FedEx and UPS jockey with Amazon as the tech giant expands into shipping

The long-standing battle between Amazon and the retail businesses has spread to the shipping industry. FedEx and UPS have adjusted their strategies to become a major competitor to the technology giant, once a mere customer.

FedEx has announced two changes in its relationship with Amazon in recent months, including the end of the ground delivery contract with the pioneer of e-commerce. Meanwhile, UPS is exploring new technologies, such as drones and autonomous trucks, to modernize its delivery services.

The changes come as Amazon builds its fleet of delivery vehicles, leases planes and offers $ 10,000 to its employees so that they leave the company and start their own local delivery business.

"I think they've said they're now a competitor in the transportation industry," said Ken Hoexter, research analyst at Bank of America Merrill Lynch. "And FedEx has clearly seen them as a growing competitor in their recent moves."

Just as some retail companies are reluctant to work with Amazon, which can be both a partner and a competitor, transportation companies face the same dilemma. And with their customers facing Amazon in other sectors, shipping companies may need to take sides.

Dan Neiweem, co-founder and lead provider for digital solutions and services Avionos, said that by abandoning Amazon, FedEx could become more attractive to Amazon's competitors in the retail sector.

He compared this information to information that WalMart would urge some of its partners to use Microsoft's Azure for cloud computing instead of Amazon Web Services. WalMart said "there is a small number of cases involving our most sensitive sales data that we would prefer not to view on a competitor's platform", but its vendors may choose the cloud service of their choice .

"I think what you are going to see is that a lot of the shipments from Amazon destined for USPS and FedEx will now be transferred to other retailers who say:" Hey, nobody in my space works who works. with Amazon, "said Neiweem." And you see that parallel very closely with AWS and Azure. "

FedEx has never relied on Amazon for much of its business. In a June statement announcing that Amazon would no longer be served by FedEx Express, the shipping company said that Amazon accounted for 1.3% of its total revenue in 2018, or about $ 900 million.

From this point of view, FedEx's decision to cut ties with Amazon is logical, Hoexter said.

"When you go to their sorting centers, you can see that Walmart and Jet are important customers of FedEx, so this relationship is just as important, if not more important, than Amazon," Hoexter said.

"So if you have to pick one, if UPS is bigger with Amazon and you're bigger with Walmart, you're going to be working more closely with this candidate."

Throughout its ascent, Amazon relied on UPS to meet a large portion of its shipping needs. UPS is still more exposed to Amazon than FedEx. David Ross, a research analyst in the transportation sector at Stifel, said he felt that Amazon was getting between 7% and 9% of its total business figure.

"If you go back 10 or 15 years, UPS was the parcel carrier chosen by Amazon, and when they launched their most advantageous offer over two days, it was a lot of UPS," said Ross.

Amazon began to make greater use of the US mail service after transportation companies struggled to deliver parcels on time during the 2013 holiday season, Ross said.

Online shopping has continued to grow since then. According to the US Census Bureau, e-commerce has increased from about 4% of total retail sales in 2010 to more than 10% earlier this year. According to FedEx, e-commerce is expected to reach 100 million packages per day in the United States by 2026.

While e-commerce has exploded, Amazon has decided more and has put in place a considerable distribution network. The tech giant may not be providing a lot of third-party packages at the moment, but Neiweem said it was "somehow the last support or threshold that they do not have." have not yet crossed. "

UPS and FedEx are also investing in their businesses, with both companies extending delivery to 7 days a week.

FedEx, which has close relationships with retailers of all sizes, has begun offering retailers longer hours for parcel pickups, partnerships with stores such as Dollar General to create customer collection areas, and is experimenting with retailers. delivery robot.

UPS, which saw the next day's airmail request rise by 30% in the second quarter, has invested in TuSimple, an autonomous shipping company, and is in the process of creating a UAV subsidiary called UPS Flight Forward. The company is also expanding its fleet and plans to add 11 cargo planes this year.

The growing demand for fast shipping has weighed on the financial results of large transportation companies. Home deliveries are more numerous, which means that transport companies earn less at a stop than if they delivered a large number of packages at a single point, such as a convenience store.

Hoexter said that domestic margins at UPS have been under pressure for several years. That's where analysts will check if his new investments and his increased leverage with Amazon are working.

"As we approach the high season, have they found a way to stabilize these margins despite the growth of e-commerce, this will be the key to the stock." When you ask what we are looking for, what is it? that margin and pricing? " we are beginning to see improvement or stabilization. This is the first step, "said Hoexter.

Now that FedEx is out of the question, UPS could also get short-term leverage on prices, Hoexter said. This opportunity might not last very long, as Amazon continues to expand its own distribution network and plans to have 70 aircraft in its fleet by 2021.

For FedEx, this separation means that the company can demonstrate that its success in e-commerce is not related to Amazon.

"FedEx just shows people that they do not need Amazon to be a good company and that they feel that they can continue to grow without Amazon. I think that they just wanted to stand out from Amazon so as to create their own growth story a little clearer for people, "Ross said.