No Mercy / No Malice

How Amazon Beat FedEx at Their Own Game

Notes on the future of e-commerce, aka: FckdEx 🚚

In the next 24 months, FedEx will either be acquired or lose an additional 40%+ in value. The likely acquirer is Walmart. The gangster move: a merger with Shopify.

In July 2017 we predicted, “If Bezos tomorrow said, ‘We see overnight delivery as a huge opportunity,’ the $150 billion of market cap of DHL, FedEx, and UPS would begin leaking to Amazon.”

This has happened. Since the launch of Amazon’s delivery service in February 2018,FedEx has lost $25 billion (39%) in value, despite the S&P’s 24% gain. Amazon has added $240 billion (33%). In less than two years, Amazon captured nearly one-fifth of the market for e-commerce deliveries in the U.S.

Since 2014, U.S. e-commerce has increased 84%, creating a massive opportunity for the delivery industry. But instead, there has been a transfer of wealth from FedEx, UPS, and the U.S. government to Amazon. Amazon enters high-friction, low-margin businesses as a means of differentiating low-friction, high-margin businesses (AWS and AMG).

How We Got Here — Featurizing

Network effects, cheap capital, idolatry of innovators, and a feckless DOJ/FTC have resulted in a monopoly era where a wildly profitable business (phones, digital marketing, loyalty programs, cloud, Yoda dolls) can generate such staggering value (“antimatter”) that entire industries become loss leaders (“features”) to differentiate and protect the antimatter. Netscape, the fastest-growing software firm in history, went from antimatter to feature when Microsoft began bundling Internet Explorer with Office.

I served on the board of a visual commerce SaaS firm (Olapic) until we sold for $130 million in 2016. There was a great deal of discussion on whether to sell. I urged the founders, naturally optimistic about the firm’s prospects, to sell. The difference between $1 million and $10 million in wealth is meaningful (go big), but the difference between 0 and $1 million is profound (sell). Every entrepreneur should bank enough money to provide economic security for their family… at any opportunity. For every CNBC story on Spiegel and Zuck turning down offers and going on to capture billions, there are dozens of founders who should have sold.

Pro tip: your VCs will encourage you to “be in it to win it,” and to keep going, as they are already rich. Assume you are not Mark Zuckerberg.

Speaking of Zuck, I think he’d be happier if he’d sold to Microsoft (I don’t know him, so this is pure speculation). A powerful algorithm for happiness is to be wealthy but anonymous. Perhaps as a coping mechanism for realizing the significant damage he levies on the world, Zuck has developed the attributes of a sociopath. At some point, he’ll likely be criminally charged. Instead, he could have worked in Seattle for 27 months, retired to Hawaii, invested in rockets, owned a football team, and produced Cats for the big screen.

With any software start-up, there is a non-zero probability that you wake up the next day and find that a better-resourced firm (Microsoft, Oracle, Salesforce, Adobe) has deployed 200 engineers to copy your product, bundle it with their stack for free, or near free, and… welcome to zero. I believe this is happening to Slack, but more slowly than Netscape, as Microsoft’s General Counsel has likely coached Satya to charge a nominal fee for Teams and let Slack bleed out, instead of putting a bullet in its head and stirring the DOJ from a 3-Ambien slumber.

FedEx is in the midst of being featurized by Amazon, who can make investments across their vertical stack that FedEx can’t match, as Amazon has antimatter (Prime, AWS, AMG). The Memphis firm’s most recent earnings were a sh*t-show with top- and bottom-line misses, drivel about a slowdown in air freight, and (my favorite) an unfavorable calendar — a Kabuki dance attempting to distract investors from the fact they’re being featurized by Amazon.

FedEx shareholders have woken up in an M. Night Shyamalan nightmare. Instead of seeing dead people, investors are haunted by Mercedes-Benz Sprinter vans with an arrow the shape of a smile on their side. Everywhere. They might as well be German Panzer tanks fighting a white-and-purple cavalry of FedEx trucks. There will be a lot of macho battle cries from FedEx, some heroism, and an increasing stench of death. (Can’t help it, I love WWII war metaphors.)

The Monopoly Algorithm: Innovation, Obfuscation, Exploitation

Innovation

To be fair, Amazon is a better-run company than FedEx, who has stuck their chin out with an offering that, from a consumer standpoint, feels 1995. In addition, Fred Smith spent a great deal of time lobbying the president to lower corporate taxes so he could free up capital to buy back shares, instead of fighting Amazon.

