By Nick Carey
CHICAGO (Reuters) - After two years of disappointing profits from the holiday season, United Parcel Service Inc (N:UPS) is hoping a network of mom-and-pop retailers will help it avoid a third blue Christmas.
Investors will be watching closely.
The coming weeks will be a referendum on the expansion of UPS's Access Point network earlier this year to 8,000 locations in 100 cities from a few large test markets.
The network, including 4,400 UPS stores and thousands of small retailers, is meant to give the company's drivers more places to leave packages for customers to pick up, avoiding multiple delivery attempts.
UPS says it costs three times as much to deliver to a home as to a business.
In densely populated areas, Access Point will "have a dramatic impact" on UPS's ability to operate during the peak season, said Geoff Light, U.S. president of product development.
UPS is also levying surcharges on packages delivered to homes.
Handling holiday shipping profitably and effectively is critical to UPS, which has delivered underwhelming results for the past two Christmas seasons.
In 2013, a last-minute pre-Christmas surge in e-commerce packages caught the company off-guard, and last year it overestimated demand and hired too many workers.
Last year's fourth-quarter results underscored the hit from residential packages. UPS reported its lowest net income as a percentage of revenue for the quarter since the Great Recession in 2008.
With e-commerce activity still unpredictable, it is not certain whether the solution lies in an expanded Access Point network.
It is clear, though, that if the world's largest package delivery company slips for the third consecutive holiday season, Wall Street will not take it well.
"Heads would roll," said Greg Donaldson, founder of Donaldson Capital Management. Donaldson, whose Evansville, Indiana, firm holds UPS shares, said he was confident the company would do better this year.
Kent Winegar, portfolio manager of Austin, Texas-based asset manager Terry McDaniel & Co, which also owns the stock, stressed the importance of protecting the UPS brand. "They need to ... make sure that every single package gets where it needs to go," he said.
In particular, the quarter is a test for UPS Chief Executive Officer David Abney, who was chief operating officer before taking the top post in 2014.
"IN THE HOT SEAT"
If a driver cannot deliver a package in one trip, he or she drops it off at an Access Point for consumers to pick up, executives said. Retailers receive undisclosed "nominal" fees per package.
UPS's Light said tests in markets like New York and Chicago during the 2014 peak were highly successful and that only a "very small number" of retailers since left the network.
At Access Point store Fruit Paradise in Chicago, people who collect packages often buy its Mexican ice cream treats and snacks, said owner Gabriela Ortiz.
"I'm not going to make money off the packages," Ortiz said. "This is about getting people to come in and know we are here."
Elizabeth Milito, senior executive counsel at the National Federation of Independent Business, said that while increased foot traffic should help small retailers, they could suffer if it distracts them from their regular customers. And if people are unhappy about waiting for packages, it could hurt the reputation of the company that sold them their goods.
David Beets is a case in point. The owner of Dell Cove Spice Co in Chicago was notified in July that a package from a vendor was at a local retailer listed as an Access Point.
During two lengthy visits, the retailer could not find his package. During the third, Beets was told it had been returned to the vendor because he had not picked it up.
"If a customer of mine had that kind of experience, they'd never order from me again," Beets said.
John Haber, CEO of logistics management firm Spend Management Experts, said he was looking at how UPS handles e-commerce volumes across its entire network.
Last year, for instance, the company delivered 35 million packages on its peak day, almost double the 2014 daily average of 18 million.
"To me, Access Point is just a smokescreen," Haber said. "The real question is, can they execute through peak season?
"If they can't get it right this year, they're going to be in the hot seat."