- FedEx is ending its ground-shipping relationship with Amazon, it said in a statement Wednesday.
- In June, FedEx stopped moving Amazon’s air cargo. It was seen as a move that would benefit FedEx in the long-run as the margins that Amazon’s small, e-commerce shipments provided FedEx were minuscule.
- FedEx has also recently made it clear that it views Amazon as a threat to its bottom line rather than a customer. Amazon has been rapidly scaling up its logistics infrastructure in a way similar to its web-hosting unit.
- Visit Business Insider’s homepage for more stories.
FedEx is ending its ground-delivery contract with Amazon when it expires at the end of August, the shipping company said in a statement Wednesday.
The news comes months after FedEx announced that it would no longer move Amazon’s air cargo packages. Amazon is also working to scale up its own logistics and delivery services.
“This change is consistent with our strategy to focus on the broader e-commerce market,” FedEx said in an email, “which the recent announcement related to our FedEx ground network have us positioned extremely well to do.”
In a statement to Business Insider, Amazon said, “We are constantly innovating to improve the carrier experience and sometimes that means reevaluating our carrier relationships. FedEx has been a great partner over the years and we appreciate all their work delivering packages to our customers.”
Amazon was responsible for just 1.3% of FedEx’s sales in 2018. Over the past year, FedEx’s leadership has made it clear that it views Amazon as a threat to its bottom line and not a collaborative partner.
Amazon, meanwhile, is hoping to do for logistics what it did with cloud computing and web-hosting services. The company’s network for now is used only for in-house goods, using a massive shipping network that’s already grown fifteenfold – double the rate of sales – from 2008 to 2018.
- SEC filings; Andy Kiersz/Business Insider
Industry experts say Amazon would love to eventually offer that network to third-party customers for shipment of any number of other goods, not just those sold on its platform.
As of now, however, Amazon’s network may not be much of a threat, according to Wall Street analysts. Goldman Sachs estimated in early July that – despite the company’s 70 planes and 10,000 trucks – it could take another $122 billion worth of investment to catch up to the infrastructure that the leaders UPS and FedEx have built over past decades.
Shares of FedEx and Amazon were largely unchanged in early trading Wednesday following the news.
A low-margin customer
It’s becoming clear that Amazon might not be the best customer for delivery giants like UPS and FedEx.
While Amazon made up some 1.3% of FedEx’s 2018 revenue, Donald Broughton, the founder and managing partner of Broughton Capital, told Business Insider the operating profit from that revenue was under 0.25% – “something between tiny and zero.”
The proliferation of high-volume, low-margin customers like Amazon is clear in FedEx’s most recent quarterly report. FedEx’s US deferred package segment (non-priority shipments, and e-commerce parcels) increased by 24% in volume, but dropped by 7% in revenue-per-package.
UPS makes $6.21 per Amazon package when moving the parcel through its Ground network (how UPS moves a package during the last leg of its journey before delivery), Jindel estimated. According to the company’s most recent quarterly report, the average revenue per piece on all of UPS’s Ground packages is $8.76 – 41% higher.
UPS relies much more on Amazon as a customer; experts estimate that nearly 10% of its revenue comes from Amazon. The reliance worries some investors, who say that Amazon’s rapid in-housing of deliveries may trigger a sudden shift in UPS’s bottom line.
But, before that happens, some say Amazon will actually continue to do more business with UPS. FedEx’s ditching of Amazon likely means that the e-commerce giant will come to UPS to move its packages, according to a recent Goldman Sachs report.
“(I)t is conceivable that UPS could get less business from Amazon in the future,” Goldman Sachs analysts said in a July report. “That said, with FedEx not renewing its Amazon contract, and the USPS experiencing financial challenges, it is also conceivable that UPS’s position could actually be in good shape vis-a-vis the business it wants to get from Amazon.”
More logistics news:
- FedEx stopped flying your Amazon Prime packages in June because the partnership wasn’t profitable enough – and UPS has the same problem
- Goldman Sachs says Amazon’s logistics network is hardly a threat to FedEx or UPS. It needs years of new construction and a whopping $122 billion just to catch up.
- FedEx is officially sounding the alarm bells on Amazon after years of laughing off the retail giant’s rapidly building package-delivery empire