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Amazon Gets Booted by FedEx

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Via Wolf Street

Ecommerce is drawing up new battle lines – in the transportation sector.

Amazon is aggressively butting in on freight carriers with its own planes, trucks, and delivery infrastructure, and is at the same time aggressively pushing for faster and cheaper service from freight carriers such as FedEx, UPS, and the US Postal Service. And FedEx has had it with Amazon, announcing today that it was dumping Amazon as customer of its FedEx Express division.

“FedEx has made the strategic decision to not renew the FedEx Express U.S. domestic contract with Amazon.com, Inc. as we focus on serving the broader e-commerce market,” it said in a surprise statement. The current contract ends June 30.

Its other units that do business with Amazon and its international services with Amazon are not impacted by this decision, FedEx said.

FedEx is not overly dependent on Amazon – unlike some other freight companies that now have come to grief under Amazon’s boots, including New England Motor Freight, a less-than-truckload carrier that “stunned” the transportation world when it filed for bankruptcy in February.

Interestingly, FedEx chose to address this point explicitly in the statement:

Amazon.com is not FedEx’s largest customer. The percentage of total FedEx revenue attributable to Amazon.com represented less than 1.3 percent of total FedEx revenue for the 12-month period ended December 31, 2018.

Amazon is trying desperately to speed up shipping and keep its shipping costs low. Being so immense, it is able to throw its weight around and negotiate very demanding contracts – that can be too demanding, as New England Motor Freight found out.

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NEMF was ranked No. 18 by revenue in the less-than-truckload sector in 2017, with FedEx being ranked No. 1, YRC Worldwide No. 2, and UPS No. 5. When it filed for bankruptcy in February and said that it would go out of business, it blamed a host of reasons.

Industry insiders at the time added a reason: Amazon’s demanding contracts. Amazon accounted for less than 6% of the company’s revenues, according to these estimates, but was low-margin business that required a lot of company resources and was expensive to deal with.

“Multiple industry insiders pointed to NEMF’s over-exposure to a very large online retailer, where volumes may have been high but margins very thin,” Seaport Global Securities analysts wrote in a note, alluding to Amazon. During holiday season, the analyst wrote, “surges in volumes can disrupt current operations, customer service levels, and therefore margins.”

A few weeks after the end of the last holiday period, MEMF was done and threw in the towel.

And so FedEx said it is going to “focus on serving the broader e-commerce market” — more profitable customers that don’t eat up so much of its resources:

There is significant demand and opportunity for growth in e-commerce which is expected to grow from 50 million to 100 million packages a day in the U.S. by 2026. FedEx has already built out the network and capacity to serve thousands of retailers in the e-commerce space. We are excited about the future of e-commerce and our role as a leader in it.

This “opportunity for growth” would be less gigantic shippers that don’t have the margin-crushing power of Amazon.

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In addition, there is the issue of growth for FedEx, with regards to Amazon. Amazon is aggressively building up its own delivery capabilities, from cargo planes to last-mile delivery services, and in the process has become a logistics giant in its own right, as it is trying to get control of its shipping costs and move business away from FedEx and others.

So for FedEx, Amazon is no longer a growth opportunity. It’s just a low-margin cost-intensive and perhaps shrinking business.

We can only imagine what happened during the negotiations between Amazon and FedEx as they were trying to renew the contract that will expire on June 30.

Amazon must have tried to cut its cost further and speed up deliveries further, at the expense of FedEx. And FedEx must have done the math that it would be better off chasing after less costly business. Ecommerce is growing in leaps and bounds, powered by countless large and small players – and Amazon is not the only one.

It’s happening one frustrated retail customer at a time. But I doubt there are other options. Read…  Here’s How I think E-Commerce Is Wiping Out Brick & Mortar

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