FedEx And UPS Need Not Worry About Amazon

Recently, Amazon announced its intention to start its own delivery service – Amazon Seller Flex – in an attempt to reduce its reliance on third-party logistics companies, and increase the amount of third-party merchandise that would be eligible for free two-day delivery to Amazon Prime members. For the longest time, the e-commerce giant has entrusted companies like UPS (NYSE:UPS) and FedEx (NYSE: FDX) to fulfill such deliveries for a large majority its packages. However, two major disadvantages arose from such a model.

• First, the costs associated with employing third-party delivery services weighed heavily on Amazon’s operating expenses, accounting for nearly 10-15% of its net sales.
• Second, there have been instances when such third party companies have not been able to cater to the rising delivery demands of Amazon (and other e-commerce giants) surrounding timely package deliveries, leading to heavy delays, and severe backlash from expectant customers.

Hence, it was only a matter of time before Amazon began thinking of ways to gain complete control over its own logistics, while also venturing into the logistics industry to earn additional revenue. This, however, begs the question: How will such a move hurt FedEx and UPS? Surprisingly, not much.

• UPS and FedEx have continually reiterated the importance of e-commerce for their revenue growth, as is evidenced by the fact that the e-commerce business has grown faster than other business segments for both shipping giants over the past few quarters. However, at the same time they have also underlined the fact that their growth is not dependent on any one particular e-commerce company. FedEx recently stated that only about 3% of its revenues are derived from Amazon, while an estimated 7% of UPS’s revenues come from Amazon.
• Further, there has been a rapid acceleration in global trade in the recent past; a trend that is only expected to pick up further in the coming years. Moreover, outside the U.S., FedEx and UPS have very limited competition. The culmination of these two factors will enable the companies to take full advantage of this changing trend. Analysts at Goldman Sachs believe that the aforementioned factors will deliver a significant boost to both companies’ earnings that will far outweigh any inroads by Amazon.
• Additionally, one must keep in mind that Amazon’s fleet of 40 jets is significantly smaller than FedEx’s fleet of 659 aircraft or UPS’s fleet of 236. While Amazon is ready to ramp up its investment in its air cargo services, it won’t be able to make much of an impact in the immediate future.

Therefore, while Amazon may be expanding its delivery network in an attempt to ultimately have complete control over its logistics, it seems UPS and FedEx have little to worry about in the short-term.

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