Online Marketing

FedEx can't ignore Amazon clout in e-commerce as online market swells – The Commercial Appeal

Written by admin

You probably heard this the other day.

FedEx Corp. no longer will deliver merchandise bought on  Amazon.com.

Unbothered by the news? Well, look a bit deeper. 

It’s like Ben telling Jerry, “Ice cream? Who wants to be in ice cream?’’

In Memphis it is unlikely forklift jobs will vanish, the World Hub shrink or warehouses close, though this Amazon breach is perhaps historic for FedEx, surely pivotal.

By Sept. 1, the Memphis carrier will end ground service for  Amazon, the one golden piece of American retail that enthralls Wall Street.

“This would have been unthinkable five to seven years ago when e-commerce growth was the main investment thesis” for FedEx, transportation analyst Ravi Shankar of the investment bank Morgan Stanley told clients in a note Wednesday.

Amazon can’t be ignored

Trying to make sense of what this means for Greater Memphis, where FedEx employs 32,000 people, sounds like opportunity lost, though it’s not certain. It’s like sorting out an early-innings baseball game. No one knows the final score. It’s early innings.

What’s clear is FedEx no longer will partner with Amazon, but Amazon isn’t out of the picture. It is too big, too critical in the future of American retail.

Eight in 10 U.S. households order online, spent $517 billion last year, buying everything from towels to tires on their computers. Electronic commerce has bankrupted traditional retailers and closed mall stores.

Yet e-commerce is like an adolescent expected to double in size in the coming years, powered by Amazon. Almost 60% of American shoppers’ online searches for consumer goods start at the Seattle company’s website, reports Atlanta freight carrier United Parcel Service. 

Back in December, Fred Smith sounded upbeat about the relationship. “We look at Amazon as a wonderful company and service, and they’re a good customer of ours,” said the FedEx chairman and founder.

Then FedEx backed away, saying, “This change is consistent with our strategy to focus on the broader e-commerce market.” Amazon never was a big money maker, accounting for less than 1.3% of FedEx’s total $67.9 billion in revenue last year. Now it will account for barely anything. FedEx Express ended air freight deliveries for Amazon in the United States on June 30, though it will continue hauling packages abroad for the Seattle company.

FedEx bets on Walmart

FedEx has been sure footed. People running the place are smart. That’s not hometown cheerleading. Their talent helped international trade boom worldwide. Those graceful air freighters you see climbing outbound from Memphis International Airport fed the boom.

The Memphis company amassed some 670 aircraft, 170,000 ground vehicles, 239,000 employees and 5,000 facilities worldwide, all girded with a genius for moving parcels flawlessly among 220 nations. A woman in Ho Chi Minh City needs a stainless steel spinal implant tomorrow? FedEx delivers swiftly to the surgeon’s door.

No company in Memphis or Tennessee is as large. Nothing else in Memphis has grown as fast. Global trade, especially business-to-business trade, helped fuel FedEx over two decades. Then tariffs, trade wars, Europe’s woes and China’s downdraft weighed on commerce.  Freight volumes at the World Hub dropped 6% in June.

It was long said, as Morgan Stanley’s Shankar pointed out, electronic commerce was the next big profit maker. FedEx still bets on this, though the bet is placed on Walmart and other smaller Amazon rivals.

Shortly before announcing the breach with Amazon, FedEx revealed the full cost for the expansion underway at the World Hub would rise to $1.5 billion, a $450 million increase to help handle “growing customer demand” in e-commerce.

Amazon aims to ‘corner the market’

FedEx officials are famously quiet. They seldom elaborate in public. Reading what transportation industry analysts made of either “growing customer demand” or divorcing Amazon was puzzling to me as the analysts assessed the what-ifs.

Analysts sounded cautious, not because they doubt demand will increase, but apparently because of Amazon’s dominant scale. It is big and getting bigger. Many yardsticks exist. One is market capitalization, the current value on the stock market of all outstanding shares. FedEx’s market cap is about $44 billion, Amazon’s $897 billion.

