UPS & FedEx Summer Reading Series: Is Amazon a Threat? (Chapter 7)

I have previously served FedEx and UPS for 37 years across multiple professional positions in sales, marketing and operations. Today as a transportation consultant, I am regularly asked the following two questions about UPS and FedEx:

1)     Who is cheaper?

2)     Who is the best service provider?

There are no blanket answers for these questions as a carrier’s perceived value to the client is based on a shipper’s specific needs and how those needs are satisfied. Given the volume of transactions that each carrier handles and the scope of services each provides, they generally do a good job. However, the service that each carrier provides and how they price those services must be congruent with the client’s goals and transportation requirements. UPS and FedEx are vastly different companies and how each carrier gets from point A to point B is also very different. 

This is chapter seven of a weekly summer reading series where I will opine on the two carrier’s capabilities, strengths, and weaknesses. My opinions will be based on my experience serving clients from both the carrier and shipper perspective for over 40 years. I do not expect that you will agree with me all the time regarding my claims and positions.   I do expect my linked-in connections and followers to engage in open and frank discussion, so we can learn from each other. FedEx and UPS operate within a duopoly environment where both carriers exercise extreme pricing power.  As transportation costs soar, we all need to be making the correct carrier decisions regarding cost and service to realize the best, overall carrier value proposition for our business enterprises and clients. I am hopeful that the summer reading series will help you make the correct decisions regarding UPS and FedEx moving forward.

The Amazon Transportation Initiative:

We know that Amazon is investing billions of dollars towards taking over more direct control of their transportation. They would like to reduce their exposure to constant UPS/FedEx rate increases and become less dependent on the struggling USPS. In true Amazon fashion, their ultimate goal, is to reduce transportation related expense and improve service to their customer, especially during the busy holiday season.

Even as they develop their own, in-house delivery solutions, Amazon has suggested that there will be enough business to go around in the future to satisfy their delivery partners. FedEx founder Fred Smith has gone on record as saying that FedEx is not concerned about Amazon becoming a competitive threat because it would be impossible for Amazon to replicate FedEx infrastructure capability. UPS CEO David Abney has called Amazon an important business partner and, also does not view Amazon as a future competitive threat.

Myself, I believe the carriers are being a bit short-sighted or simply kowtowing to the investment banker community with warm and fuzzy comments regarding any type of Amazon threat. As publicly traded companies, UPS and FedEx could never objectively acknowledge a potential Amazon threat as that would put additional pressure on their share prices. Here is my objective analysis of how the Amazon transportation initiative could impact UPS and FedEx.

Potential Loss of Existing Amazon Business:

Amazon and the two carriers do not reveal Amazon’s spend with UPS and FedEx. Consensus spend estimates from the experts in the industry suggest that Amazon spends about $10 billion with UPS and maybe $3 billion with FedEx. Let’s take a minute to evaluate each carriers relationship with Amazon:

FedEx: Historically, FedEx has had to charge the largest shipping companies like Amazon more than UPS because they deliver significantly fewer residential ground shipments than UPS. FedEx does not possess the scale specific to the home-delivery to drive the lowest operational cost and resulting best prices. About two years ago, FedEx made a conscious business decision to back-away from low or near negative margin e-commerce, business relationships. That resulted in a large amount of existing Amazon business moving from FedEx to UPS and the USPS. 

While Amazon is still one of FedEx’s largest customers, FedEx could weather the storm if Amazon started to pull large amounts of business from FedEx and take those deliveries in-house. FedEx's exposure to Amazon in this respect is manageable.

UPS: Big Brown’s relationship with Amazon is much more complicated and important to them than FedEx’s relationship is to Amazon. When it comes to e-commerce home-delivery, UPS is a volume play and requires many residential deliveries to flow through their network to drive reduced cost via scale. Remember, it's UPS scale that allows them to operate more cost-effectively than FedEx Ground in the home-delivery arena and still profit with lower rates. It would be catastrophic for UPS to lose a large amount of Amazon’s home-delivery business if Amazon was to take that business in-house. Such a redirection/loss of business would result in reduced scale and higher delivery related operating cost which would force UPS to charge their other customers more. Higher rates could then put those customer relationships at risk.

The Amazon Wild Cards:

1)  Moving More Than Their Shipments.

2)  Entry into the B2B Delivery Segment.

Most analysts are assuming that Amazon will only play in their current sandbox and deliver their packages to residential, e-commerce customers. I don’t think so! Just covering cost or actually making money in the parcel transportation segment is all about scale and it’s nearly impossible to scale the ugly, residential, single piece delivery.  To keep their delivery contractors happy and profitable, Amazon will have to fill up all those Amazon branded vans with packages out-for-delivery. That will never happen by just delivering their own e-commerce, residential shipments. 

Look for Amazon to selectively offer their in-house parcel delivery services to other shippers and e-commerce competitors. They will cherry-pick the customers and shipment metrics they desire and that best work with their operating model. Ultimately, it will only be the multi-piece, commercial customer with high piece and stop density metrics that can make Amazons parcel transportation initiative work. Amazon must go down this path to properly scale their parcel transportation effort, reduce transportation related expense for their customers and improve their overall competitive positioning.

Amazon isn’t going to put UPS and FedEx out of business. Amazon could very well put a world of hurt on UPS/FedEx margin and those two carriers just might be blind to a low cost, Amazon threat.