FedEx Fully Ends US Amazon Relationship while UPS Stays the Course, while the USPS Sees Parcel Volumes Fall as Rivals and Partners Take Away Business

The action and news in the parcel shipping continues to come in hot and heavy.

We'll pick up in recent weeks with FedEx announcing in early June it was not going to renew its contract with Amazon for express (air) shipments when the existing deal expired at the end of that month.

That move was estimated to cost FedEx about $900 million in annual revenue. But FedEx said that Amazon in total represented only 1.3% of its revenue in 2018. However, one UBS analyst estimated Amazon was a much larger 5.4% of just its US Express business.

Supply Chain Digest Says... The USPS delivers the most parcels for Amazon of any carrier – but Amazon as noted above is siphoning off a growing share of those volumes, at the expense of the USPS. What do you say? Click here to send us your comments Click here to see reader feedback

In addition to the growing moves by Amazon to build its own parcel network, many analysts said FedEx was making almost no profits on the Amazon express deliveries.

"We believe Amazon is one of FedEx's least profitable customers on a margin basis and that the decision implies that Amazon would not agree to financial terms that would meet FedEx's needs," said analyst Jonathon Root of Moody's in June.

Donald Broughton, the founder and managing partner of Broughton Capital, said FedEx's operating profit from its Amazon business was under 0.25% — "something between tiny and zero."

Kevin Sterling, an analyst at Seaport Global, added that FedEx should ultimately benefit from ending the contract as it can grow its market share with smaller ecommerce operations and "not be beholden to Amazon."

At the time of that announcement, it was noted that it appeared FedEx would still have an arrangement with Amazon for ground deliveries and international parcel shipments.

Not for long.

Last week, there was news that FedEx said it would also end domestic ground deliveries for Amazon packages when the contract between the companies expires at the end of August. With that move, FedEx is effectively terminating its business relationship in the United States with Amazon – which of course represents by some estimates almost 50% of the US ecommerce market.

"FedEx has made the decision that is no longer wants to sharpen its executioner's sword," Scott Galloway, a professor at New York University's Stern School of Business, told the New York Times. "It's another reflection of this winner-take-all "Hunger Games" economy that is dominated by an increasingly few number of companies.

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As evidence of that, in 2018 holiday season, Amazon handled 30% of its last-mile shipments. That was up from just 8% in 2016, according to an analysis by Rakuten Intelligence, an ecommerce research firm.

Despite its recent investment, Amazon has a way to go before it can match the logistics infrastructure of the major parcel companies. In a recent report, Goldman Sachs analysts wrote that Amazon would need to put $122 billion into its logistics network to catch up with FedEx and UPS.

But that doesn't mean Amazon can't skim off the most attractive deliveries in terms of density and make that work with a less robust total network.

Chief FedEx rival UPS, however, is taking – for now – a different course

Amazon is Now Its Own Largest Parcel Carrier

UPS gets close to 10% of its revenue from Amazon, according to a Morgan Stanley estimate, a figure that could grow as Amazon switches some or most of its FedEx parcels to other carriers, either UPS, the United States Postal Service, or regional parcel carriers.

For example, UPS reported a 30% jump in its next-day air-shipping volume in Q2, which came as FedEx was winding down its air service offered to Amazon. While UPS doesn't provide any details on its share of any customer's business, many analysts believe the increase is largely attributed to UPS picking up most of the former FedEx deliveries.

And while undoubtedly the profit margin for UPS with its Amazon business is also low, UPS needs the revenue to help support a massive investment program that will involve a network of highly automated and very expensive "super hubs" – 18 of them planned for opening in 2019.

These investments will command substantial 8.5% to 10% of UPS's $72.9 annual revenue in the next several years.

Meanwhile, and perhaps surprisingly, the US Postal Service delivered fewer packages in the Q2 for the first time in nine years, even as overall ecommerce volumes continue to grow rapidly. Parcel volumes were down 3.2% in the quarter.

What is happening? The USPS delivers the most parcels for Amazon of any carrier – but Amazon as noted above is siphoning off a growing share of those volumes, at the expense of the USPS.

The USPS also said its partners UPS and FedEx are cutting back on programs where the USPS was used just for last mile deliveries, called SmartPost by FedEx and SurePost by UPS.

For example, FedEx has said it intends to shift all of the 2 million daily packages it passes on to the USPS for "last-mile delivery" into its Ground network next year.

Postmaster General Megan Brennan said that the other delivery players are working hard to convince shippers to switch to their networks, noting that they are "aggressively pricing their products and services in order to fill their networks and grow package density."

That's a lot of action in just a few weeks, as ecommerce continues to transform business and society.

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