In the past three months there have been substantial changes in the business relationship between the corporate titans and sometimes competitors, Amazon and FedEx.
In June, FedEx decided to non-renew their Domestic Express delivery contract with Amazon and now earlier this month, FedEx made the strategic decision to non-renew its Ground delivery contract with Amazon.
One of the obvious factors for FedEx making this decision to split with its long-time customer is that Amazon has been working hard to carve out local delivery areas in dense population markets that are principally handled with their own logistics assets.
Amazon, by strengthening their hold on these dense population delivery areas has obviously reduced their cost to serve these communities through continued consolidation of deliveries. FedEx obviously believes it can accomplish the same task by consolidating packages however from multiple e-tailers into these dense population areas and no longer rely on Amazon to control what packages they get and don’t get.
Amazon currently utilizes 20,000 Mercedes Sprinter vans, (and more of them are on the way), which are used for Prime customer delivery service direct to the customer’s door, combined with 44 Amazon aircraft making roughly 670 flights per week and a large volume of Amazon trucks, tractors and trailers. Amazon is clearly building a more hybrid transportation and logistics network where they can connect their own warehouses and fulfillment centers and their own planes/trucks/vans to their top markets served.
Before non-renewing the Express and Ground contracts, FedEx delivered roughly 10% of Amazon’s total package volume which FedEx said represented approximately 1.3% of their annual revenue. Compare that volume moved with parcel giant UPS which handles anywhere from 20%-25% of Amazon’s packages per year and by some estimates accounts for 5%-8% of UPS’ total annual revenue.
We don’t see a time where Amazon is going to move all of its packages completely with its own logistics assets, however. They will certainly need to continue relying on UPS, USPS and other third party delivery solutions, such as regional parcel carriers to manage their significant growth and to sustain their delivery commitments to customers.
In 2015 Amazon reported it spent $11.1 Billion on transportation and logistics costs overall and in 2017 that figure increased to $27.7 Billion. In the next 3-5 years that cost will be significantly higher and represent an unhealthy percentage of its overall revenue. Amazon felt it needed to invest in its own logistics assets in order to better manage and control costs with its Prime experience.
FedEx is now focused on the broader ecommerce market which is growing significantly as opposed to doing everything to meet and please Amazon’s needs. If Amazon was to truly compete with FedEx and UPS in any real manner the investment in time and financial assets for Amazon would be enormous. Fact remains that 5 years ago this discussion would be pure fiction and in 2019 Amazon has shown FedEx, UPS and other carriers how quickly and efficiently it can transform and evolve its delivery ecosystem.
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