FedEx Cutting Out Amazon on Ground Deliveries

Two months after deciding not to renew its contract with Amazon for air freight service, FedEx is now parting ways with the ecommerce giant on the ground as well.

FedEx announced it will not renew its ground contract with Amazon when it expires at the end of August, effectively severing the long-term relationship as Amazon continues to ramp up its own delivery and logistics capabilities. Part of that has included hiring away top logistics talent from both UPS and FedEx.

Instead, FedEx will focus its efforts on broadening its base of higher-yielding ecommerce customers not named Amazon; the latter represented about 1.3% of its 2018 revenue or about $906 million.

“This change is consistent with our strategy to focus on the broader ecommerce market, which the recent announcements related to our FedEx Ground network have us positioned extraordinarily well to do,” said a FedEx spokesperson.

Dave Clark, senior vice president of operations for Amazon, hinted the move was Amazon’s decision in a tweet, calling it “conscious uncoupling at its finest.”

“Nothing but respect for FedEx but they were (sic) very small piece of our network and vice versa, we wish them nothing but the best,” Clark said. “We have great strategic partners who are part of our long-term plan and we appreciate what they do for customers.”

FedEx has already taken a hit from canceling its air freight business with Amazon, as the volume dropped more than 8% in June at its main hub in Memphis, according to the Commercial Appeal.

In its 10k filing last month, FedEx acknowledged Amazon as a competitor for the first time, after dancing around the question for the past few years, as rival UPS had done earlier in the year. Amazon for its part listed “transportation and logistics services” as competitors for the first time in its 2018 10k.

Even with Amazon’s heavy investments in its logistics infrastructure, the loss of FedEx ground will likely hurt during the coming peak season, especially given its new one-day shipping promise for Prime.

Amazon accounts for an estimated 5% to 8% of UPS’s business, according to FreightWaves, a figure sure to increase with FedEx moving on. UPS, the U.S. Postal Service and regional carriers are all options on the table for Amazon to address its soon-to-be homeless volume.

John Haber of shipping consultancy Spend Management Experts, said on the other side it will take more than a couple competitive wins for FedEx to make up the loss of Amazon’s ground business.

“It’s more line 7 to 10 wins, and that won’t be easy,” Haber said. “We’ve heard they recently won two very large retail and retail/wholesale accounts that will help offset the loss. However, UPS is not going to just let higher-margin large accounts start walking so it’s going to be challenging for FedEx from a revenue standpoint.”

Haber said while the loss of Amazon for FedEx “creates a lot of leverage” for UPS, it’s much more dependent on Amazon’s business to help cover fixed costs and reinvest into capital expenditures, especially infrastructure and network expansion. Thus a “me too” exit from Amazon is highly unlikely.

Jerry Hempstead, principal of Hempstead Consulting, said FedEx’s divorce from Amazon has been in the works for quite a while, starting with the latter’s decision to discontinue its SmartPost contract years ago. SmartPost is FedEx’s hybrid last-mile service handled by the U.S. Postal Service, cousins with UPS SurePost.

“Moving forward I believe it’s Amazon’s intention to take even greater control of its deliveries and either make them directly or use the USPS,” Hempstead said. “After all that’s the one company that by law goes to every address, six days a week.”

Hempstead added FedEx was more impacted by the cancellation of its air contract with Amazon. “That space will be hard to fill with reasonably yielding freight,” he said.

Tim Sailor, owner of Navigo Consulting Group, said he found it surprising that FedEx would walk away from the Amazon deal based on margin alone, given the scalability of its business. He estimated FedEx handled about 20% of Amazon’s business, with UPS taking 30% and the USPS handling the rest.

“I believe there are other factors involved (besides margin),” Sailor said. “This is probably an acknowledgement that FedEx views Amazon as a competitor. I’ve also heard that one factor in FedEx’s decision was its desire to strengthen the relationship with Walmart. The biggest beneficiary of this decision will probably be the USPS as I believe Amazon will move more business over there.”

Sailor agreed with Hempstead that cutting off the air freight contract was the more painful decision for FedEx “as this service is more difficult to replicate with the USPS.”