FedEx to End Ground Deliveries for Amazon

Amazon delivery is a fast-growing private small business opportunity for the PEO industry and the recent news will keep the private delivery companies growing for years to come.

See below from the Wall Street Journal:

Amazon represented 1.3% of FedEx’s total revenue in 2018, or less than $1 billion. PHOTO: CHRISTOPHER LEE/BLOOMBERG NEWS

FedEx Corp. FDX +2.03%said it was ending its contract to deliver Amazon.com Inc.AMZN +1.43%packages through its ground network, essentially severing ties with one of the world’s biggest shippers and gambling it is better off filling its trucks with other customers’ goods.

The delivery giant said Wednesday it decided not to renew the contract when it expires at the end of August. In June, FedEx said it was ending its air-shipping contract with Amazon in the U.S. but would continue to handle ground deliveries. FedEx would still handle international shipments.

The moves are evidence of escalating tensions between the longtime partners as the e-commerce giant builds its own delivery network, including leasing cargo planes, buying trucks and funding local delivery drivers.

While it is walking away from the largest e-commerce player in the U.S., FedEx is positioning itself as a go-to carrier for TargetCorp. , Walmart Inc. and the world of retailers that aim to compete with Amazon.

“This change is consistent with our strategy to focus on the broader e-commerce market,” FedEx said in a statement.

FedEx’s decision will require Amazon to find a new way to handle millions of packages ahead of the critical holiday shopping season at the same time Amazon is looking to speed many home deliveries to one-day shipping.

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Amazon will redistribute packages among its other carriers and its own network, according to a person familiar with the matter. Amazon doesn’t anticipate any disruptions to its new Prime one-day shipping speeds as a result of FedEx severing its relationship with Amazon, the person said.

The retail giant already appears to have wound down much of its business with FedEx. According to the parcel consulting firm SJ Consulting Inc., Amazon used its own drivers to deliver 45% of its July orders, the U.S. Postal Service for 28% and United Parcel Service Inc. for 21%. FedEx, according to the firm, didn’t register any deliveries in July.

Return to SenderAmazon delivers an increasing share of its own orders.Share of Amazon.com packages*Source: Rakuten Intelligence*Last-mile carriers
%AmazonUSPSUPSFedExOther2017’18’190102030405060

The once-staid delivery business has been upended in recent years as consumers buy everything from toilet paper to trampolines online, causing a surge in e-commerce shipments. FedEx and UPS have invested billions of dollars to handle the increased volumes. FedEx cut its profit forecast twice for the recently completed fiscal year, amid a revenue decline in its express division and higher costs in its ground business.

Although Amazon ships millions of packages a day, it spreads the orders among FedEx, UPS and the Postal Service, as well as its own growing delivery operations. FedEx said Amazon represented 1.3% of FedEx’s total revenue in 2018, or less than $1 billion.

“Nothing but respect for FedEx, but they were [a] very small piece of our network and vice versa,” Dave Clark, Amazon’s senior vice president of operations, said in a tweet. He called it “conscious uncoupling at its finest,” referring to the term Gwyneth Paltrow used to describe her divorce from musician Chris Martin.

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Without a contract, Amazon could still send items using FedEx, but it wouldn’t be at a favorable rate. Amazon third-party sellers who fulfill their own package deliveries are still able to ship using FedEx.

For years, FedEx executives have played down the threat to their core business from Amazon’s logistics efforts. They said it would be costly to replicate FedEx’s global network and e-commerce was a small slice of the company’s volumes. More recently, FedEx executives have talked about their plans to carry a growing volume of e-commerce packages.

“It is clear that we are all-in on e-commerce,” FedEx Chief Operating Officer Rajesh Subramaniam said on a recent earnings call.

When FedEx ended its air-shipping contract, the company said it planned to focus on serving other retailers. Meanwhile, UPS has been investing heavily to expand its capacity to handle more packages for Amazon and other shippers. UPS reported a surge in the volume of packages going through its air network in the June quarter.

UPS Chief Executive David Abney said in a July earnings call that changes the company was making to speed up its network, add air capacity and process packages with automated facilities are winning over shippers from competitors’ two-day air service.

FedEx, which only recently added Saturday ground deliveries, plans to offer seven-day residential delivery in the U.S. next year. With the change, FedEx plans to bring to customers’ doorsteps many of the packages it currently drops off at local post offices. The shift will seek to lower costs by building density along FedEx Ground routes, while also shifting some two million packages daily out of the Postal Service’s network.

The 2013 holiday season was a turning point in Amazon’s own shipping ambitions. Amazon orders overwhelmed carriers in the U.S., leading to missed orders and frustrated customers. The company began earnestly building out its own last-mile network to handle the overflow of orders while pushing for speedier delivery times.

Since then, Amazon has more than doubled the number of facilities in the U.S. to more than 400, according to data from supply-chain consulting firm MWPVL International Inc., including delivery stations and sorting centers within reach of most major metropolitan centers. At the same time, it has built a network of its own drivers who can deliver inside homes and built robots to drop off packages by ground and air.

Amazon’s ambitions extend beyond its own site. The company has sought to haul and deliver packages for other retailers and consumers, encroaching on the carriers’ turf. Last year, the company started the “Shipping with Amazon” service to first serve the company’s independent merchants, with the aim of expanding to outside businesses on a national scale.

Internally, Amazon’s logistics teams discussed becoming a third-party logistics company bigger than FedEx and UPS, according to Brittain Ladd, an industry consultant and former Amazon manager who until 2017 worked on e-commerce strategy and operations. The company thought that because of the network Amazon was building and putting in place that it could one day control between 10% to 20% of the global logistics industry, he said.

The end goal for the company is to join with companies across industries to ship their goods much like FedEx does today, Mr. Ladd said. Executives compared their ambitions to what Amazon’s cloud-computing business, AWS, does for clients, according to Mr. Ladd.

But Amazon faces a steep climb if it wants to match FedEx or UPS in shipping prowess. Analysts have estimated it would need tens of billions of dollars in investment, thousands of trucks, hundreds of planes and thousands of sorting centers to handle the billions of packages it ships each year.

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