Worley Blog


Posted on: April 8th, 2019 by Clifford F. Lynch

In an earnings call on March 19, FedEx president and COO Raj Subramaniam, when asked about Amazon, said, “We have been clear this is not a threat to our business because Amazon represents less than 1.3 percent of our total revenue, which is substantially lower than what our largest competitor (UPS) carries, nor is Amazon a threat to our future growth.” In another related comment, Fred Smith, Chairman and CEO said., “Amazon is a retailer, we are a transportation company”. This delineation may have been true five years ago, but Amazon is beginning to look more and more like a third-party logistics service provider, with both a strong distribution center and transportation network. Amazon’s infrastructure is developing so rapidly it is difficult to define it accurately; but as of last fall, it consisted of 40 aircraft, several thousand truck trailers, 396 domestic distribution centers and 452 in other countries. As an added touch, they also have on order 20,000 Mercedes Benz delivery vans (many of which are already in service) and utilize 6000 storage lockers from which customers can retrieve their purchases.
In my wildest dreams, I cannot imagine that Amazon would put FedEx out of business, but do believe (along with others) that long-term, the E Commerce giant is more of a threat than FedEx would have us believe. The battle for the last mile can only get more heated. While Amazon represents only a small percentage of FedEx revenues, as Amazon refines its delivery network, it will not only be able to reduce that percentage; but their capability could be very attractive to other retailers that might want to outsource their own operations.
According to Transport Topics, the loss of Amazon business (which was insourced) played a role in the recent bankruptcy of New England Motor Freight, a regional LTL carrier. In another major move, the largest customer of XPO Logistics (reported to be Amazon) is curtailing two thirds of its business with the provider, resulting in an upcoming loss of $600 million in revenues.
Smith is correct when he says Amazon is a retailer, but what he fails to say it that it is also a third party provider of both warehousing and transportation services. Some analysts believe that it will continue to grow in this area, and in a few years will be a dominant third party. In order to provide same day or next day deliveries, Amazon has opened distribution facilities in most major U.S. markets. This reduces the cost of the smaller customer deliveries since the “last mile” is relatively short. By locating centers closer to the customer, much of the freight expenditures are for longer lower-cost inbound shipments. There is no question about their ability to compete effectively in the major population centers.
Notwithstanding this, UPS and FedEx are not sitting by watching, nor are competitors such as Walmart that is expanding its own distribution system. FedEx recently purchased GENCO, a major logistics service provider, enabling them to compete in the warehouse operations outsourcing market. FedEx has tried this before, with limited success. This time however, the purchase of an existing, well-respected LSP will give them a solid base on which to build. UPS is expanding its operations in this area, as well.
FedEx also is testing a last-mile robot which can make home deliveries. These battery powered messengers are equipped with software and cameras to aid in avoiding obstacles as they make their rounds.
Is the “Amazon Effect” going to permeate the entire industry? I do not think so, but it would be a serious mistake to underestimate Amazon’s logistics competency. Amazon is far more than just a retailer, and I believe is moving toward being a formidable third-party competitor. Jeff Bezos, CEO of Amazon has been quoted as saying, “If I can conceive it, Amazon can achieve it.” I guess time will tell.
One interesting footnote to this competition is the fact that FedEx has recently added Amazon to non-compete agreements for its employees.