THE CUSTOMER ISN’T ALWAYS RIGHT

At least FedEx doesn’t seem to think so. Last week, with great fanfare, FedEx announced it would not review its US Express contract, scheduled to expire on June 30. This is only the air contract, and other FedEx/Amazon contracts will remain intact – at least for the time being. In making the announcement, FedEx indicated it would “focus on serving the broader e-commerce market.” Presumably, that includes companies such as Target and Walmart, with whom FedEx also has contracts.

Financial firm, UBS indicated that 80% of FedEx total business is part of the express contract, and 7.8% of FedEx packages in the U.S. originate with Amazon. In minimizing the move, FedEx attributed only 1.3% of its total 2018 revenues to Amazon; but according to UBS, Amazon generated a total of 5.4% of FedEx Express’ domestic revenue. Whatever percentage you are inclined to use, the total revenue that will be lost is $716 million, according to UBS>That is a considerable amount of revenue to transfer to a competitor – quite possibly UPS.

There is precedent for a logistics service provider (LSP) to sever relationships with a good account, but this has been more prevalent in the warehouse sector. Some warehouse firms have found themselves with as much as 50 – 60% of total revenues produced from a single contract. As painful as it might be for the LSP, this is a problem that needs to be remedied, ideally through a significant extension of the contract and a major effort to secure more business – but not for 1.3%, or even 5%.

I am not sure we know the real reason for the move. It could be that FedEx simply does not want to have a relationship with a customer that is also a competitor. As Amazon expands both its air and ground capabilities, it is sure to divert some delivery fees from FedEx to its own coffers. There is always a frisk that if the contract were renewed, Amazon volume could become significant enough to cause heartburn to FedEx if Amazon cancelled the contract later. There certainly is precedent for that. Recently, a firm, widely thought to be Amazon, cancelled a contract with XPO Logistics, expected to cost XPO about $600 million in revenue

I suspect the real reason might be price. Moody’s estimates that Amazon packages moving through the FedEx network only produced about $15 in revenue, compared to the overall average of $18.50 per package. If FedEx can fill the void left by Amazon with higher revenue business, the mov e makes very good sense. Less widely known, is the fact that some LTL carriers are quietly cancelling their contracts with Amazon for the same reason.

The big question is, who is going to pick up the Amazon business being rejected by FedEx and others. UPS is a logical assumption since according to a recent study, Amazon already is contributing 10% of revenue and 15 – 20% of UPS volume. If Amazon threatened to pull this business, UPS may be a little more receptive to lower rates than FedEx.

Everyone needs to keep in mind that Amazon already has significant transportation capability of its own and could pick up much of this volume. This could be consistent with Amazon’s goal to remove every firm between it and its customers. While I do not think we will see this any time soon, it would be a mistake to underestimate them, given their accomplishments to date.

Written By: Clifford F. Lynch