August 7, 2019

FedEx to sever another Amazon link when ground-delivery contract expires

Carrier had also stepped away from air shipping contract with its e-commerce "frenemy" in June.

By Ben Ames

FedEx Corp. will not renew its ground-delivery contract with e-commerce giant Amazon.com Inc. at the end of August, dialing back its tight relationship with the Seattle-based "frenemy" that supplies vast volumes of parcels even as it continues to build its own private delivery network.

Just two months ago, FedEx had also stepped away from its air shipping contract with Amazon, declining to renew its FedEx Express deal.

Amazon has seen an increasingly tense relationship with carriers FedEx, UPS Inc., and the U.S. Postal Service in recent years, both relying on them to deliver its flood of smile-branded boxes and also building its own capabilities in third party logistics (3PL) and last-mile delivery services.

In May, Amazon broke ground on a $1.5 billion expansion of its air cargo hub at the Cincinnati/Northern Kentucky Airport, saying the facility would open in 2021 with a mission to drive the company's trademark offer of "fast, free shipping," And in 2018, the company ordered a whopping 20,000 delivery vans from Merecedes-Benz Vans, adding momentum to its strategy of recruiting small business owners to launch parcel delivery fleets around the country.

Both investments support Amazon's move in April to upgrade the delivery terms of its Amazon Prime subscription service from two-day shipping to nationwide, next-day delivery. That offer has also served to raise the table stakes for any other company providing home delivery, boosting consumer expectations for fast, free delivery of their e-commerce orders.

The traditional carriers have not been standing on the sidelines, but are hustling to expand their own delivery standards. In May, Memphis-based FedEx said it would run its FedEx Ground delivery service seven days a week year-round beginning in 2020. That followed its 2018 move to expand its domestic FedEx Ground operations from five to six days a week all year round in a move to match logistics and delivery giant UPS Inc., which had launched that feature in 2017.

Those moves don't come cheap. In May, the U.S. Postal Service (USPS) notched a net loss of $2.1 billion for its second quarter, blaming its problems on the soaring e-mail and e-commerce volumes that have driven decreasing volumes of postal mail and increasing amounts of parcels.

Despite those ongoing service wars, parcel carriers have been loathe to criticize Amazon's ambitions in fear of losing its business.

Asked about the impact on UPS of rival FedEx backing away from Amazon, the Atlanta-based firm sidestepped. "UPS continues to provide innovative solutions to all of our customers to help them grow and succeed. We don't comment on any specific customer discussions," Steve Gaut, UPS' vice president, public relations, said in an emailed statement.

FedEx itself was also circumspect, confirming the change in its Amazon contract but offering no further details. "This change is consistent with our strategy to focus on the broader e-commerce market, which the recent announcements related to our FedEx Ground network have us positioned extraordinarily well to do," Katie Wassmer Johnson, manager, FedEx global media relations, said in an emailed statement.

While FedEx will certainly lose Amazon's hefty volume of parcels, the company has been busy building alternative streams of business to keep its channels running at full capacity. Even as it expanded ground delivery to seven days per week, the company also unveiled several other changes in May, saying it would integrate its "FedEx SmartPost" package volume—marketed as "cost-effective service for your low-weight residential shipments and returns"—into FedEx Ground standard operations. The company will also increase large package delivery capabilities.

UPS likewise has been busy, saying in July it will expand its parcel delivery service in 2020 to seven days per week and making a handful of other changes designed to drive higher network utilization and profitable growth.

That bulked up capacity may allow UPS to seize the moment and capture some of Amazon's business, now that FedEx has stepped away from the fray, said John Haber, founder and CEO of supply chain consulting firm Spend Management Experts. "As for who will be handling the volume - this may be spread to UPS, USPS, or other regional carriers," he said. "UPS has built out a regional super hub for sorting and processing packages and is also in the midst of expanding to seven-day delivery. By FedEx saying 'no' to Amazon, it gives carriers like UPS leverage in holding their pricing."

FedEx may miss out on that business, but the move could actually help the company's profits in the long run, "because while being able to handle volume is somewhat impressive, it is not always profitable for carriers," Haber said. "The recent announcement from FedEx on not renewing its Ground Delivery contract with Amazon, on the heels of letting their Express domestic contract also go, says a lot about FedEx wanting to protect their margins and yields against the volume that comes from Amazon," he said.

About the Author

Ben Ames
Senior Editor
Ben Ames has spent 20 years as a journalist since starting out as a daily newspaper reporter in Pennsylvania in 1995. From 1999 forward, he has focused on business and technology reporting for a number of trade journals, beginning when he joined Design News and Modern Materials Handling magazines. Ames is author of the trail guide "Hiking Massachusetts" and is a graduate of the Columbia School of Journalism.

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