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Monday, 08/12/2019 11:13:11 AM

Monday, August 12, 2019 11:13:11 AM

Post# of 132363
UPS Bets on Amazon, for Now

8/11/19, 3:58 PM
As FedEx Corp. stops shipping Amazon.com Inc. packages, United Parcel Service Inc. mulls a similar question to the one its delivery rival just faced: grow alongside one of the world's largest shippers or cut off a looming competitor?

For now, UPS is retaining close ties to Amazon, one of its largest customers. The Atlanta-based shipping giant gets close to 10% of its revenue from Amazon, according to a Morgan Stanley estimate, a figure that could grow as the online retailer seeks new carriers for the packages that once went to FedEx.

The decision could pose risks down the road, if Amazon is able to build out its own delivery network enough that it can cast aside UPS, the U.S. Postal Service and any other regional shippers. Losing that big of a customer could hurt UPS by depriving it of a large chunk of revenue and volume to fill -- and pay for -- its vast package-delivery network.

But UPS currently retains some power in the relationship, especially as Amazon nears the all-important holiday shipping season, when it will have to lean on outside carriers to meet its shipping needs.

"Amazon doesn't have anyone to turn to right now to replace UPS to the extent they need to," said John Haber, chief executive of supply-chain consulting firm Spend Management Experts.

Unlike UPS, FedEx had winnowed down its exposure to Amazon to just 1.3% of overall revenue last year, or around $ 900 million in shipping.

FedEx has said the decision to not renew the two contracts with Amazon reflects its strategy to partner more closely with other e-commerce shippers, from large retailers like Target Corp. and Walmart Inc. to small- and medium- size businesses.

The carrier is betting that it can replace Amazon's business, which is generally at a lower profit margin because of volume discounts, with more profitable business from smaller shippers.

UPS already appears to be filling much of the void as Amazon moves away from FedEx, which this week said it would stop shipping Amazon packages through its Ground network after earlier stopping Express deliveries by planes.

In its second quarter, UPS reported a 30% jump in its next-day air-shipping volume, which came as FedEx wound down its air service offered to Amazon. While UPS doesn't discuss specific customer shifts, analysts believe the increase is largely attributed to onboarding Amazon packages on planes.

An Amazon spokeswoman said, "UPS continues to be a great partner in serving Amazon customers." The company anticipates being able to fulfill its orders through a combination of its own delivery infrastructure and outside carriers.

"We have strategic partners who are part of our long term plan and we appreciate what they do for customers," Dave Clark, Amazon's senior vice president of world-wide operations, said in a tweet last week.

Nice read!

UPS declined to comment on its relationship with Amazon. It has said that no customer makes up more than 10% of revenue. A spokesman said the company "is realizing strong growth, concurrently generating improved operating leverage and creating value through new product solutions that help all our customers grow and succeed, from the smallest to the largest."

As UPS takes on those packages, FedEx is fighting to sign on new customers, including some that have long used UPS, according to shipping consultants. Citi analyst Christian Wetherbee expects that FedEx will use the fact that it has detached itself from Amazon as a selling point to pick up other shippers.

The U.S. Postal Service, which on Friday reported a decline in package volume for the first time in nine years, says its delivery rivals are offering discounts to convince shippers to join their network. The strategy is depriving the quasigovernmental agency of critical volume and revenue needed to fund operations, agency officials said.

Postmaster General Megan Brennan said the carriers are "aggressively pricing their products and services in order to fill their networks and grow package density."

Patrick Fitzgerald, FedEx's senior vice president of marketing and communications, said the company's pricing is based on the services it offers for each customer, which is "often discounted for volume, which is a standard industry practice."

It is adding business with new services like the ability to pick up shipments late in the evening that can be delivered the next day and the coming launch of Sunday delivery.

"FedEx continues to introduce major innovation to residential e-commerce delivery and our customers are taking notice," Mr. Fitzgerald said.

Write to Paul Ziobro at Paul.Ziobro@wsj.com


(END) Dow Jones Newswires
08-11-19 0700ET
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