UPS adapts to Amazon’s reduced business by shifting focus toward high-end services

UPS Shifts Focus Toward High-Value Growth Amid Amazon Volume Decline

UPS is not downsizing but rather realigning its business for future profitability, according to a senior executive. As the company reduces its reliance on Amazon shipments, it is targeting more lucrative markets beyond short-haul courier services.

Industry analysts have praised UPS (NYSE: UPS) for successfully executing the largest network consolidation in its history, all while maintaining service quality.

During the Raymond James Industrials Conference, CFO Brian Dykes explained, “By the end of Q2, we’ll have a leaner, more profitable network ready to grow with the right mix of shipments. We’re shifting away from e-commerce and focusing more on small and medium businesses, B2B, and healthcare, which positions us for expansion into late 2026 and 2027.”

While Dykes’ comments didn’t reveal new strategies, he provided deeper insight into UPS’s ongoing transformation. FedEx has also recently emphasized its commitment to high-value B2B and premium e-commerce segments over last-mile delivery.

In 2024, UPS launched an ambitious plan to streamline and automate its delivery network, aiming to boost profits by better aligning resources with reduced parcel demand. The company’s decision to cut its Amazon volume by half by mid-2026—its largest customer—was a strategic move, as those shipments were not profitable. This, combined with slower e-commerce growth and increased competition in last-mile delivery, has impacted UPS’s small-package business.

UPS has already eliminated 34,000 full-time operational roles, reduced 25 million operational hours, and closed or exited 93 facilities in 2025. In January, the company announced it would cut an additional 30,000 jobs and shutter 24 parcel sort centers this year. It has also offered $150,000 buyouts to unionized delivery drivers. By June’s end, UPS expects to have reduced its daily Amazon volume by 2 million packages and lost $5 billion in revenue in under two years.

Automation in the remaining facilities is helping to further reduce unnecessary capacity by cutting down on sorting shifts.

UPS anticipates that a challenging revenue environment and costs from these operational changes will impact profits in the first half of the year. However, as efficiency gains take hold, performance is expected to improve later in the year. The company projects first-quarter domestic margins of 4%-5%, with revenue down slightly from last year. For the full year, domestic revenue is expected to rise modestly, with operating margins around 8%.

Additional Operational Challenges

Beyond right-sizing its network, UPS is facing extra costs as it transitions some of its Ground Saver deliveries back to the U.S. Postal Service after a year of self-delivery proved too expensive. The company is also incurring costs from hiring third-party cargo airlines to compensate for the retirement of its MD-11 fleet, though these expenses should decrease as new Boeing 767-300 freighters are delivered.

International revenue growth is also under pressure, partly due to tough comparisons with 2025, when importers rushed to stock up before new U.S. tariffs and the end of duty-free treatment for low-value parcels, both of which have dampened e-commerce volumes.

Smooth Transition and Service Excellence

Financial analysts generally agree that UPS’s restructuring showcases strong discipline and execution, as evidenced by fourth-quarter results that surpassed expectations for both revenue and earnings.

Industry experts caution that as UPS and FedEx (NYSE: FDX) streamline their networks and reduce staff, there is a risk of service degradation. So far, however, delivery performance remains strong, though some customers have reported declines in sales and account support.

Despite closing nearly 10% of its facilities last year, UPS maintained service levels. Dykes emphasized the importance of this, especially when discussing rate increases with customers: “Delivering superior service is essential for justifying premium pricing, and we’ve consistently done so for eight consecutive years.”

During the peak holiday season, UPS achieved an on-time delivery rate of 97.2%, outperforming the previous year’s 96.5%.

Analysts note that network carriers like UPS depend on high package density per route for cost efficiency. Reducing Amazon volumes could increase costs per delivery, potentially leading to higher rates. Both UPS and FedEx have raised base rates and surcharges in recent years to offset slower growth, which is driving some online retailers to lower-cost alternatives.

Satish Jindel, president of ShipMatrix, commended UPS’s U.S. operations team for their rapid cost reductions, noting their execution outpaced FedEx’s network integration. He added that UPS’s facility reductions are a response to declining Amazon business, not excess capacity.

Jindel also highlighted UPS’s commitment to operational efficiency, saying, “They’re relentless in trimming any excess and have managed the Amazon volume decline exceptionally well.”

Research from Barclays analyst Brandon Oglenski indicates that UPS’s forecast for flat domestic operating income in 2026 is notable, as previous downturns typically saw income fall more sharply than volume.

Leveraging Value-Added Services and Pricing Power

UPS is retaining profitable segments of its Amazon business, particularly avoiding outbound deliveries from local Amazon fulfillment centers near residential addresses. Dykes explained, “Amazon has built a robust supply chain and can handle these deliveries internally. We’ll focus on other areas where we can add value, and Amazon will remain a major customer.”

UPS will continue to process a significant volume of Amazon returns through its store network and support small sellers on the Amazon marketplace.

“Our partnership with Amazon remains strong, with multi-year contracts in place for other business segments. This allows us to concentrate on areas where we can invest and foster growth,” Dykes told investors.

UPS has also moved away from unprofitable Chinese e-commerce shipments, which contributed to a 10.6% drop in average daily volume in the fourth quarter. The company made this shift after ending its USPS partnership due to new requirements for bulk shippers, opting instead to handle deliveries directly and raise rates, which led to the exit of sellers like Shein and Temu.

Dykes expects UPS to complete its transition away from Chinese e-commerce this quarter, with mid-single-digit revenue growth from small and medium businesses anticipated as the year progresses.

“This isn’t about shrinking the company—it’s about growing in areas that deliver the most value,” Dykes said. UPS is prioritizing enterprise clients in B2B, healthcare, and industrial sectors, where higher revenue per package and better network utilization are possible, while also supporting smaller businesses, especially those involved in cross-border trade, by integrating shipping solutions into their digital platforms.

This improved customer mix enabled UPS to boost revenue per package by 8.3% in the fourth quarter. Over a third of this increase came from higher base rates, another third from more profitable volume, and the rest from increased fuel surcharges.

Dykes noted, “Healthcare and high-value shipments are extremely resilient. For example, when delivering clinical trial drugs with 99.99% on-time performance, customers are less sensitive to price increases. It’s a very different scenario compared to shipping low-value items like T-shirts.” UPS projects revenue per package to rise 6.5% in 2026, then stabilize at around 3% annual growth.

Shipping T-shirts has become less attractive for major carriers, with FedEx’s Chief Customer Officer recently stating the company is no longer interested in such low-value shipments.

UPS shares climbed 21% over the past three months, though they dipped following geopolitical tensions that raised concerns about fuel prices and global trade.