July 17, 2019

Amazon has been moving into package delivery using many of its assets, prompting observers to ponder whether the retail giant now has UPS, USPS, and FedEx in its competitive sights.

Amazon uses its own delivery network for almost half (47.6 percent and growing) of its shipments. As it has done with its fulfillment services, will it grow to challenge the existing integrators and become a common carrier?

Competitive advantages

The online retail giant undoubtedly has several things going for it.

  • Amazon is more innovative and nimbler than its competitors. The company’s decision-making is faster than that of its rivals, be it retailers or carriers, and it is quicker at moving ideas from the concept stage to implementation.
  • Amazon is not wedded to making a profit, as it continuously demonstrates in its retail business. Consequently, the company can undercut its competitors’ prices on transportation services.

Moreover, many argue that the end game for Amazon is to own the entire retail value chain — from manufacturers to Amazon warehouses and distribution centers, to consumers’ homes and finally, the product returns process. In particular, the argument goes, this is how Amazon can control the entire customer service experience. The retailer is already in the home with its Alexa audio device and Dash Replacement Services, and its delivery people can enter customers’ abodes. Consequently, building a vast delivery network to replace UPS and FedEx makes sense. Furthermore, delivery is a density game, so to make the transportation service efficient, Amazon is likely to offer its transportation services to others.

Given these advantages and Amazon’s relentless push into various markets, will it eventually dominate the package delivery business?

The downsides of dominance

I am not so sure that it’s in Amazon’s best interests to attain a leadership position in packaged delivery, as the company has done in other retail markets.

First, while it makes sense for Amazon to focus on last mile delivery — as the company is already doing — this is the most expensive and least profitable part of the delivery business. Granted, Amazon is less sensitive to profits than most other companies, but this business is likely to drain Amazon’s coffers.

Furthermore, Amazon’s transportation network is a delivery, outbound network. The company’s trucks and vans still have to return to depots, and that part of the trip is likely to involve empty hauls, further increasing the overall cost. By comparison, UPS and FedEx operations include pickup in addition to deliveries. This is especially true for the long-haul network — movements between hubs and distribution centers.

Also, as Amazon develops its last-mile delivery business, it is not clear that it will make headway in the business-to-business side of the transportation industry. First, the investment required to build a complete network equivalent to those operated by UPS or FedEx is vast — even by Amazon standards. Second, if FedEx and UPS sense an existential threat, they are perfectly capable of becoming tenacious competitors — just ask DHL. The company lost billions of dollars during its foray into the US business only to leave the market after five years, unable to wrestle significant market share from UPS and FedEx.

Observers should also keep in mind that while Amazon is a formidable competitor, it has a long way to go before it catches up with the likes of FedEx in the packaged delivery business. In June 2019, FedEx announced that it cut its express service for Amazon. The strategic initiative reflects the fact that Amazon moved during the last few years from a cherished customer with high volume to a direct competitor to FedEx. The change is not a significant loss for FedEx; Amazon used FedEx for only 1.6 percent of its shipments in the year ending June 2019, compared to 16.5 percent of shipments on UPS trucks and 33.3 percent handled by the USPS system. Furthermore, Amazon shipments, which represented less than 1.3 percent of FedEx’s total revenue in 2018, had lower than average margins for the carrier. Thus, the move does make strategic sense. Moreover, FedEx is deepening its ties with Amazon’s biggest competitor — Walmart.

More realistic strategy

What makes more sense for Amazon is not to build a complete network that will compete with the UPS, FedEx, and USPS. Instead, the company should choose the areas of the business where it either has a different reason to enter, regardless of costs, such as last-mile delivery (where service and customer intimacy may be important), or areas where it can operate efficiently (lanes that require minimal empty backhaul, or heavy-volume lanes where the vehicles will usually run full). In other words, mimic private fleet owners that use their fleets on profitable lanes and outsource the rest to common carriers.

The issue with such a strategy is that when you outsource the so call “dog lanes” (the unprofitable lanes), the carriers that provide the service will charge you a higher rate. These nuances could be irrelevant to Amazon because the company has a different rationale than profit maximization for entering the transportation business.

Unclear outcomes

Considering the above arguments, I am not sure Amazon will present an existential threat to UPS and FedEx.

However, both of these companies are likely to experience margin pressure in some areas and relief in others. The pressure can come from Amazon offering lower prices and, in some urban areas, decreasing the density of deliveries, which may increase the delivery giants’ costs and/or degrade their service. Yet, home deliveries in suburban and rural areas have not been highly profitable for the delivery companies. So, if Amazon will take these deliveries or takes over some urban delivery routes, UPS and USPS are likely to raise their rates for Amazon suburban and rural deliveries (since they will not have the deliveries in the high-density, high-margin urban areas to offset the high-cost deliveries).

It’s a fascinating contest and one that will have far-reaching — and in some cases unexpected — consequences for the future shape of the package delivery market.