Last year, United Parcel Service (UPS +0.28%) announced that it would be slashing the business it does with Amazon by more than 50%. The reduction is set to be complete by the latter half of this year, and the result will be a smaller and leaner operation for UPS.
The company has made the controversial move in order to improve its margins, so that its financial results will be stronger. But at the same time, it's taking away a big growth opportunity for its business. Could this move end up backfiring for UPS and its investors?
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What does this mean for UPS?
Cutting a big chunk of business from a major customer is never an easy move, but the benefit for UPS is that it will be able to get leaner and cut a lot of overhead and staff related to Amazon deliveries. Meanwhile, it can reallocate existing efforts to shipments with better margins, thereby improving overall profitability. The company is cutting 30,000 jobs this year as a result of the reduced deliveries. Last year, it eliminated 48,000 jobs.
In terms of dollars, this amounts to around $5 billion less in revenue for UPS. That represents approximately 6% of the $88.7 billion in revenue that UPS generated last year. By being leaner and more efficient, that can result in greater margins and improved profitability. But it can also make it more difficult for the company to grow, at least in the short term.
NYSE: UPS
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Why this can be a net win for UPS in the long run
In the past few years, UPS' profit margins have been in single digits, around 6% to 7%. That's not terribly high, and if the company is able to improve upon that, it may be able to significantly offset a decline in revenue from doing less business with Amazon. The silver lining may be that by having a more profitable overall business with better margins, UPS' earnings may not necessarily deteriorate despite shedding billions from its top line. CEO Carol Tomé says that, "2026 will be an inflection point in the execution of our strategy to deliver growth and sustained margin expansion."
I don't think cutting down on Amazon volumes will backfire for UPS. While the company may experience a setback in its growth, that's likely to be temporary given how vast e-commerce has grown over the years and all the companies involved. While it might still be a challenging road ahead for UPS, the stock looks like it could be a good one to buy and hold for the long haul, as focusing on profit margins should pay off for the business.
