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VOL. 131 | NO. 18 | Tuesday, January 26, 2016

Logistics Startup Exec: Amazon Gunning for FedEx

By Andy Meek

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The number of voices in the technology world convinced that Amazon has stuck a target on the back of FedEx – as well as its larger competitor, UPS – continues to grow.

Evidence keeps mounting that online retail giant Amazon is building up an in-house logistics infrastructure to wean itself off of reliance on outside delivery vendors like FedEx and UPS.

(Oliver Mehlis/picture-alliance/dpa/AP Images)

The latest is Matthew Hertz, director of operations at package shipment startup Shyp. He took to social networking service LinkedIn in recent days to pen a commentary about why Amazon’s emergence as a significant logistics alternative appears to be a matter of when, not if.

“Amazon has been working on this strategy for years,” he writes, in a piece headlined “Why FedEx and UPS are (or should be) Scared of Amazon.” “The headlines you read are simply lagging indicators of the work Amazon is doing behind the scenes. Transportation initiatives such as pre-sorting and zone skipping shipments in their own dedicated sort centers have been done for years.

“Today, they’ve lured me into paying $99 a year for 2-Day ‘Free’ Prime shipping. Now, through their density and scale of infrastructure, it may soon become mundane to have your shipment delivered within hours of order. For free. It’s happening already with the Prime Now network. These aren’t services offered by UPS or FedEx, nor could they.”

Hertz, to be sure, is not a disinterested observer.

His company likewise wants to take advantage of the cost structure and operations of incumbents like FedEx to offer something different and more tailored to the smartphone-driven, on-demand age. Users snap a photo of the item they want to ship and enter an address. Shyp shows up at their door and takes care of the rest.

Hertz writes that he decided to put down some thoughts about Amazon – whose deeper moves into the world of logistics have been generating a flurry of headlines in recent months – as a result of news stories about the topic flooding his email inbox.

He shared his thoughts in the wake of news like word that Amazon during the current quarter is expected to take a majority stake in a France-based package shipment company. The thinking is that the move represents one of the clearest signs yet that Amazon wants to decrease, maybe eventually eliminate, its usage of shipment vendors like FedEx and bring package deliveries in house.

Other Amazon developments:

– Reached a deal to acquire a small stake in U.K. parcel-delivery company Yodel in 2014.

– Said in December the company is expanding its U.S. truck fleet.

– Is in talks to lease 20 Boeing 767s, per The Seattle Times.

And in one of the more extraordinary clues pointing to its logistics ambitions, Reuters has reported that Amazon’s China arm has registered as an ocean freight forwarder.

Whether the implication of moves like these represents an existential threat or a nuisance to a company like FedEx remains to be seen.

FedEx founder Fred Smith has generally needed little prompting by analysts during presentations like earnings calls to point out that just because a tech company or on-demand service is able to deliver packages doesn’t mean they’ll necessarily be good at it – or a threat to FedEx.

Indeed, a note from Baird Equity Research in October explained how domestic parcel delivery requires significant investment in fixed assets, things like distribution centers and delivery vehicles.

Here’s how FedEx executive vice president Mike Glenn, when asked about Amazon, put it on a FedEx earnings call last month:

“Amazon is a very large FedEx customer, and we work closely with them … to optimize delivery needs,” he said. “And of course, work with them very closely to create new solutions to support their future growth. And I do think it’s important to point out, however, that FedEx is a highly integrated global transportation network, in fact, one of only two operating at a significant scale in the United States today, and only one of three major delivery networks in the US – the other two being UPS and the United States Postal Service. That’s not likely to change in the foreseeable future, as these networks are very capital-intensive and information-intensive.

“And finally, I think it’s important to note that our network is a linchpin in the e-commerce market, and our customers rely on us to support their growth. So we feel quite comfortable where we are situated today.”

Nevertheless, the Baird note also points out that while Amazon currently partners with some carriers to facilitate so-called “last mile” delivery, Amazon also has been investing heavily in its own delivery assets like Prime Fresh and Prime Now.

The former is Amazon’s same-day grocery delivery option, while the latter is an hourly delivery option for Amazon purchases that can come straight from Amazon’s own sorting centers. For time-sensitive deliveries, Amazon also has its Flex program that uses contract couriers to make the delivery.

“We believe Amazon may be the only company with the fulfillment/distribution density and scale to compete effectively with global UPS/FedEx/DHL, and with an investor base that historically is tolerant of margin volatility relative to the ‘profit mandates’ of traditional transportation and logistic shareholders, a significant competitive advantage in our view,” the Baird note reads.

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