What's Behind United Parcel Service's Billion-Dollar European Investment Plan?

United Parcel Service’s latest announcement is a testimony to its conviction in the region’s prospects.

ICRA Online
Eshna Basu
Jul 21, 2014 at 3:10PM

United Parcel Service's (NYSE:UPS) CFO Kurt Koehn made a big strategic announcement this month -- he told German daily newspaper Sueddeutsche Zeitung that the company will invest $1 billion in Europe over the next three to five years. Though the full details won't be revealed until November, Koehn provided some interesting snippets. Investments will be mostly in Germany, with emphasis on developing more logistics hubs. In terms of sector specialization, health care will be the focal point.

If we look at Germany's growth prospects and UPS' course of action in recent times, the announcement does not surprise; here's why.

Source: Flickr.com

Why Germany?
Though growth has slowed in the second quarter after the economy expanded at a strong 0.8% rate in the first quarter, Germany is the mainstay for a recovery in the eurozone. Germany's central bank, Deutsche Bundesbank, is convinced that the country's prospects remain sound amid low inflation and sluggish growth in the region.

In June, Bundesbank raised Germany's 2014 GDP growth forecast to 1.9%, up from the earlier estimate of 1.7%. The bank expects growth to accelerate by another 2% in 2015 and 1.8% in 2016. Bundesbank President Jens Weidmann said, "Germany's strengthened domestic economy as well as the ongoing improvement in the economic situation of the industrial countries and the gradual recovery of the euro area suggest that Germany will follow a robust growth path."

More logistics hubs required
UPS has 450 operating facilities or logistics centers across 120 countries in the Europe, Middle East and Africa (EMEA) region, serving more than 50 intra-Europe airports and 13 intercontinental airports. It needs more capacity to cater to the rising demand, however. According to German market research consultant GfK, online retail sales in Germany could grow 25% this year, with overall retail sales improving 1.2% over the past year.

UPS has already expanded its flagship logistics air hub in Cologne, spending $200 million, which makes it one of the biggest facility expenditure by the company. The exercise has increased its operating area by roughly 70% to 1.1 million square feet. Now, the hub sorts more than 190,000 packages per hour and its package conveyer system covers more than 40 kilometers in just 15 minutes. UPS's competitors are not sitting idle, however.

Its European rival Deutsche Post (OTC:DPSGY) plans to double capacity of its European logistics hub at Germany's Leipzig/Halle airport. Post completion, the hub would sort 150,000 packages per hour. Not to be left behind, FedEx (NYSE:FDX) is aggressively expanding in Europe, having added 100 new depots in less than two years' time. In 2010, FedEx had shifted its Central and Eastern European hub from Frankfurt to a new state-of-the-art facility in Cologne.

European Air Hub Expansion Small Package Sort, Source: United Parcel Service

All eyes on the lucrative health care segment
According to a report (link opens a PDF) prepared by professional services provider Deloitte, global spending on health care is expected to grow at an average rate of 5.3% between 2014 and 2017, the major driver being the planet's ageing population. The report projects that life expectancy could increase from 72.6 years in 2012 to 73.7 years by 2017, which means that 560 million people (around 10% of the world's entire population) would be over 65 years old. In Western Europe, the proportion could be as high as 20%. This could fuel a huge demand for health care services, and logistics companies would be one of the big beneficiaries.

UPS has made big strides in the European health care market since 2011. It is setting up specialized hubs across the region that allow health care service providers to do all of their labeling and shipping from a single location.

In February, the company acquired U.K.-based Polar Speed, marking its third European acquisition in the past three years. Widely known as a pharmaceutical logistics company, Polar Speed's highly organized fleet of 118 temperature-controlled vehicles is expected to complement UPS' health care operations, and its three warehouses will add to the company's eight facilities across Europe. 

Deutsche Post, with years of experience in serving the health care sector, is continually expanding its network all over the world. It's recently added 15 new certified Life Sciences stations in America and Europe, including Germany. FedEx has also launched its renowned SenseAware service in Europe, which monitors temperature, light exposure, relative humidity, shock, and barometric pressure of shipments in addition to tracking locations. The SenseAware 2000 device is especially useful to the health care industry.

UPS' Healthcare Facility 2, Source: United Parcel Service

Foolish thoughts
Germany is the eurozone's biggest economy and growth driver. With fresh investments in the region, UPS can position itself better in comparison to rivals that are equally intent on milking the German recovery. Increased focus on health care could help derive big gains. The stage is set for UPS to up the ante in Europe.