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Shipping Wars

Shipping and delivery have been vital to the success of e-commerce, both for retailers and for the

shipping companies themselves. FedEx, UPS, and the United States Postal Service (USPS) have earned

many billions of dollars handling the massive amount of products ordered from Amazon and other e-

commerce sites. Convenient and seamless online ordering and shipping processes, along with free or

low-cost delivery or two-day delivery, are a source of competitive advantage for online merchants over

traditional brick-and-mortar retailers.

Especially important in logistics is the “last mile,” which refers to the last step in a delivery that takes the

package to the customer’s doorstep. Instead of using the USPS, FedEx, or UPS for the last mile, Amazon

is building a fleet of delivery vans and expanding its fleet of Boeing 737 and 767 airplanes for this

purpose. Amazon Air is a cargo airline operating exclusively to transport Amazon packages. By 2021,

Amazon Air will have at least 70 cargo aircraft operating out of over 20 air gateways in the United

States. Amazon additionally expanded its airport hub operations, building a $1.5 billion hub at

Cincinnati/Northern Kentucky International Airport. Amazon also has operations at Fort Worth Alliance

Airport and Chicago Rockford International Airport.

Amazon taking over the “last mile” will drain billions of dollars of business away from the US Post Office

(which handles 62 percent of Amazon’s packages), UPS (handling 21 percent), and FedEx (handling 8

percent). Amazon is not trying to replace these shippers but does want to gain some control over

logistics in order to guarantee that Amazon Prime members get their two-day shipping on time and that

it has capability to handle very large sales volumes during the holidays or bad weather periods. Amazon

will also save on costs. According to Morgan Stanley, Amazon saves $2 to $4 per package, amounting to

$2 billion annually, when it uses its own fleet. Additionally, having total control over the entire shipping

process makes it possible for Amazon to provide a better customer experience. It is easier to track lost

packages and respond immediately to customer inquiries if Amazon does not have to work through

another shipper. Amazon’s shipping policies have been a principal driver of its rapid retail growth.

When Amazon announced one-day shipping for Prime members in April 2019, FedEx canceled its

express delivery contract with Amazon, redefining its business strategy. Management believes FedEx

doesn’t really need Amazon to flourish, since Amazon accounted for less than 1.3 percent of FedEx’s $70

billion in consolidated annual revenues and had been one of FedEx’s least profitable customers on a

margin basis. Management also believed that working with Amazon was cannibalizing FedEx’s own

business. The direction FedEx has chosen calls for focusing on its ground delivery service and

establishing new partnerships with other retailers and brands to serve the broader e-commerce market.

For example, in June 2019 FedEx and Dollar General announced a strategic alliance to offer new,

convenient access to FedEx drop-off and pickup services at thousands of Dollar General stores. The

effort is designed to increase access to FedEx for all customers, particularly those living in rural

communities where Dollar General has a large footprint. FedEx and Dollar General began rolling out the

service in more than 1,500 Dollar General stores in late summer 2019, and will be in more than 8,000

stores by the end of 2020. The Dollar General alliance will expand the FedEx Retail Convenience

Network to more than 62,000 retail locations. That move will put more than 90 percent of Americans

within 5 miles of a FedEx hold retail location. Customers will be able to drop off prepackaged and

prelabeled FedEx Express or FedEx Ground shipments at Dollar General stores and pick up packages sent

to their neighborhood Dollar General stores.

FedEx thinks it can overtake Amazon and become the fastest, most cost-efficient e-commerce delivery

service. In December 2018 FedEx announced its Extra Hours’ Delivery Options for Retail Customers,

which will provide next-day and overnight shipping to e-commerce customers. FedEx is also initiating

package delivery seven days a week to further compete with Amazon.

How does United Parcel Service (UPS) stack up in this competitive arena? Unlike FedEx, UPS is

deepening its ties to Amazon. It wants to stay neutral, whereas FedEx has broken away from Amazon in

favor of courting the brick-and-mortar retailers. UPS is also relying more on the U.S. Postal Service,

especially for Sunday deliveries. FedEx is now delivering on its own about 2 million packages per day

that it had formerly handed to the U.S. Postal Service for last-mile delivery. By handling an increased

volume of packages on its own, FedEx believes it can make better use of its more than 600 sorting and

delivery facilities around the United States to help retailers with shipments from stores to residences.

However, analysts such as Morgan Stanley’s Ravi Shanker are not sure that increasing the volume of

short-haul deliveries will generate the kind of returns FedEx is seeking.

Which company will win the retail shipping wars? The outcome could determine the future direction of

the entire e-commerce retail industry.