UPS and FedEx pricing power is driving Amazon’s delivery threat

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Dean Maciuba, managing partner for North America at Last Mile Experts, sheds some light on the growing threat posed by Amazon to FedEx and UPS’s dominance of the US market

Is Amazon a threat to FedEx and UPS’s delivery business? Last week Bloomberg reported that Amazon is expanding its FBA Onsite warehouse and shipping program, allowing sellers to ship directly to homes. Amazon is trespassing on FedEx and UPS’s turf.

FedEx founder and CEO Fred Smith is on record suggesting Amazon is not a threat as the company could never replicate what FedEx does. David Abney, CEO of UPS, says Amazon is a business partner and not a competitor.

I submit that Amazon is a threat to the two parcel transportation giants. UPS and FedEx price increases targeting e-commerce merchants are driving Amazon to seek lower cost transportation solutions. By taking direct control of product distribution, Amazon can protect its critically important free shipping value proposition Prime, which is the most important buying motive for an Amazon customer. In addition, it can develop new value-added propositions that the commercial carriers simply aren’t prepared or able to offer.

FedEx and UPS rate increases

The two carriers operate as a duopoly in the USA and continue to take significant rate increases each year across multiple categories, including:

• Annual base transportation increases of 4%-5%;

• Increasing the minimum ground shipment rate, which can render transportation discounts useless for lighter shipments between 1 lb and 5 lb;

• Constant rate increases on both rural and residential surcharges, disproportionally affecting e-commerce merchandise that Amazon ships to consumers’ homes;

• Additional handling and large package surcharge increases;

• UPS will start raising the cost of some e-commerce specific surcharges twice during a single calendar year; and

• Volumetric-based rate increases that continue to negatively affect e-commerce merchants that ship large and light items.

Collectively, these UPS and FedEx rate increase practices are crushing Amazon and e-commerce merchants. E-commerce retailers’ transportation costs are rising faster than most other costs so they must seek cheaper shipping solutions, including managing their own transportation.

Amazon, Walmart and Target may be the lone e-commerce merchants large enough to build their own cost-saving parcel distribution solutions. The question is: will they build-out their parcel distribution networks to only support delivery of their own products, or could they offer excess capacity to other e-commerce merchants to help offset their transportation network costs and thus become a direct competitor to FedEx and UPS?

Amazon stands alone as the only e-commerce merchant possessing the scale, resources and expertise to directly challenge and compete with UPS and FedEx.

The Amazon transportation service offering

Amazon could never replicate the scale and service offering of the two parcel giants, but why should it? Amazon can selectively compete with UPS and FedEx in the e-commerce delivery arena, and make it harder for those carriers to profitably scale the residential delivery, by:

1. Giving the carriers, primarily UPS, fewer shipments for delivery;

2. Offering delivery services to their e-commerce competitors, further eroding the ability of UPS and FedEx to scale their residential deliveries;

3. Further leveraging more than 100 forward-stocking fulfilment centers that make low-cost, last-mile delivery possible; and

4. Growing FBA Onsite, allowing Amazon to move product directly from suppliers’ warehouses via the Amazon distribution network.

The Amazon Air and Amazon Business wildcards

Amazon Air encompasses 40 Boeing 767 freighter aircraft and a Kentucky air hub that, when completed, will be larger than the FedEx Super Hub. This initiative will enable Amazon to selectively eat into express shipment volumes at UPS and FedEx. While Amazon will use these assets to support Prime e-commerce delivery, it can also target specific express opportunities like the booming specialty pharmacy business segment.

Amazon Business has been operating under the radar but this B2B e-commerce marketplace with Prime two-day delivery is quickly growing. As Amazon starts to deliver these shipments via its own transportation assets, it will erode the hugely profitable, multi-piece business delivery that drives most profits at UPS and FedEx.

Amazon is not going to put FedEx or UPS out of business because it will never allow itself (and its customers) to be dependent on one supplier, even its own. However, Amazon poses a significant competitive threat to these two parcel industry giants.


Dean Maciuba is a parcel industry expert and has previously served UPS and FedEx for 37 years across multiple professional positions in sales, marketing and operations. Today, Maciuba is the managing partner for North America at Last Mile Experts. As a transportation consultant, he supports the design and implementation of specialty distribution solutions for his shipping clients with a focus on e-commerce, last-mile, cross-border and cold-chain distribution solutions and also supports his clients by helping them to navigate the complicated parcel shipping cost landscape.

February 6, 2018

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