UPS’s $20 billion bet on e-commerce is paying off

Can a fleet of drones and a seven-day-a-week delivery strategy help “Brown” and CEO David Abney stay ahead of Amazon?
December 20, 2019, 10:30 AM UTC
PARCEL PUSHER: Abney in the lobby of UPS’s Atlanta headquarters. Under his leadership, UPS has launched delivery by electric bike (shown here) and drone. Photograph by Melissa Golden for Fortune
Photograph by Melissa Golden for Fortune

Everyone knows the UPS delivery service, with its ubiquitous brown trucks that ramble through every neighborhood in America. But to really understand what makes UPS tick, you must check out the massive facility in western Atlanta known as the UPS Southeast Metro Automated Routing Terminal (or SMART). 

This whirling dervish comprises 18 miles of conveyor belts, moving at 600 feet per minute on three levels inside a single sprawling building the size of 19 football fields. To an outsider it looks like the kind of thing cartoonist Rube Goldberg would have dreamed up as a machine to, say, fold the world’s largest napkin. 

But unlike Goldberg’s deliberately nonsensical and wasteful contraptions, the year-old super terminal is super-efficient, one of the crown jewels in UPS’s global logistics and shipping empire. It’s just one of six similar highly automated, gigantic, spanking new UPS package-sorting centers spread across the U.S. It’s also one of the reasons the company stands more than a fighting chance in its uneasy rivalry with Amazon, the e-commerce giant that is UPS’s biggest customer but is increasingly expanding into logistics and delivery work too.

Inside the Super-Sorter: Inside UPS’s routing terminal in Atlanta, a scanning tunnel confirms each package’s destination.
Courtesy of UPS

Every day, hundreds of tractor-trailer trucks from UPS and big customers like Walmart, Target, and, yes, Amazon trundle into the Bankhead neighborhood and pull up at one of the hub’s 104 unloading bays. UPS workers quickly roll up each truck’s back door and unload the contents onto an intake conveyor belt. That belt cleverly extrudes deeper into the truck as the “UPSers” empty the contents, shortening the distance that the worker needs to carry packages. 

But it’s not until the package exits the truck that the technology gets truly mind-blowing. It sounds impossible to believe, but the average box spends only seven minutes inside the terminal, a building that’s so large, I can barely see from one end to the other. UPS doesn’t usually allow outsiders into the center during its busy season—from Black Friday through Christmas—but made an exception for Fortune the day after Cyber Monday.

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Each intake belt zips boxes of almost every size and shape up away from the trucks to larger consolidating belt lines, which in turn move them toward the center of the building. (Really big packages, like your 80-inch LCD screen TV, are known as “irregs” and get shunted off to a special area.) Once consolidated, each wave of boxes approaches one of the brains of the operation: the scanner tunnels. 

Approaching one of the tunnels isn’t for the faint of heart. Clambering three stories up on the slatted metal catwalks has already put me on edge. The noise from the whirring belts drowns out any conversation below the volume of a yell. And when I get up close to the belt, I involuntarily jump back—the speed of the packages pouring down the line triggers a reflexive, defensive reaction in my brain. Despite the hundreds of UPSers on the job at the facility, our four-person tour group seems to be far from the nearest help if something goes wrong.

An elaborate system of “shoes” guides the packages to the right truck.
Courtesy of UPS
With help from human backup in the control room, the average package spends just seven minutes in the terminal before hitting the road.
Courtesy of UPS

Taking a deep breath and focusing on the task at hand, I can see that the stream of packages offers evidence to back up a boast that UPS CEO David Abney made to me earlier that day. The company delivers for nine of the 10 largest U.S. retailers by revenue, Abney says, not to mention much of the rest of the industry. Sure enough, the boxes streaming past show a grab bag of logos of every company I can think of that sells online, from Amazon’s smile to Wayfair’s box cross to Target’s bull’s-eye. (Plus some I’ve never heard of— 

The scanning tunnel, it turns out, isn’t really a tunnel: It’s a metal frame the size of a small SUV. The frame holds six high-speed cameras, made by Italian automation specialist Datalogic, that perch over, next to, and underneath the line. Via a small gap in the conveyor belt and a system of carefully placed bright red lights and mirrors, the cameras snap pictures in a fraction of a second of all six sides of every box, without slowing their flow. An image-processing system instantly decodes the destination information inscribed on each box’s label and decides which of more than 300 exit bays in the facility has the correct departing truck to take the box on the next part of its journey, whether to a nearby home or business, or to another city, state, or country. 

