FedEx Gears Up for All-Out War With Amazon

The pandemic turbo-charged e-commerce — now the two giants are battling over the future of shipping

In August 2019, FedEx made an announcement that puzzled anyone who hadn’t been keeping a close eye on the tick-tock of the shipping industry: The company would no longer deliver packages for Amazon.

Why would a business entirely built around prompt package delivery go out of its way to fire the single largest customer that ships more time-sensitive packages than any company in history?

The breakup, it turns out, had been the culmination of years of a combative and eroding relationship between the two giants. Six years earlier, frustrated with FedEx and UPS delivery delays during the 2013 holiday rush, Amazon began building out its own delivery network for the products it sells and ships. As its network grew, Amazon steadily shrunk its dependence on outside carriers, and especially on FedEx, whose prices tended to be higher than UPS’s. So when FedEx formally severed its relationship with Amazon, they were breaking up with a customer that had essentially already dumped them.

Even after the formal split last year, third-party merchants that sell on Amazon were still free to choose FedEx delivery — until December last year, when Amazon further inflamed its new competitor by banning merchants on its platform from using FedEx during the month-long holiday rush. It rescinded the ban in January, but the damage was done. On March 16, FedEx’s stock hit a nine-year low of $90 per share, as the company first struggled to come to grips with the onrushing pandemic.

Now Amazon is greasing its delivery network to deliver a much bigger blow: Going into business as a third-party shipper looking to steal business from FedEx and other shippers. “They’ve got tons of cash to subsidize going to go toe-to-toe with FedEx,” says Dean Maciuba, a career-long FedEx manager who is now a managing partner with logistics consultancy Last Mile Experts.

At the moment, FedEx doesn’t seem to need Amazon’s business. Largely due to the pandemic, in the six months between April and September, the company’s shipping volume was up some 20% over last year’s numbers during the same time period. That’s expected to climb over the next month to as much as a 70% increase over last year’s holiday rush volumes in an unprecedented and potentially chaotic “shipageddon”—the collision of the two online shopping surges. Early data from Black Friday suggests online sales jumped more than 20% over last year’s event, setting a record, even as in-store Black Friday retail sales plunged to less than half last year’s number.

FedEx may be at the biggest risk of being left behind by the e-commerce explosion — thanks in large part to Amazon’s relentless, masterful efforts to drive down the costs of online retail shopping.

FedEx’s business is already soaring, according to the company’s 2021 first quarter earnings released in mid-September. Revenues were up 14% over the same quarter last year, while profits were up a whopping 60%. The profit gains were almost certainly due to a series of price increases the company has been rolling out nearly nonstop since the start of the pandemic. Last week, the company’s stock price hit an all-time high of more than $291 a share. UPS and the Postal Service have likewise seen a boost in volume and revenues, and have also raised prices.

But the profitable shipping boom hides a looming threat to the major shippers, and to FedEx in particular. As more consumers embrace online shopping — a long, steady trend that was goosed by the pandemic — the cost of shipping packages has become unsustainable for most retailers and especially to smaller ones. Not to mention the consumers who are paying for it, often without realizing it.

The climbing prices have opened the door to a reckoning in the fast-growing residential shipping industry. As the highest-cost provider, FedEx may be at the biggest risk of being left behind by the e-commerce explosion — thanks in large part to Amazon’s relentless, masterful efforts to drive down the costs of online retail shopping, which have played against FedEx’s strengths in higher-value, B-to-B shipping.

But FedEx has no intention of letting Amazon push it around. Long known as the highest-tech shipper, FedEx is preparing to roll out a range of schemes for making residential shipping more efficient, from shifting when and where consumers get their packages, to sending delivery robots to their doorsteps. “We’re going to be weaponizing data,” says Richard Smith, president of FedEx’s operations in the Americas, executive vice president of the company’s global Express division — and the son of FedEx founder and CEO Fred Smith, a decorated former Marine. As it prepares to engage Amazon in an all-out battle for shipping dominance, FedEx is hoping it can get ahead of the one company that has managed to upend virtually every industry it’s touched.

FedEx CEO Smith was taking a week off with his family in February when emails suddenly started flooding his inbox. “It wasn’t much of a vacation,” he recalls. “I was on the phone day and night.” The immediate crisis was that China and other Asian countries were grounding flights and quarantining pilots who landed there, throwing operations at FedEx — the world’s largest cargo airline — into turmoil. Smith, a self-proclaimed “logistics network geek,” oversaw a massive juggling of the company’s 670 aircraft, 5,000-odd package sorting facilities, 180,000 ground vehicles, and half million employees, in order to try to work around the restrictions.