The clean-sheet, technology-driven innovation at Amazon, coupled with cheaper capital, has caught FedEx flatfooted. Amazon:

• Has the most on-time deliveries the week following Black Friday: FedEx 90%; UPS 93%; Amazon 94%.
• Charges $80 for 600 pounds of boxes from a seller’s warehouse vs. $104 at FedEx and $160 at UPS.
• In Q4, Amazon will invest $1.5 billion in its one-day shipping initiative.

As Amazon is vertical, the return process is nearly frictionless. I have an Amazon four-star store on the street level of my office. I can take a product downstairs, hand it to them, and they handle the rest. A return via FedEx involves printers, labels, and additional costs to have them package.

Despite what feels like an invading army of Amazon vans, the reality is the Seattle firm is doing more with less — better service with less CapEx.

Obfuscation

Evading regulators, tax avoidance, a 1,000-person communications department, exploiting our culture’s idolatry of innovators — these weapons have rendered CNBC Amazon’s bitch. The result is a firm that throws its weight around like no other. Amazon banned merchants from using FedEx right before the holidays. That’s like staging a mock homecoming queen ceremony so you can pour pig’s blood on your competitor in front of the senior class.

Exploitation

“Deliver with Amazon. Be your own boss. Great earnings. Flexible hours. Make more time for whatever drives you.” Amazon has taken a page from Uber and is leveraging the romanticization of entrepreneurship, the need for flexibility, and the decreasing options of non-degreed workers in rural areas. There are already stories depicting breakneck delivery schedules that obviate luxuries such as bathroom breaks. FedEx drivers get paternity leave and (gasp) health insurance.

What’s a Tennessee Girl to Do?

Sell or merge. FedEx stock is cheap and will get cheaper. EBITDA will decline as management will be forced to make incremental investments in a futile game of catch-up. But the real virus infecting the stock has already taken hold of the delivery firm’s corpus. Amazon did a Jedi mind trick last week. Banning merchants from using FedEx convinced the markets, with a single press release, that FedEx has regressed from “growth” to “mature” to a declining firm.

A Walmart acquisition would mean the retail giant goes (more) vertical for an 11% dilution ($38 billion vs. $340 billion market caps). Walmart would recognize economies of scale (accretive), buttress their grocery offering (the gangster unlock of the last five years in business), burnish their data set, and go Yoda on Amazon’s a$$ — old, but not to be trifled with. FedEx solves their succession problem (CEO is 75), gets 5,000 well-staffed distribution centers (stores), and sells at a high. Time is not on their side. The stock price today will seem overvalued tomorrow.

A more interesting and bolder tie-up would be with Shopify. The pride of Canada boasts a $45 billion market cap vs. FedEx’s $38 billion (think about that). The combined firm would be a viable option to Amazon (the anti-Amazon) — increasingly attractive positioning to a growing cohort of merchants. Retail is an enormous and fragmented business that wants out of the Amazon gulag.

Shopify-Ex would offer retailers something they don’t get from Amazon: partnership. Newco would provide merchants a lot of the great taste of Amazon (robust e-commerce tools and fulfillment) without the calories (merchants keep their data, control the customer, branding, no private label launches on backs of merchant data). The much larger firm would have a combined market cap of $83 billion, high single-digit revenue growth, and likely register multiple expansion as the complexion of the business would move to recurring revenue. It would captivate the markets (see above: CNBC’s bitch). This could be the biggest thing since Tim Hortons.

Everything Everywhere Ends

In 24 months, FedEx will not exist in its current form. A lack of innovation, and a competitor who can overwhelm enemies with cheap capital and Jedi mind tricks, has featurized one of the great success stories of modern business. The resulting firm, post acquisition of FedEx, will offer an increase in shareholder value, superior customer experience, fewer jobs, less tax revenue, and no paternity leave.

We are barrelling toward a country with 350 million serfs serving 3 million lords. We attempt to pacify the serfs with more powerful phones, bigger TVs, great original scripted television, and Mandalorian action figures delivered to your doorstep within the hour. The delivery guy might be forced to relieve himself in your bushes if not for the cameras his boss installed on every porch.

Life is so rich,
Scott

P.S. Two weeks ago I wrote a letter to Omid Kordestani, chairman of Twitter, expressing my concerns about a part-time CEO relocating to Africa. I haven’t heard back. Maybe they are busy looking at Nigerian crypto charts and writing longer explanations about why #burntheJews is ok.

P.P.S. Spoke to NYU colleague Adam Alter about our obsession with screens.