As packages zip out of the scanner, each is joined by a shadow companion moving at the same speed along the side of the conveyor. They take the form of little black rectangles—UPS calls them “shoes,” and they’re about that size. Each package gets accompanied by a pair, or a bunch, depending on its size and weight. These are some smart shoes, though: They whiz down the line, escorting a box, and then, just when the box is passing its correct “off-ramp,” the exit chute to a smaller belt that will take it to the appropriate departing truck, they pop out and push the box down that chute. The shove happens so fast, you can miss it if you blink. The boxes seem to fly about by magic—Harry Potter minus the wand. Soon the box is on a new truck and off to a customer—wrapping up a ritual that takes place hundreds of thousands of times a day.

The Atlanta facility, which cost about $400 million and employs some 3,000 locals across three shifts per day, is a far cry from what Abney experienced when he started at UPS back in 1974. His first job involved memorizing zip code locations and moving boxes around the old-fashioned, manual way as a part-time loader at a sorting facility in Mississippi. The SMART building’s system, he says, is 30% to 35% more efficient than the old way in terms of package handling productivity, having replaced the need for human sorters for all but the largest boxes.

Those factors make the super-sorter a crucial element of Abney’s bold $20 billion, three-year transformation plan­­—a bid to make sure 112-year-old UPS is around for the next 112 years. The company has been the world’s largest and most profitable commercial delivery service for decades, but it faces ever-hotter competition to deliver packages faster, cheaper, and more often—thanks in large part to the unstoppable growth of e-commerce. FedEx and DHL are also battling for package hauling supremacy. Even the dowdy U.S. Postal Service is expanding its weekend deliveries and horning in on the private companies’ turf. 

And then there’s Amazon, which has already declared that it plans to become a global power in shipping and logistics. It’s currently UPS’s largest customer. Oppenheimer analyst Scott Schneeberger estimates Amazon accounts for almost 10% of UPS’s revenue. (UPS itself doesn’t break out such numbers.) But the e-commerce heavyweight is shipping a fast-growing share of its own deliveries through its Amazon Logistics unit, and it’s widely seen as only a matter of time before it not only withdraws its own business from its delivery rivals but also begins poaching other retailers from them. At the same time, some of UPS’s historically best customers, department stores and retail chains, are shrinking or dying—thanks again, in part, to e-commerce.

It’s a fast-changing, treacherous landscape—and one in which UPS was stumbling when Abney was chosen as CEO, in 2014. During the prior year’s holidays, the company made the worst kind of headlines when it failed to provide the shipping capacity it had promised retailers. The upshot: Millions of people had to open their Christmas presents in January. Subsequent years exposed deeper problems. As consumers started ordering more items online, UPS was making a growing share of deliveries to homes, where it dropped off an average of just one package per stop, and relatively fewer to businesses, which typically take more than three per stop. The changing mix—more stops, slower throughput—was crushing UPS’s profitability even as delivery orders to retail chains dwindled. “They had fallen behind,” says Schneeberger. “They should have seen the writing on the wall with e-commerce.” When UPS reported weak fourth-quarter results for the end of 2016, its stock dropped 10% in a day. 

It took visits with the heads of all of the big retailers for the real lessons to sink in with Abney. The world was moving to e-commerce, with consumers expecting rapid delivery of their purchases seven days a week. Amazon had lit a fire under those big retailers, and as they moved to respond, UPS had to evolve too. “Going in, I thought I had a pretty good picture of what UPS needed to look like in the future,” he recalls. “Coming out, I had a lot more input.”