As the pandemic took hold in the U.S. in March, the juggling expanded to diverting employees and packages away from facilities in the hardest-hit areas, like New York City, and finding a way to move personal protection equipment to health care organizations. The company directed more than 150 flights and 1,000 ocean cargo containers to move PPE into and around the U.S., and set up 28 new flight legs just to process Covid tests. “We can flex our networks better than anyone in the business,” boasts Smith.

Meanwhile, FedEx’s customer help lines were being flooded with callers mostly looking for the answer to one question: Are you delivering packages? In spite of some initial delays, the packages were still getting through — even on Sunday, a new service FedEx happened to roll out just before the pandemic hit, and which turned out to be a special boon for shipments of perishable food items to consumers who were cut off from in-person shopping. It didn’t hurt that FedEx employees were also declared essential workers.

FedEx’s reputation for fast or reliably on-time shipping services goes back to its founding by Fred Smith in 1971, famously inspired by a paper he wrote as a Yale undergraduate. The paper described a delivery service for urgent or valuable items — think medicine, jewelry, or high-tech parts — that involved flying all packages to one central location every night for sorting, and then flying them back out for delivery the next day. In other words, Smith had dreamed up a service that was almost comically inefficient, but fast and dependable. (Legend has it that Smith received a “C” on the paper, but he himself has never made that claim.)

After founding Federal Express to do just that, Smith ensured the company became one of the first in the world to exploit information technology strategically, pioneering then-radical innovations such as bar-code scanning and sharing tracking data online. That tech-forward sensibility continues today, including the company’s September announcement that it can now use Bluetooth sensor chips on packages to let customers track almost every inch of the journey in real time.

FedEx pricing is complex — the company’s standard pricing list is 79 pages long — and further varies with an array of discounts and surcharges. But to use some rough, typical numbers, the increases and surcharges levied since the start of the pandemic have already added about $3 to the $14 cost of shipping a relatively small, light package via FedEx Ground, with more increases scheduled for the holidays and beyond. UPS and Postal Service rates, while up, remain a few dollars cheaper for small, light packages in most cases. (While the high-urgency FedEx Express is the heart of the company’s business, FedEx Ground is its cheapest and slowest service, which competes more directly with the Postal Service and UPS.)

The percentage of consumers who do more than half their shopping online has nearly tripled from 16% to 45% since the start of the pandemic — and 73% of new online shoppers say they enjoy it more than they expected.

A few dollars is a big difference on an e-commerce order of, say, $25, and FedEx’s pricing disadvantage tends to grow with package size and weight. But while an $11 shipping fee might be cheaper than $14, it’s still a lot to pay for shipping on a small order — especially when you’re running a small business. Chandler Tang opened her San Francisco artsy gift shop PostScript in November last year, only to have to scramble to throw up an online store just four months later when the pandemic hit. After a self-taught crash course in shipping, Tang went with USPS for most in-state sales, and UPS for more distant customers. What about shipping via FedEx? Never, insists Tang. “It would cost at three times as much as the Postal Service,” she says, adding that FedEx makes it too difficult for small businesses to negotiate the corporate discounts that makes FedEx’s services more competitive.

But while FedEx might have less small-business-friendly pricing than its competitors, the bigger problem is that shipping is just too expensive for an economy that’s increasingly buoyed by e-commerce. Glenn Gooding, president of consulting firm iDrive Logistics, estimates that in recent years about half the packages shipped by FedEx and UPS have gone to homes rather than businesses. But during the pandemic, he says, that’s jumped to as high as 80% with rocketing e-commerce sales. This trend is only likely to grow. A Pitney Bowes survey found that the percentage of consumers who do more than half their shopping online has nearly tripled from 16% to 45% since the start of the pandemic — and 73% of new online shoppers say they enjoy it more than they expected. FedEx itself has predicted this growth rate in e-commerce in past years’ earnings reports; but the company estimated it would take three years longer to reach this level. In other words, the pandemic has been a powerful accelerant for an ongoing trend.

As shoppers move to buying more and more online, the added costs of shipping will become a bigger and bigger inhibitor. Sucharita Kodali, an e-business analyst at research firm Forrester, notes that the average e-commerce order is for about $50, making shipping costs of $8 to $20 a real burden. “Consumers are highly price sensitive, and delivery fees can make the difference,” she says.

