The Amazon FedEx Breakup
Amazon and FedEx have traditionally had a love-hate relationship. On the one hand, Amazon is one of the biggest customers of FedEx, whereas, on the other hand, it is also one of their biggest competitors. Amazon has already made its intentions clear. In the long run, they do not want to be associated with FedEx, UPS, United States Postal Services, or any other service provider for shipping.
Amazon is planning to build up its own shipping network which it will use to deliver its own shipments and also offer services to other third parties. This is the reason why Amazon has made significant investments in the shipping domain. Amazon has purchased planes, vans, tractors, and even drones. This is because it wants to be involved in bulk transportation as well as last mile delivery. Amazon plans to use technology to revolutionize the package shipment domain.
Therefore, the interests of Amazon and FedEx are definitely not aligned in the long run. It was therefore only a matter of time before one of the companies decided to pull the plug on the partnership. By doing so pre-emptively, FedEx now has to moral high ground as well the first mover advantage.
In this article, we will have a closer look at the corporate breakup which has taken place between Amazon and FedEx and what it means for both parties as well as the rest of the world.
Why did FedEx Call off the Relationship?
FedEx was never really dependent on Amazon. Amazon accounted for only about 1% of the top line of FedEx. Amazon has traditionally had closer relationships with two other service providers. About 60% of Amazons packages are transported by the United States Postal Services, another 30% are transported by UPS, and the balance is transported by FedEx along with other service providers. Therefore, not having Amazons business will definitely not have a huge dent on the top line at FedEx. However, it is still a significant step to say no to the business of a major competitor.
FedEx hopes to receive many benefits as a result of this move:
- Firstly, since FedEx has called off the relationship unilaterally, it would receive reputational benefits. This means that people will now perceive FedEx to be a company that put its values above money. FedEx will be perceived to be the company that stood up against the digital bully.
- Secondly, the package shipment business is expected to double in size by the year 2026. It is true that Amazon will account for the lions share of the growth. However, other companies like Wal-Mart, Target, etc. will also see significant growth. Since FedEx has now positioned itself as being anti-Amazon, other companies would want to use its services. The last thing Wal-Mart and Target want to do is to send more money to the coffers of Amazons associates. Since FedEx will provide a better alternative, it is expected to obtain more business.
- Smaller companies will also feel more comfortable conducting business with FedEx knowing that it doesnt work with Amazon any longer. Smaller e-commerce companies have always been wary of their shipping partners. There is a common belief that these shipping partners pass on their data to Amazon, which is then used against them.
Why are Analysts Questioning FedExs Decision?
FedEx has been using many numbers to justify the breakup with Amazon. However, financial analysts all over the world do not seem to be convinced. FedEx claims that all of Amazons business is a volume gain. The margins are wafer thin however, the volume is seemingly endless. Hence, according to FedEx, they do too much work and make very little money as a result of the partnership with Amazon.
The analysts, on the other hand, believe that the cost structure at FedEx is fixed. This means the costs remain the same regardless of whether or not FedEx serves Amazon. Therefore, the 1.3% loss in top-line sales will have a disproportionately large impact on the bottom line at FedEx. FedEx claims that discontinuing services to Amazon will free up capacity, which can be used to serve other customers who are more profitable. However, analysts doubt whether FedEx will be able to do so. It is true that in the medium term, FedEx will be able to fill this capacity. However, in the short term, the company may be susceptible to lost revenue and lost profits.
What the Breakup Means for UPS and USPS?
Both UPS and USPS are too intertwined with Amazon to pull back. Over the next few years, Amazon is going to continue ramping up its business. In the short to medium term, this would mean lower volume business for UPS and USPS. However, once the growth from the retail industry reaches its peak, Amazon is going to turn to the shipping industry for growth. This is when it may simply buy out UPS! USPS is a government-owned entity, and hence, its future cannot be predicted easily. However, what FedEx has essentially done is stopped Amazon from developing an iron grip over its business and finances. In the short run, it may seem like a loss-making decision. However, it will help FedEx stay independent and profitable over the longer term.
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