Medical Airlift: In Raleigh, N.C., UPS uses drones to ferry blood and urine samples across the WakeMed hospital complex.
Courtesy of UPS
Health care providers, which need fast delivery, have emerged as an ideal test case for commercial drone use.
Courtesy of UPS

The plan he and his team eventually formulated­—and announced in mid-2018—required changing or even abandoning some of UPS’s cherished strategies. Abney describes it as shifting from a mindset of “constructive dissatisfaction,” which meant making incremental changes to fix existing programs, to one of “continuous transformation,” which emphasizes reconsidering all of the company’s programs regularly. In practice, going to seven-day home delivery required a more flexible—and less expensive—delivery fleet. Investing in new technologies like automation, robotics, and drones required finding other cost savings. And truly understanding customers’ needs meant the company’s senior leadership ranks needed to include more people with outside expertise, an unheard-of change to a culture that had long relied on developing talent from within (Abney himself included, of course). 

Today, Abney is presiding over an incipient turnaround. Revenue, which was nearly flat in his first few years, is expected to top $74 billion for 2019, up 20% since the end of 2016. More important, analysts expect earnings before interest and taxes to jump 10% this year and that much again each of the next two years. UPS’s stock, which had been on a wild ride for several years, is up 21% in 2019, crushing rival FedEx. 

Admitting that UPS “stubbed its toes” at first with online shopping, Abney explains, “We invested wholeheartedly in e-commerce and now … we’ve got competitors trying to catch up.”

“The scope of the changes is quite transformative to the pace at which UPS has historically operated,” says analyst Ben Hartford, who follows the industry at Baird. “It’s still early, and they still have work to do. But we’ve seen enough evidence that it’s beginning to work.” (Story continues after the following sections on drones in the delivery industry.)


Airing Their Differences

In a delivery industry made feverishly competitive by e-commerce, drones could help the top players deliver more packages more efficiently. Here’s how they stack up in the air race.

Robert Alexander—Getty Images


Employees: 448,000*
Revenue last fiscal year: $69.7 billion
Average daily deliveries: 15.16 million/day**
Vehicles: 188,000
Aircraft: 681#
Drones: FedEx has partnered with Google’s Wing unit to test delivery service from Walgreens pharmacies. Wing won permission to launch from the FAA—a so-called Part 135 exemption—in April. FedEx made its first drone deliveries in Christiansburg, Va., in October. The Wing craft can carry up to three pounds, with a range of six miles.

Courtesy of UPS


Employees: 481,000
Revenue last fiscal year: $71.9 billion
Average daily deliveries: 20.7 million/day
Vehicles: 123,000
Aircraft: 564#
Drones: UPS was the first company to win the most wide-ranging version of a Part 135 exemption. UPS is working with startup Matternet to test delivery from doctors’ offices to hospitals in Raleigh, N.C. It’s also testing deliveries from CVS stores to customers’ homes. The Matternet M2 drone can carry 4.4 pounds and travel 12 miles.

Chris Ratcliffe—Bloomberg/Getty Images


Employees: 647,500
Revenue last fiscal year: $232.9 billion
Average daily deliveries: N.A.
Vehicles: 40,000
Aircraft: 47
Drones: Amazon is working on its own drone projects, designing aircraft and software. It does not yet have a Part 135 exemption, but the FAA says seven applications are pending, and Amazon’s is widely believed to be one of them. Its Prime Air drones, unveiled in June, can carry five pounds with a range of 15 miles.

* Includes all FedEx delivery units
** Includes Fedex Express, FedEx Ground.
# Includes owned and leased aircraft.


This Drone Delivery Service Was Dreamed Up by a Doctor Who Used to Be a Pilot

wakemed hospital drone
A drone delivers lab samples to Wakemed Hospital in Raleigh, N.C.
Aaron Pressman/Fortune

Surgeon and former pilot Stuart Ginn worked with Matternet and UPS to create a drone delivery program that couriers lab samples to medical offices in Raleigh, N.C. Read more here. (Main story continues below.)