When Tang, the gift-shop owner, first started shipping early on in the pandemic, she offered it for free, but after a few weeks of losing money on the deal she began tacking on a $5 fee for local deliveries and $10 for all others. “We had a surge of orders from people who wanted to beat the shipping charges, and then we had a big dip when the fees kicked in,” she says. “I’d say we’re losing about a quarter or third of our customers because of the fees.” And that’s in spite of the fact that her fees don’t cover her own shipping costs. To try to recapture some of those customers, Tang is experimenting with dropping the fees on larger orders, while raising item prices to recover some of the costs.

So consumers ultimately pay for the shipping one way or another. Or do they? That notion — along with everything about e-commerce shipping — becomes a little convoluted when Amazon enters the picture.

Amazon’s Prime service eviscerated the model for speed and delivery fees. “The Amazon paradigm is that you can get it tomorrow, and for free,” says John Haber, CEO of consultant Spend Management Experts. Of course, Prime membership itself is $119 a year, but that includes a lot of other benefits, including free video streaming, music, books, and various shopping discounts. Still, Amazon loses money on shipping on many of its orders — and can afford to, given its many other revenue streams. Its cloud services alone generate enough money to subsidize shipping many times over, says Haber. Even the largest retailers have a hard time giving away shipping, he adds, and less-than-giant retailers simply can’t do it. If a retailer raises item prices to make up some of the difference, he notes, consumers will simply shop around and end up buying from Amazon or elsewhere.

The fact that Amazon’s free shipping frequently comes with next-day service makes it all the harder to compete, given the exorbitant cost — typically triple — of next-day shipping services. That means retailers end up annoying many shoppers with delivery times that frequently stretch out to five days or longer, as well as charging them for the privilege. “Thanks to Amazon, customers are used to two-day shipping,” says Mark Desimone, CEO of Seattle-based Ares Tool, a Seattle-based supplier that sells wrenches and other tools to consumers on its website as well as Amazon. “If it took us a week to deliver orders from our website, most customers wouldn’t buy from us.”

As the world’s largest retailer assembles its own shipping network and gears up to become a third-party shipper in direct competition to FedEx and UPS, Amazon may have a simple and well-tread strategy for underpricing FedEx, and even UPS and the Postal Service: Lose money. “Amazon has a multi-billion-dollar business to subsidize its shipping initiative,” says Maciuba. “It will aggressively target markets and give the shipping service away. FedEx and UPS won’t be able to compete.” Amazon had been testing that service in California until the pandemic hit in March, but the company is expected to double down on its third-party delivery push next year. (Asked for comment, Amazon would only provide an email statement reiterating that it had paused its test of its U.S. shipping program.)

Can FedEx lower its shipping costs enough to defend against Amazon in e-commerce shipping? FedEx’s numbers last quarter reveal how far it has to go. Profits from its Express division were up 149%, but its Ground profits only went up 30%. In other words, the revenues are increasingly in Ground — which is how e-commerce is shipped — but not the profits. And that’s in spite of the large and ongoing increases and surcharges in Ground pricing.

The biggest opportunities for slashing shipping costs may lie with seemingly farfetched technologies that take over drivers’ tasks, or even replace them altogether.

The reason shipping to homes remains a low-margin business with little room for price cutting is the so-called last-mile problem. IDrive Logistics’ Gooding explains that shipments to businesses tend to involve dropping off several packages per stop, with several stops close to one another, meaning drivers can drop off dozens of packages in a short time. With residential deliveries, however, drivers typically drop off a single package, then get back in the van, driving to the next single-package delivery.

What’s more, Gooding adds, packages to homes are on average about 25% the weight of packages shipped to businesses, which makes the fees each package brings in much lower. So when delivering to homes, drivers spend more time with a smaller number of lower-revenue packages. “That low-density delivery is especially problematic for FedEx,” says Gooding, noting that the company’s residential density is lower than the other major shippers.

The simplest way for FedEx to cut its costs is to raise residential delivery density by setting up centralized delivery locations in or near residential communities, so that drivers can drop off more packages in one stop. That’s why FedEx last year partnered with Walgreens, Dollar General, and some grocery chains to offer “access points” where customers can pick up their packages. (UPS has struck similar deals with CVS and Michaels.) Granted, driving to large stores isn’t a popular option during a pandemic, but doing so might well take off after. And it’s not really an option for Amazon — stores are happy to have the extra traffic, of course, but they aren’t going to partner with Amazon and help it erode their business. That’s forced Amazon to build its own “locker” facilities for access points, an expensive approach even when taking advantage of increasingly cheap dead-mall space, as it has. (Amazon also accepts returns of any Amazon-sold products at Whole Foods stores, but customers can’t pick up deliveries there.)

