Report: Amazon to roll out offerings to take market share from FedEx and UPS

For those that still think Amazon does not directly compete with the parcel duopoly of FedEx and UPS, a report in The Wall Street Journal today drives home the point that it may be time to reconsider that notion.

The reason, according to the report, is that a new seven-days a week delivery network being introduced by the global e-commerce bellwether, aims to take customers from FedEx and UPS by zooming in on fuel surcharges and extra fees, which increase home delivery costs.

This is essentially an extension of a push made by Amazon nearly a year ago, in which it announced a new service that would have Amazon picking up packages from businesses and shipping them to consumers (in a few select cities), with third-party merchants selling goods through Amazon.com. And the WSJ noted at that time that Amazon would like to open it up beyond third-party sellers to other businesses as well and that Amazon is “planning to undercut UPS and FedEx on pricing, although the exact rate structure is unclear.”

In its move to take market share from FedEx and UPS, the report said Amazon intends to take out fees carriers use as revenue producers, including “extra charges to deliver packages to homes during the peak holiday season or on weekends.”

And it quoted an Amazon spokesman explaining that the company “is always working to develop new, innovative ways to support the small and medium businesses who sell on Amazon, including testing shipping programs that help these businesses get packages to their customers quickly and reliably.”

Drawing in customers through price reductions was laid out in various forms in the report, including:

• a residential surcharge at FedEx is $3.80 per parcel and $3.95 at UPS, which can represent more than 40% of the average ground delivery charge of $8.81 at FedEx and $8.71 at UPS, based on publicly available company data; and
• fuel surcharges, with FedEx at 6.75% and 7% at UPS (UPS has levied fuel surcharges on peak season deliveries the last two years)

“UPS and FedEx don’t offer seven-day delivery to anyone, not domestic, not international,” said Jerry Hempstead, president of Hempstead Consulting. “So Amazon, who markets itself as free overnight or second-day delivery and touts that as part of its secret sauce, will now offer ‘suppliers’ (so its not the vast amorphous market) a delivery service that takes a week. There has always been a trade-off of time vs. price. I can say that the integrators could, if they wanted, offer a much better price for a weeklong service. But the pressure of the last decade has been on faster not slower.”

When asked what the chances would be of UPS and FedEx going to seven-day delivery, he explained that could happen only if they see it as something the market wants.

And he added that the market does have a fairly large support base for a lower price, coupled with many e-tailers who would gladly trade transit time for price.

“Much of what gets delivered in two days has absolutely positively no need for that sort of speed,” he said. “My daughter gets a month’s worth of paper towels and toilet paper delivered in two days by Amazon and you just wonder ‘was that really necessary? If you trade time for price, then the carriers can maximize loads and save some costs and share some of that with a lower price. You could even move [some] of the longer distance traffic on the rails to reduce costs.”

Another parcel sector observer made the case that while this news from Amazon is premature, it ensures that the “ominous cloud” of competition is going to hang over FedEx and UPS, with the USPS will also feel the eventual volume loss.

“But where's the guts? Will there be Published pricing?  Is Amazon going to build national hubs for non Amazon packages?” asked Gordon Glazer, senior consultant for San Diego-based parcel consultancy Shipware LLC. “I believe this is this another Amazon publicity stunt like the idea of drones replacing uniformed drivers. This will keep the rest of industry scrambling to deal with the Amazon effect. I would love to be a fly on the wall at Amazon, watching them laugh as its competition squirms and devote limited resources to compete. We look forward to analyzing the opportunity for our shipper clients, once the program is fully developed.  More likely, it will be a selected program for hand picked vendors to further enhance their Shipper Fulfilled Prime offerings.  Even limiting services to residential deliveries, it will take years and billions of dollars to build out a national distribution network for non-Amazon packages.  If only Amazon and the USPS could collaborate on a joint program to deliver e-commerce packages, it could be a real win for Amazon, Amazon's competitors, the USPS and Consumers alike.”

As for how FedEx and UPS view Amazon as a competitor, their respective views could be viewed as direct and also guarded.

“We look at Amazon as a wonderful company in service and they're a good customer of ours,” said FedEx Chairman, CEO, and President Fred Smith on the company’s fiscal second quarter earnings call in December. “We don't see them as a peer competitor at this point in time for many reasons. We think it is doubtful that, that will be the case. So we have very strong strategies, well understood by the management team, the addressable markets that we deal with are growing. And as we've said over and over again, we've grown market share, particularly in the sectors we want to grow, there have been some sectors that we've chosen not to attack for a number of reasons and that can change from time to time.”

While UPS did not provide the WSJ with a direct reply on Amazon’s shipping strategy, a company representative said that UPS has a healthy and growing small package business that is capable of transferring goods competitively from dock to doorstep anywhere in the world.”