The company known as “Brown” may have a steady, venerable veneer, but UPS has transformed itself multiple times in the past. It started in 1907 as the American Messenger Company, founded with borrowed money by two teenagers, James Casey and Claude Ryan, who delivered notes, packages, and even hot meals, mostly on foot or by bicycle, across the city of Seattle. The company slowly spread down the West Coast, changing its name to United Parcel Service in 1925. It reached the East Coast by 1930 and started regular air cargo service in 1953, via UPS Blue Label Air.  

Abney has been with the company for 45 years, or 40% of its long existence. His first job helped him pay for college at Mississippi’s Delta State University. Moving up through the ranks, Abney went from Tennessee to New Jersey and Utah. He headed UPS’s air delivery service, then ran the international unit starting in 2003, overseeing major acquisitions that sped its growth in overseas markets, including China. Starting in 2007 and for all six years of predecessor Scott Davis’s tenure as CEO, Abney was the chief operating officer. 

Abney’s rise has been fueled by both an encyclopedic grasp of global trends and a down-home humility and ability to connect, says Jeff Rosensweig, a professor at Emory University’s Goizueta Business School who has known the CEO for decades. “David is the only person I know, in any profession, who can say something useful about most of the world’s 220 nations,” Rosensweig explains. And “he’s equally comfortable sitting down with the associates who load and deliver packages as he is with the leaders of major nations.”  

Walk into Abney’s fourth-floor office at UPS headquarters in Sandy Springs, Ga., near Atlanta, and you’ll see how seriously he values the task of both sustaining and overhauling his company’s culture. On the wall opposite his desk is a huge framed poster that looms over his conference table section. It looks a bit like something out of children’s author Richard Scarry’s book Busy, Busy World. A closer look shows scores of cartoon-like figures performing all kinds of tasks that UPS workers and its customers engage in every day, amid text blocks explaining UPS values, strategies, and business segments. In one vignette, workers and customers are using new apps and tools to route packages; in another, delivery trucks are filling up with compressed natural gas for fuel instead of gasoline.

It’s a busy, busy chart, a little hard to take in all at once. But the big idea is to emphasize the critical pieces in the transformation agenda. The chart combines elements of old and new UPS and maps out the way forward, Abney says. He has had versions distributed to UPS offices around the world. Look even more closely, and you’ll find Abney’s fingerprints all over the glass display because he likes to jab at specific images that back points he’s trying to make during meetings. Still, the chart is over three years old (it predates Abney’s $20 billion plan), and it’s ready for an update. “In transformation, anything more than about three months old can start to get dated,” Abney says.

For help implementing his wall art, Abney turned to Walmart. One of Abney’s biggest and most controversial changes has been to add outsiders to the company’s 12-person senior leadership team. His first major outside hire: Scott Price, who joined UPS from Walmart two years ago as its first ever “chief strategy and transformation officer.” Price has become the point person on overhauling UPS’s processes and structure. He had a similar role at the world’s largest retailer, where his title was executive vice president of global leverage, but he also knows the shipping world, having previously run DHL’s Asia-Pacific unit. 

Price’s initial brief from Abney was to find places where UPS could save money, so that it could invest more behind a few big bets. The bets Abney wanted to make were on home delivery for e-commerce, specialized health care deliveries, helping small and midsize businesses compete online, and expanding in the fastest-growing overseas markets. None of the bets were cheap, as Abney’s $20 billion price tag made clear, but they have already been impactful.

One way to think about the evolution of UPS’s business, Price explains, is to consider the basic unit of shipping that the company can keep track of in transit. For decades, the company focused on tracking industry-standard, semitruck-size containers filled with goods. As logistics operations got more computerized, UPS could track smaller pallets of goods. Now, with scanning systems in place throughout the system like those in the Atlanta super-sorter, the unit of shipping is what Price calls “each’s,” or single items that can be uniquely tracked around the world inside UPS’s highly automated network. “We’re down to each one—your shaving cream to your front door,” he says. 

To customers, the each’s system brings new flexibility too. Using UPS’s mobile app, it’s easy to delay a delivery or reroute it to a UPS store or other drop-off point. Behind the scenes, the network figures out where the package is in the system and redirects it, even contacting delivery drivers in real time if necessary. UPS has lately started incentivizing customers via a rewards program in the app to skip home delivery in favor of picking up at its stores (cheaper for the company). 

