Digital Wars: FedEx Stops Amazon Deliveries
by Jim Lundy
Amazon first challenged Walmart—the largest retailer in the world—and now it is challenging FedEx by increasing its native delivery capabilities, particularly for the last few miles of delivery. FedEx saw this coming and it did warn investors of emerging threats. It ended its ground delivery contract with Amazon in June. On August 7th, 2019, FedEx announced it was ending ground deliveries. This blog is about this new war for eCommerce and the overall war that all enterprises face in a digital era.
Shipping Wars: Amazon’s Delivery Service
The main reason for Amazon starting its own delivery service is twofold: first it is to reduce costs and second, it is to increase profitability. FedEx, USPS, and United Parcel Service (UPS) offer higher wages and in many countries, their full time drivers are unionized. That is not the case with Amazon, who is trying to encourage Amazon employees to start their own delivery service.
In fact, the sheer growth of Amazon has increased its spending on shipping to such an extent that it is creeping up on FedEx and UPS on overall Amazon spending for shipping vs revenue for the latter.
Amazon Still Depends on UPS and USPS
While FedEx has cut ties with Amazon, UPS, and the US Postal Service (USPS) still do significant shipping for Amazon. In fact, the USPS does a high volume of deliveries, particularly on Sundays.
If either provider were to cut ties with Amazon in the short term, it would hurt the company. Additionally, Amazon has made decisions on Amazon Prime that may impact long-term customer satisfaction.
Amazon Prime: Some Returns Have To Go To Kohls
Amazon Prime, the vaulted service you pay for for expedited services, has had some changes. A friend recently called Amazon to do a return and was told that for that item, it had to be taken to the nearest Kohls. When my friend told Amazon that they were a Prime member, the Amazon associate simply said that didn’t matter. Certain returns had to be taken to Kohls for a pickup.
To us, that is a downgrade of the Prime experience and Amazon is choosing cost control over experience. Many buyers may think twice about clicking on the Amazon buy button versus going to another eCommerce retailer for their next purchase.
What Happens Next in Shipping Wars?
We expect Amazon to continue to grow and to continue to focus on profitability. That means it will continue to invest in shipping—since it already has a formula that lowers its shipping costs compared to FedEx and UPS. We don’t think that Amazon can beat the prices from USPS, but we also think that the USPS should raise prices for Amazon.
The bottom line is that you can have a customer one day and in an era of digital, they can be a competitor the next day. Amazon is the best example of this and because of its cost efficiency models, it has expanded into multiple markets that has allowed it to become a formidable competitor in markets such as retail food (Whole Foods acquisition). The lesson for all enterprises is to focus on what digital means and to become fully digital to enable faster responses to competitive threats.