Pundits have been writing off the U.S. consumer for years, particularly in the post-recession era with households unwinding credit card debt and tightening their budgets. But time and again, those dour expectations have been proved wrong.
Sure, most of us look for ways to make our dollars stretch further these days. And we might not be so quick to make impulsive big-ticket purchases without doing some homework first. But at heart, we are still a nation of shoppers. It's what we do.
And increasingly, the Internet is our favorite shopping medium.
That has been clearly visible this holiday shopping season. According to comScore, a digital-business analysis company, 50 million Americans visited an online retail outlet on Black Friday, the day after Thanksgiving. And they weren't just browsing. In fact, virtual cash registers rang up $816 million in online purchases -- a 26% surge compared with last year.
Sites dedicated to health and beauty, apparel, and home improvement were really buzzing, reporting sales growth of 34%, 47% and 49%, respectively.
But that was nothing compared to Cyber Monday, the Monday following Black Friday, when Internet shoppers spent a whopping $1.25 billion. Since then, online sales topped the $1 billion mark five more times. Remarkably, there have only been seven billion-dollar days in the entire history of e-commerce -- and six of them have occurred in the past few weeks.
Total online holiday spending is currently tracking 15% ahead of last year's heated pace. By the time you read this, online shoppers will have spent more than $25 billion so far -- and there are plenty of beneficiaries.
Amazon.com (Nasdaq: AMZN) has sold four times as many Kindle devices as this time last year. Online auctioneer eBay (Nasdaq: EBAY) reports that its mobile channel did nearly triple last year's volume, led by shoes, jewelry, toys and sporting goods.
But regardless of where those purchases were made, they all have to be shipped to someone's front door. And while there might be hundreds and hundreds of sites competing for your money, there are really only a handful of package-delivery companies.
United Parcel Service (Nasdaq: UPS) is the world's largest, with a global fleet of 500 jets and 100,000 vans. On an average day, the company delivers about 15 million parcels to 220 countries around the globe. But it was really put to the test the week before Christmas -- delivering 120 million gifts to be put under the tree.
On the Dec. 22 shipping peak, it's estimated that brown-clad UPS drivers rang 300 doorbells every second.
Of course, those vans didn't stop running the day after Christmas. There really is no shipping off-season. Consumers are placing more Internet orders year round. Some do it for the cost savings, others for the hassle-free convenience of skipping crowded stores and parking lots.
Whatever the reason, market-research agency Forrester Research reports that U.S. e-commerce rose 12.6% in 2010 to $176 billion. And by 2015, this total is forecast to reach $279 billion -- or 11% of all retail sales.
That's an extra $100 billion (on top of today's spending) worth of goods that used to go home at the point of sale that will need to be shipped instead.
This growing demand would ordinarily attract competition in most other industries. But there is little chance of that here -- not unless a new rival wants to spend billions acquiring hundreds of planes and thousands of delivery vans. I don't see any real competitive threat to this tight duopoly with Fed-Ex (NYSE: FDX).
In fact, No. 3 player DHL couldn't compete and was forced to surrender, exiting the U.S. market in 2009.
That size and scale not only give UPS a protective economic moat, but its huge delivery volume (more than double that of Fed-Ex) spreads expenses, while its highly-efficient delivery and logistics network means much higher profit margins.
UPS currently sports an operating margin near 12%, compared with 6% for Fed-Ex.
That's one reason why the company has generated $3.7 billion in free cash flow during the past nine months. And management has returned every penny, repurchasing $2.2 billion worth of stock and dishing out $1.5 billion in dividend payments.
Risks to Consider: Rising fuel prices could increase costs faster than price hikes can be passed through to customers. The company is also susceptible to weaker shipping arising from a protracted global economic slump.
Action to Take --> UPS is enjoying record volume right now, despite poor consumer confidence and dismal employment figures.
I could talk about rising exports to Asia or the expansion of a major European air hub in Germany. But there's no need to complicate the picture -- global economic expansion means greater shipping demand. Plain and simple.