An early riser who likes to get to the office by 6 a.m., Price is also responsible for UPS’s venture capital investments in Silicon Valley, covering such arenas as drone startups, sustainability, and automation. The entrepreneurs there tend to sleep a little later, he’s found. “You say, ‘Let’s meet at 8 o’clock,’ and they look at you like you’re from outer space,” he says.

For a guy focused on the future, Price’s office—right next-door to Abney’s—is adorned with a striking assortment of older memorabilia, including an 1876 American flag and an 1826 copy of the Declaration of Independence, that reflects his fixation on American history. 

Holding its own among the older items, however, is an important recent artifact: a ­single-page certificate from the FAA granting UPS permission to start its commercial drone program. It was the first such certificate that the agency awarded for wide-scale drone operations under its innovative Part 135 rule, and Price credits UPS’s long reputation as a steady and reliable corporate citizen for winning the right to fly experimental drones in previously untested ways. “They were thoughtful about who they were going to award the first full airline opportunity,” he says.

One of the projects where that opportunity is taking shape starts with a brown metal box sitting in a doctor’s office in Raleigh, N.C. Decorated with only a small UPS logo, the toaster-size box hardly looks like the leading edge of a technological revolution. But whenever patients at the Raleigh Medical Park have samples of blood or urine taken for analysis, the tubes of fluid end up in plastic bags put into the box. Then, once an hour, eight times a day, Monday through Friday, a UPS employee grabs the box, walks outside, and attaches it to the underside of an unmanned aerial vehicle—known more commonly as a drone.  

From a distance, this drone looks like the four-bladed quad copter models popular with amateur flying enthusiasts. But up close, it’s bigger—a lot bigger. Called the M2 and made by California startup Matternet, the craft is nearly three feet across and powerful enough to carry cargo weighing up to 4.4 pounds. It also carries heavy batteries that can power long flights. 

Once the box is locked in place, the drone zooms almost straight up to a 300-foot altitude, then flies itself to a landing pad half a mile away, across the campus of the WakeMed hospital complex, the central player in the health care network that includes the medical park. At the hospital, the drone zooms down, locking on an infrared signal on its landing pad. Once it’s on the ground, another UPS worker grabs the box and walks it inside to the pathology lab where the fluids get tested. 

Company man: David Abney in uniform for one of his first UPS jobs, in Mississippi, in 1977.
Courtesy of UPS

It’s a short journey, but it’s already making money for UPS: The company says it’s the first revenue-generating commercial drone delivery service in the country. Soon, UPS will take another big step by adding deliveries to WakeMed from a doctor’s office more than 10 miles away. The idea is to capture a whole new market for UPS in the health care segment, where the big providers need fast, reliable delivery service and don’t appear to be excessively price conscious. “We’re going to expand this very quickly,” Abney promises. (The CEO will leave the piloting to others, though, as he crashed his own drone into his swimming pool while trying to impress his grandkids.)

UPS’s next, more ambitious drone program is part of a growing partnership with pharmacy and retail giant CVS. UPS has already done a trial delivering prescription items from a CVS in Cary, N.C., to consumers’ homes, and it will expand the effort in 2020. (UPS also has a new deal to allow plain old non-drone package pickup and drop-off at CVS stores.) Other experiments, further from fruition, are exploring whether drones can perform some deliveries when launched from the top or back of a UPS truck during its daily route, shortening the distance the truck drives. The company thinks larger autonomous craft might also be able to move thousands of parcels at a time from its own warehouses to smaller distribution locations. That would require “probably like a Cessna, size-wise,” Price says.

Still, drone delivery is in the early innings. Regulators haven’t drawn up rules yet to govern most commercial services, and just how those rules come out—along with how quickly the technology improves—could determine whether UPS’s experiments ever turn into real, profit-making businesses. “We don’t believe we are going to be flying hundreds of thousands of drones delivering dog food and things that we deliver every day,” Abney says. 

“It needs to be profitable,” Price agrees. That’s why the opportunities around same-day delivery of more valuable goods—like medicines or blood samples—look “very compelling,” he adds. “It could be like the first smartphone—no one could imagine the extent that it augments life now. The same thing will be said 10 years from now about drones.”  

