Amazon’s announcement of one-day shipping for Prime members was the shot heard around the world for many retailers. Fast, two-day shipping has defined modern retail thanks to Amazon’s Prime’s guarantee, encouraging loyalty, repeat visits and influencing consumer expectations that anything ordered online will arrive within a mere couple of days. Next-day delivery pushed the barriers to entry even further for many retailers.
That’s why when FedEx (NYSE: FDX) canceled its express delivery contract with Amazon (NYSE: AMZN), the air may have left the room for the company. With an investment of $800 million on the line this year alone for one-day shipping, will Amazon still be able to deliver on its promise without FedEx?
The Cost of Shipping
Amazon has been building its own shipping infrastructure for a while, largely driven by the need for cost savings. Amazon's worldwide shipping costs have grown fifteenfold from 2009 to 2018. Net sales increased by sevenfold in the same time period. Shipping alone cost Amazon $27.7 billion in 2018. Morgan Stanley's Ravi Shanker told CNBC that Amazon will pay about $6 a box to move this themselves on their own air network, versus an estimated $8 or $9 per box paying UPS (NYSE: UPS) and FedEx. “Given Amazon's scale, that could be a couple of billion dollars at least in savings."
FedEx wasn’t ignorant to this fact, as Amazon has been broadcasting news of its growing transportation infrastructure, cobbling together agreements with airlines and shipping partners, pursuing drones, and even recruiting its own employees to deliver packages. Amazon is also trying to band-aid their shipping return policy by striking a partnership with Kohl’s (NYSE: KSS). According to an article from CNBC, starting in July, Kohl’s will be accepting Amazon returns at all of its stores – more than 1,150. Barron’s reports that “some retail experts think that the ease of online ordering, coupled with the ability to not pay to return orders, may attract lower-and-middle-income customers who won’t pay $119 for an annual Prime membership with free shipping.”
FedEx Doesn’t Need Amazon
However, while Amazon was clearly leaning on FedEx to deliver while it continued to build out its own capabilities, the e-commerce giant likely lost sight of an important fact: FedEx did not need Amazon. Moody’s senior vice president and lead FedEx analyst, Jonathan Root, stated, “We believe Amazon, representing less than 1.3% of FedEx’s nearly $70 billion of consolidated annual revenues, is one of FedEx’ least profitable customers on a margin basis...”
FedEx is looking to the future and continuing to set new partnerships with other retailers and brands. According to a recent Sourcing Journal article, FedEx Corp. and Dollar General (NYSE: DG) are entering into a strategic alliance that will offer convenient access to FedEx drop-off and pickup services at thousands of Dollar General stores. The new alliance will increase the FedEx Retail Convenience Network to more than 62,000 retail locations. “By leveraging Dollar General’s rural store footprint, more than 90 percent of Americans will ultimately live within five miles of a FedEx hold retail location,” the company said.
Working with Amazon was also essentially cannibalizing FedEx’s own business. FedEx stated in its most recent annual report, “high volume package shippers, such as Amazon.com, are developing and implementing in-house delivery capabilities and utilizing independent contractors for deliveries, which could, in turn, reduce our revenues and market share."
FedEx Aims Higher than Amazon
By canceling the contract, FedEx not only cuts off shipping capabilities on about 200,000 Amazon packages daily (according to this story), putting Amazon at a disadvantage, but also draws a particularly bold line in the sand when considering the e-commerce landscape.
The company made it very clear that the reason it chose to abandon Amazon was to “focus on serving the broader e-commerce market," which the company estimates will see daily packages soar from 50 million to 100 million by 2026.
In December, FedEx announced expanded retail offerings in a press release unveiling ‘FedEx Extra Hours’ Delivery Options for Retail Customers, quoting the company’s incoming CMO specifically on next-day and overnight shipping. “Demand trends and consumer expectations in e-commerce are shifting, and the size, scale, reliability, and flexibility of the FedEx networks uniquely positions us to offer this new service that answers a clear consumer need: evening shopping with next-day local delivery and two-day shipping within the continental United States,” said Brie Carere, Senior Vice President and incoming chief marketing officer for FedEx. The company also announced earlier this year its plans to start package delivery 7 days a week, enabling it to compete head-to-head with Amazon’s own promise.
The Training Wheels Are Off
The shipping war was already on with larger e-commerce leaders. Target (NYSE: TGT) has fired back at Amazon’s one-day Prime delivery with its own recent announcement offering same-day delivery on 65,000 items through Shipt with or without a membership, and Walmart (NYSE: WMT) has announced next-day delivery on select items as well.
With FedEx backing the broader e-commerce market, Amazon must now double down on its transportation infrastructure plans if it’s going to be able to fill the void, and the race is on. Just this month, Amazon announced it has added 15 Boeing 737 freighters to its growing air fleet, with its goal of growing to 70 planes by 2021. (By comparison, FedEx currently boasts a fleet of 700 planes).
"In a sense, the trainer wheels are off the Amazon Logistics operation," said an investors' note from Morgan Stanley's freight-analyst team in a Business Insider article. "This [FedEx] announcement is likely to put extra strain on Amazon’s in-house shipping offerings."
Whether the company will be able to not only build the infrastructure but do it well against a backdrop of seasoned shipping companies like FedEx, who bring decades of experience, is anyone’s guess. The pieces may or may not be in place, according to a March report from RBC Capital Markets that estimated Amazon already had the capacity to offer same-day and next-day delivery to 72% of the total U.S. population.
Amazon’s shipping policies have been the main linchpin in the company’s rapid growth, redefining expectations for consumers -- not to mention building a loyal base of 90 million Prime members in the U.S. alone. However, as the company scrambles to bridge the gap left by FedEx, I’m curious to see if these expectations will now come back to bite the company -- particularly with FedEx teaming up with the broad e-commerce marketplace. As with most aspects of retail, from product to service to shopping experience, understanding and meeting customer expectations is the key to success.
