Earlier this week, Amazon announced that sellers on its site will not be permitted to use FedEx for deliveries to Amazon Prime customers. The Wall Street Journal reported a “decline in performance” as the reason for the change but Amazon did not give specifics about what that decline was.
Now we know. A supply chain software company called Convey has done an analysis on 2.5 billion shipping events relating to tens of millions of packages shipped from over 500 thousand locations since Thanksgiving and the results are troubling to any FedEx shareholder: FedEx on-time delivery performance has dropped to 68.3% from 77.5% in the same period in 2018. And FedEx is not alone. The same analysis shows UPS’ on-time stats are down too, from 86% to 80%. Most likely, the increase in the number of packages and the higher percent going to consumers’ homes is overwhelming the companies’ systems and accounts for the decline in on-time performance.
Although these poor performance numbers from FedEx and UPS are bad for Amazon’s customer service in the short-term, this may be a big opportunity for Amazon in the longer term. Amazon is now leaning on these poor performance numbers to continue to build its own delivery business.
Amazon could become a potentially important competitor to FedEx and other delivery services. Why would Amazon build its own delivery service? It’s about the stock price. Amazon’s stock, unlike most other companies, rises on revenue growth where most companies’ stock prices rise on earnings growth. Amazon’s stock is critical because it’s used as an incentive for its employees. And its consistent rise creates an almost zero cost of capital for Amazon that allows it to deploy capital that other companies can’t dream of. The catch is that Amazon must continue to grow its revenue to drive its stock. With Amazon as big as it is in online retail, it’s hard to find growth opportunities that will be big enough to be impactful. Amazon has to find other places to increase revenue and the shipping business may be just such an opportunity.
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Amazon’s history may be instructive here. Year ago it invented a cloud service business for its own use. Then it offered the service to outside users and now Amazon Web Services (AWS) is the largest single contributor to Amazon’s profitability. We may now be seeing the same pattern playing out in the shipping business. Amazon has been increasing the number of packages it delivers itself, and has already reached the point where it delivers half its own packages. By cutting off FedEx, Amazon is giving itself room to grow its own delivery revenue. That may be setting the stage for an Amazon shipping company that ships not just Amazon packages but everyone else’s packages too. It won’t be surprising if, in a few years from now, there’s another major shipping company owned by Amazon that competes with FedEx and UPS. That would follow the Amazon Web Services pattern, provide the revenue growth that Amazon needs and facilitate Amazon’s own retail business. Because Amazon’s cost of capital is so low, buying the expensive infrastructure of trucks and airplanes is not a barrier for Amazon as it is for most other companies.
History has not been kind to businesses that have faced a determined drive by Amazon. But even with all its advantages, the road ahead for an Amazon shipping company won’t be simple, easy or fast. Not everything is going wrong for the existing shipping businesses. The U.S. Postal Service is doing better than it was in 2018, its on-time deliveries rose to 86% from 76% in the same period in 2018. And it’s not all bad for FedEx and UPS either — they both report better performance in the number of packages “delivered but missing.”
In the face of direct competition from Amazon, the large shippers are not going to sit still and take it. FedEx’s CFO said earlier this week, “we are at the bottom but we can see a way out,” and they are going to fight back. UPS said, “Last week UPS added resources and extended work schedules and we have successfully addressed delays in selected areas… This week the UPS network is running at our normal high on-time service levels with no delays.” This may be the fight of their lives and whether Amazon can emerge as a major competitor is an open question. Amazon has put out many competitors but it has not succeeded everywhere. It spent $13 billion to acquire Whole Foods in 2017 but is still not a major player in grocery beyond that acquisition. Amazon’s strengths are formidable and vast but now it is up against some big players who also have resources. Who will vanquish whom in the delivery business is an open question.