Not all the changes in UPS’s transformation program involve high-tech solutions that get good press. To fund Abney’s growth initiatives while keeping Wall Street happy, Price has focused on cost savings. A 2018 early retirement plan sent 2,000 of the most experienced UPS managers out the door, with savings from the departures projected at $200 million a year. That move involved a tiny fraction of UPS’s nearly 500,000-person global workforce, but it included some of the most highly paid staff and disconcerted many who remained. 

Even less popular: a five-year contract with UPS’s unionized workers that created a new tier of workers who are lower paid and who could take weekend shifts as the company transitioned to making more deliveries on Saturdays and Sundays. A slim majority of unionized employees voted in October 2018 not to accept the contract, but under union rules, two-thirds would have had to vote “no” to reject the pact.

UPS’s worker-friendly reputation has also been tested by the e-commerce battle and the longer hours it demands. Amazon and FedEx use lower-paid contractors for many home deliveries. Abney says that some UPSers told him that the company should just let big customers hire their own contractors for weekend deliveries. “My answer was, ‘Hey, we’re not gonna have to worry about Monday through Friday either if we don’t transform to seven days a week,’ ” he says.

At a company known for its in-house nurturing of talent, Abney’s willingness to hire outside the ranks no longer seems as jarring as it once did. One-third of UPS’s 12-person senior management team is now made up of outsiders, including Price. “I don’t know what that number might be five years from now,” Abney says. But he emphasizes that he’s an “avid supporter” of promoting from within and that he’s supplementing, not replacing, the practice. 

Despite the growing pains, UPS is maintaining its lead in the delivery wars—and Abney’s moves may well help the company sustain it. Amazon is likely to remain more of an opportunity for UPS than a true threat, at least for the next few years. Dave Clark, Amazon’s senior vice president of North America operations, is spearheading the delivery push, which he’s said may take three to five more years to come to fruition. “It’s a fun space to be in for the next few years,” he told Amazon workers at a recent staff gathering, reported by Business Insider. But as of now, the Seattle juggernaut has a fleet of 20,000 trailers, an equal number of local delivery vans, and fewer than 50 planes; UPS has five or six times as many vans and owns five times as many planes.

What’s more, Amazon’s decisions to offer more next-day deliveries and to dump FedEx have benefited UPS financially while reinforcing Abney’s transformation plan, says Hartford, the Baird analyst. He expects the mutually beneficial coexistence to persist for quite some time. “Amazon has given UPS the opportunity to make their network more flexible and profitable,” he says. 

As it turns out, working for Amazon may make UPS even better at competing with Amazon. Abney says UPS is taking what it learned from making Amazon’s e-commerce deliveries more efficient and using those lessons to help all its other retail customers, especially smaller and midsize businesses. “The real key is to help them compete with Amazon,” Abney says. “We would never sacrifice the ability to meet the needs of those customers based on any one customer. It’s all about balance.”

Back to the Bike

UPS’s new e-bike.
Courtesy of UPS

Tourists around the Pike Place Market in Seattle might be getting a sense of 20th-century déjà vu.

That’s because UPS, which got its start in that city in 1907 delivering letters and parcels by bicycle, is back in town delivering by pedal power again. UPS’s new bike has three wheels, a large cargo compartment in the rear, and an electric motor to assist the UPSer making the deliveries.

It’s all part of a global trial, now in 30 cities. UPS hopes the bikes will reduce pollution and improve service in dense urban areas, while avoiding the traffic and (increasingly common) vehicle prohibitions that would slow UPS’s standard brown vans. In some cities, UPS drives a big trailer as close as possible to overcrowded zones and then finishes the deliveries by foot or e-bike.

UPS transformation chief Scott Price got to pedal one of the e-bikes on a recent trip to London, but he didn’t make any actual deliveries. “I wasn’t allowed on the street” by the company, he recalls. “I wasn’t in my Browns.”

A version of this article appears in the January 2020 issue of Fortune with the headline “Stand and Deliver.”

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