FedEx makes more profit. Yet, investors believe in Amazon’s potential, bid up its stock value. Amazon plows profits into its expansion on this belief and Wall Street also pours in money, betting Amazon, like a bulldozer cutting down the retail forest, will secure vast profits someday.

Another metric is market share. Walmart and its Sam’s Club and Jet.com brands rank second in e-commerce sales, taking about 4% of U.S. online retail spending dollars last year, while Amazon’s market share reached 48%, notes a November report by market researcher eMarketer.

Nothing like this ever has been seen. Amazon’s an online marketplace linked seamlessly to merchants, an astonishingly good digital cash register and delivery network. No one is sure how big Amazon can get. One study found more than one-third of the merchants ranked in the Internet Retailer Top 500 sell their merchandise on Amazon. The share is expected to rise.

“It is no secret that Amazon.com, Inc. seeks to corner the market for the marketing, fulfillment and delivery needs of small to midsize businesses,” the trade journal Freight Waves reported this month.

Cornering the market requires a larger delivery network. Amazon created its own delivery truck and air freighter fleet, though the in-house fleets are still not large enough for potentially massive growth.

“Amazon has lots of options when it comes to meeting its logistics needs. One option I recommend above all others is for Amazon to go nuclear on Walmart and its other competitors. How? By acquiring the U.S. Postal Service,” opined reporter Brittain Ladd recently in the Observer, an online New York newspaper.

Take aim at FedEx?

Ladd claims a new ocean of business will flood parcel carriers. Amazon, FedEx, UPS,  USPS and other carriers now deliver, all of them combined, about 50 million packages per day, a volume he says researchers predict will double by 2026.

If it can afford the postal service, and it does have the wherewithal, Amazon can easily afford FedEx. Will it try? Probably not, at least not in the near term.

In the piece about cornering the market, Freight Waves reported analyst Michael White at market researcher iDrive figures Amazon’s focus will remain on e-commerce. Rather than run a parcel carrier system that, like FedEx, hauls non-Amazon goods, Amazon wants a transit system in place only to cart merchandise sold on its website.

“It is too busy trying to swallow up the fulfillment business of every small merchant in sight to bother with non-Amazon traffic,” White told the trade journal.

Of course, the question left unanswered is this: Will Amazon, once it corners the retail market, take aim at FedEx?

FedEx divorces Amazon

It is this Amazon ambition that gives pause to analysts trying to make sense of FedEx parting ways. Morgan Stanley’s Shankar sounded cautious, referring to the World Hub upgrade, and also telling clients Wednesday that FedEx is “investing significantly in the network” and at the same time merely “hoping that the third-party volumes will come.”

He also suggested FedEx can afford to pull away from Amazon, but UPS might not be able to do this as confidently. “We wonder why FedEx is walking away when UPS isn’t,” he wrote, adding that UPS relies on Amazon for business more than FedEx relied on Amazon.

After cutting off air service for Amazon this summer, FedEx offered shippers discounts on air freight, trying to pull business away from UPS, according to the Wall Street Journal, a report FedEx disputed but Bloomberg News columnist Brooke Sutherland cited as part of the Memphis carrier’s adapting to Amazon’s clout.

FedEx, she wrote, most likely “recognized that Amazon’s efforts to bring more of its logistics operations in house were real, and that it may want to start the process of breaking up with Amazon before Amazon decides to break up with it. While FedEx CEO Fred Smith has repeatedly painted any notion of Amazon disrupting the logistics industry as ‘fantastical,’ his actions increasingly suggest otherwise.”  

What does this all mean for Memphis? Well, that’s just it. It is still early innings as Amazon scales up and FedEx pulls away.

Ted Evanoff, business columnist of The Commercial Appeal, can be reached at evanoff@commercialappeal.com and (901) 529-2292.

Let’s block ads! (Why?)


Source link

About the author

admin

Leave a Comment