks leading up to Christmas. “What they can do is try to push some of that volume [in the last-minute rush] into the earlier preceding days.”

The way to do that is to charge more for late orders during peak periods like the holidays, to incentivize customers to place their orders earlier.

It’s not unlike the way airlines price their fares.

“My guess is they will have incentives to get people to shop a little earlier,” Landau said.

Of course, UPS and its competitors already charge extra for express shipping versus slower options. But retailers like Amazon had the same shipping policies over the holiday period as they do the rest of the year. For example, Amazon Prime members still got free two-day shipping on Prime shipments over the holidays, all the way up through Dec. 22.

In the end, even if UPS upset some consumers, shoppers might not be able to avoid the shipping giant in favor of FedEx or the Postal Service.

“They’re rarely making a choice,” unless it’s a sale between individuals such as on eBay, Corridore said. “There’s really not much a customer can do, other than order earlier next time around.”