FedEx's CEO says he does not see Amazon as a threat — here's why he's wrong (AMZN, FDX, UPS)
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On the company's fiscal year Q2 2019 earnings call, FedEx CEO Fred Smith dismissed the potential threat Amazon poses to its business, saying "The prospects that this company is going to be 'disrupted' is fantastical," according to Business Insider.
Smith elaborated that "We don't see them (Amazon) as a peer competitor of ours for many reasons." For context, Amazon is widely considered a sleeping giant in the logistics industry — it has a wealth of infrastructure built up to handle its own parcels and deliveries.
While the e-commerce giant isn't going to directly compete with FedEx and its peers overnight, there are a few reasons Smith is wrong to dismiss the threat of Amazon completely:
- FedEx, like the entire logistics industry, has already been fundamentally transformed by Amazon. Amazon's Prime subscription program — which offers free two-day shipping — now counts over 100 million member. That's conditioned consumers to expect two-day shipping from retailers and ultimately crunched retail supply chains. Over two-thirds (67%) of executives at parcel shippers say they feel the primary effect of Amazon's two-day shipping promise is that it forced them to decrease the amount of time their goods are in transit. That's fundamentally changed how FedEx, UPS, and other delivery firms do business, forcing them to build more warehouses, automate fulfillment methods, and create routing algorithms to quickly get parcels into the hands of consumers.
- Amazon will dent legacy shipper's revenue as it continues taking over more of its own deliveries. The Seattle-based e-tailer controls 44% of the US e-commerce market, making it a key strategic partner and revenue source for all its shipping partners, UPS and FedEx included. Trip Miller, the founder and managing partner of Gullane Capital, estimates that Amazon deliveries comprise between 3-5% of FedEx's total revenue. Miller estimates that Amazon's revenue percentage at UPS is "in the low teens." Amazon has slowly but surely been building out its own delivery capacity, and now counts 40 cargo planes and hundreds of final mile delivery couriers. As the firm begins to execute more of its own deliveries, FedEx and its chief competitors will suffer. While the growth in e-commerce volumes could help offset losses from Amazon, it's never easy to lose a top customer.
- Amazon will almost certainly open up its delivery infrastructure to third-parties, which would present a massive threat to UPS and FedEx. Amazon's primary motive in building up more logistics infrastructure is to execute more of its own deliveries and follow through on its two-day shipping promise. But as it adds more and more warehouses, delivery trucks, and other network infrastructure and ultimately perfects its logistics operation, it will look to enlist big third-party retailers. For their part, 55% of retailers said they'd consider moving their business to Amazon if it announced a parcel delivery service, per IR Research. Such an announcement seems closer than ever, as last month Amazon took its most concrete step forward, testingthird-party delivery for local merchants. Amazon's track record is a good one when it comes to monetizing a service it initially built for internal purposes — just look at Amazon Web Services.