Security Analysis

Examining United Parcel Service’s (UPS) Moat

The story of United Parcel Service (UPS) is synonymous of the American Dream. The company started by Jim Casey and $100 in capital, and formerly known as American Messenger Company, is now the world’s number one delivery package company. Recently the stock price of UPS hit a snag as its closest competitor FedEX (FDX) reported a fourth quarter loss due to a charge on Kinko’s , rising fuel costs and a slowing economy. As a result of FedEX’s woes, the street figured it would also punish the stock price of UPS, bringing it to the lower end of its 52 week low.

First, UPS operates in a duopoly with FedEx in the package delivery industry (not counting the US Postal Service). UPS is generally considered more consumer oriented, while FedEx is considered more business oriented. Now, it was over the weekend when I realized how big a moat these two companies have, in particular UPS. Considering I do not work on weekends, I decided to chill out and watch television. I came across the National Geographic’s “Ultimate Factories: UPS”. I highly recommend watching it as it takes the world behind the scene’s of this massive operation. i found a small video of the show on Youtube (below) so you can get a glimpse of what I am talking about.

Lately, I have been trying to dig into moats (or competitive advantage) and I cannot think of a better example than UPS. Think about it, if one sees a big brown truck, what comes to mind? UPS. DHL (3rd among package deliver companies) only wishes its “Yellow” could be as prominent as UPS’s “Brown”. Sorry, but not happening soon. Even though DHL has made strides to catch up with UPS and FedEX I doubt they will ever catch up. Why? To start competing with UPS, DHL needs to processing capacity to compete in terms of price. To compete in price, it needs the volume. Volume has been improving but not at the sufficient pace to make a profit. Until recently, DHL has been keeping its head above waters, but the recent run in oil has put them in the red. Thus, DHL turned to UPS to handle its air operations. Basically, UPS will make money without any capital investments.

This is another advantage of UPS. Every additional package that gets loaded on a truck goes to the top line. The expenses will have little variance (driver, fuel, maintenance) , but revenues will increase with every package added to the truck. Also, businesses are very loyal to UPS. In my family’s business, UPS is the only choice to deliver packages. With a couple of clicks, I can print out a label, drop off the package at a UPS Store, UPS drop box, or if I see a UPS truck pass by, the package will be delivered to our customer in 2-3 days (we usually ship ground). Also, we have used their freight services and have never had a problem. Whether the equipment was shipped to Vietnam or New York, the equipment arrived i one piece, on time and at a reasonable rate, that’s all I ask for.

When thinking of moats, I often ask myself what would it take for a competitor to really make an impact? Answer: A boatload. Anyone trying to compete with UPS (and FedEX) will have the same issues as DHL, trying to compete at a grand scale with a not so grand customer base. As time goes on, UPS will continue to only increase its most. First, its technology is constantly being updated which will only add costs to future competitors and further increases its efficiency (decreases expenses). Second, every customer added to UPS, is one less customer for future competitors. Third, billions of dollars will have to be spent on brand awareness. Note to competitors, the following colors are taken; Brown, Yellow, Black, and I remember a service with Green….

Disclouse: I own shares of UPS

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