When Your Customers Are Your Competitors

On August 7th FedEx announced they won’t renew Amazon’s ground-delivery contract when that agreement expires at the end of this month. In June FedEx had previously announced that it would cease U.S. air-delivery services for Amazon.  It has been estimated that FedEx handles approximately 4% of Amazon’s volume and that represented about 1.3% of FedEx’s sales last year.  By comparison UPS delivers about 17% of Amazon’s packages. 

While significant, the fact that FedEx Ground chose not to renew its delivery contract with Amazon did not come as a great surprise. Amazon is an extremely difficult and demanding customer for any transportation company.  Their size and growth trends mean that you must make a decision to scale up to meet their demands for faster delivery times and greater discounts.  Amazon has focused on using its own operations to make deliveries in high-density urban areas that allow for more efficient transportation operations.  That left the more costly package deliveries to FedEx, driving down their margins.

Amazon has been working on its own local delivery networks that would eventually be offered as a service to other companies, as it has done with warehousing, online sales, and cloud capabilities. As the company stated in its last annual report, it considers as competitors "companies that provide fulfillment and logistics services for themselves or for third parties, whether online or offline." But by comparison it has a long way to go. 

Cowen, the investment banking firm, estimates that FedEx and UPS together have about 1,300 aircraft, thousands of facilities, and more than 750,000 employees. Amazon, on the other hand, should reach 50 aircraft by the end of this year, between 65 and 70 in 2020, ultimately needing 200 planes within seven years.  It may be a while before they are recognized as a true competitor.  However there is little doubt that they will continue to be a marketplace disruptor.

What do these events mean for the marketplace?  First FedEx has a need to absorb the increase in capacity that the exit of Amazon will mean for their network.  This is likely to make them a bit more competitive in the market places especially for ‘friendly freight’.  By contrast it is likely that UPS will be in a stronger bargaining position to negotiate for Amazon’s business and the business of other shippers.  The regional delivery package services like OnTrac and LaserShip are likely to capture some of the Amazon business positioning them in a more competitive position.

Data2Logistics is here to support shippers in meeting the challenge of obtaining optimal service at a reasonable cost for their shipments. To learn more, contact Harold B. Friedman at 609.577.3756 or Harold.friedman@data2logistics.com. We are here to support you!