One compelling argument for consumers to be on board with their packages shipped to access points is that it avoids having packages sit in a lobby or on a stoop where they could be rained on, stolen, or used by burglars as a tip-off to an unattended home. Eventually, some communities may choose to set up their own neighborhood access points to get that security benefit, notes Bryant Walker Smith, a University of South Carolina law professor who specializes in transportation technology. To sweeten the deal, shippers could offer discounts for shipping to access points, rewarding consumers for taking the trouble to head there to get their packages. “It’s a model of shifting some of the delivery work to the end user,” Smith says.

The other solutions are a matter of dialing in efficiency anywhere they can find it. FedEx can try to raise “virtual density” in residential neighborhoods by shortening the distance between stops, or reducing the distance drivers have to walk from the truck to drop off a package. That could be done, notes Forrester’s Kodali, by adjusting the timing of deliveries to ensure that two or more packages destined for similar locations end up in the same truck together at the same time.

Shippers could also use AI to further improve virtual density by scheduling deliveries that precisely take advantage of whatever flexibility recipients may have in time or location, adjusting the parameters on the fly as packages move through the network and recipients’ needs and availability change. The system could even take into account likely driver and truck availability throughout the shipping chain to predict, prevent, and work around any bottlenecks. “Routing technologies could drive substantial savings,” says Haber. Again, shippers could share those savings through pricing that incentivizes consumer flexibility in when the package arrives and where it’s met.

FedEx would have a leg up on other shippers, including Amazon, in this regard, given its leading-edge approach to tracking, including its new on-package sensor-tracking capability. FedEx’s Smith insists the company has every intention of pressing that advantage. “We have the real-time routing engines and predictive analytics to be more efficient,” he says. “There’s a lot more we can do with it to make us more competitive.”

The biggest opportunities for slashing shipping costs may lie with seemingly farfetched technologies that take over drivers’ tasks, or even replace them altogether. “Driverless vans, pilotless planes, and drone deliveries aren’t going to solve any problems immediately,” says John Gnuschke, a University of Memphis economist who studies FedEx. “But they will in the future, and FedEx is preparing for them now.” Both FedEx and Amazon have already made drone deliveries, FedEx through a partnership with Alphabet, Google’s parent company. But making a dent in the task of delivering tens of millions of packages a day would require loading local skies with at least hundreds of thousands of drones lugging boxes over people’s heads, an unlikely scenario from a regulatory point of view.

The best bet for driverless deliveries might be tiny, robot-like vehicles that navigate sidewalks and walkways to drop off items.

All the major shippers have announced plans to enlist driverless vans and trucks once regulators allow them. While various pilot programs for driverless vehicles have been running in dozens of cities across the U.S. over the past five years, progress toward regulatory approval has been slow. Even if the shippers were allowed to field driverless vans, they’d run into what Kodali calls the “final feet” problem. “How are you going to get the package to the front door?” she asks. “Throw it? Leave it by the side of the street?”

The best bet for driverless deliveries might be tiny, robot-like vehicles that navigate sidewalks and walkways to drop off items. FedEx may have a lead here with its “Roxo” robot, based on the smart-wheelchair technology developed by inventor Dean Kaman of Segway fame, and demonstrated last year in Manchester, New Hampshire. “We’re bullish on Roxo,” says Smith. “It could make a delivery to a home from a local retailer up to three miles away, and that’s a growing market that shippers have had trouble serving profitably.” In theory, Roxo or something like it could also team up with a driverless van on longer-distance deliveries.

Right now, none of these technologies looks promising as a complete solution to the problem. But stitched together, they start to present a compelling vision: Drones could deliver high-value, high-urgency items like life-saving medications or critically needed machine parts; driverless vans might service rural areas where there are fewer cars and pedestrians to dodge; and Roxo-like robots could roam city sidewalks with local retail-shop deliveries. Drivers would continue to make the bulk of the deliveries, but with fewer stops and more packages per stop.

All of these high-tech tweaks aren’t likely to soothe the pain of Shipageddon. But post-pandemic, as FedEx’s battle with Amazon resumes and intensifies, the future of e-commerce will ultimately come down to which one can crack the most pedestrian of problems: the cost of shipping.

David is a Boston-based science writer. The most recent of his five books is WRONG, about the problems with medical research and other expertise.

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