FedEx's double-edged sword: New rivals Amazon and Uber aim to slash its business

Key Points
  • As FedEx prepares to report earnings on Tuesday, market watchers are looking at the range of threats the world's second-biggest courier company is facing.
  • Earlier this month FedEx announced it won't renew its express U.S. shipping contract with Amazon.
  • The move comes as Amazon is more aggressively building out its own shipping and delivery network.
  • Uber Freight is just getting started; it already has relationships with about 1,000 shippers.
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Many traditional companies would be scared enough to find themselves facing threats from either Amazon or Uber Technologies — but FedEx is dealing with both.

As the Memphis, Tennessee-based shipping giant prepares to report earnings on Tuesday, FedEx's cancellation June 7 of its contract with Amazon to deliver packages in the U.S. is just one of a range of threats the world's second-biggest courier company (behind United Parcel Service) is facing.

Over time, Amazon wants Amazon Prime to become the premier delivery service for Amazon's own business, and also handle logistics for other e-commerce vendors. Uber wants to use its fleet-management software to push into the business for less-than-truckload shipping, matching trucks with available space to people who need to move more than a package but less than a trailer of goods someplace.

Analysts think the FedEx-Amazon split could lead to a series of acquisitions by Amazon as it tries to jump ahead. Deutsche Bank's director and lead shipping analyst, Amit Mehrotra, speculated in a June 10 note that the retailer could buy companies like XPO Logistics, C.H. Robinson Worldwide and Forward Air Corp. Morgan Stanley analyst Ravi Shanker thinks the whole parcel industry has to brace for the impact of Amazon taking over more of its own shipping. And S.G. Cowen's managing director and senior research analyst, Helane Becker, thinks FedEx is likely to boost its dividend this month, hoping to offset a 40% decline in the stock since early 2018.

And that may just be the beginning of changes at FedEx and its rivals as they evolve to meet the relative upstarts' challenges.

"We believe FedEx's breakup with Amazon is a watershed moment for the parcel industry," Shanker said. "[It] signals Amazon's emergence as a player in the industry and brings new levels of risk to both FedEx and UPS.''

Amazon is at the center of most speculation, both because it's an enormous customer for FedEx and UPS and because it has designs on the business itself, the full scale of which is not well understood.

Shipping and fulfillment, taken together, are a huge line item in the giant online retailer's budget. Last year it spent $27.7 billion on what securities filings called "sortation, fulfillment and transportation costs." But moves like last year's order by Amazon of 20,000 delivery vans from Mercedes-Benz, as well as orders of airplanes, are driving the speculation. So is the Uber-like Amazon Flex Initiative, where independent contractors are delivering for Amazon using their own vehicles. Morgan Stanley has estimated that Amazon saves $2 to $4 per package when it handles delivery itself.

Amazon is playing its cards close to the vest. When called for comment, Amazon spokesperson Kelly Cheeseman declined to say how much of its shipping business Amazon plans to take in-house.

"We are very happy to have the delivery capacity our carrier partners can provide," Cheeseman said in an email. "They provide a high-quality service, and our own delivery efforts are needed to supplement that capacity rather than replace it."

The loss of business and potential competition over time from Amazon will hit FedEx's ground business, which accounts for 28% of FedEx's revenue. Uber's freight business is designed to compete against FedEx's freight unit, which the company says provides 11% of sales.

The company itself is keeping mostly mum, declining an interview for this story. But FedEx executives have explained their view of the company's challenges and its strategies, in conference calls with analysts as well as other presentations.

The Uber threat

Uber, especially, is just getting started and may not pose a major threat soon, says James Corridore, CFRA's director of industrials equity research. Uber's filings for its recent initial public stock offering notes it has relationships with about 1,000 shippers and about 36,000 carriers. It brought in more than $125 million in revenue during the fourth quarter of 2018, a year and a half after its May 2017 public launch, the filing says. It focuses less on individual packages bound for consumers, handling lots that are bigger than a package or two but less than a truckload — a $700 billion market, according to Uber, that many shippers find expensive and inefficient.

The idea for Uber Freight is similar to its ride-sharing service: Its software streamlines a process that is often done via fax and telephone. It offers more transparent pricing as well as visibility to more shipping options at once than most logistics managers can contact by phone.

"It can take several hours, sometimes days, for shippers to find a truck and driver for shipments, with most of the process conducted over the phone or by fax," Uber said in its pre-IPO filings. "Uber Freight greatly reduces friction in the logistics industry by providing an on-demand platform to automate and accelerate logistics transactions end-to-end. Uber Freight connects carriers with the most appropriate shipments available on our platform and gives carriers upfront, transparent pricing and the ability to book a shipment with the touch of a button."

But this isn't especially dangerous to FedEx Freight — at least not yet, says Corridore.

We believe FedEx’s breakup with Amazon is a watershed moment for the parcel industry. [It] signals Amazon’s emergence as a player in the industry and brings new levels of risk to both FedEx and UPS.
Ravi Shanker
Morgan Stanley analyst

"FedEx does it better because they have much better size and scale," the analyst said. FedEx has 25,000 vehicles and 45,000 workers in the FedEx freight business alone, according to the company. It operates 370 service centers and handles 110,000 shipments a day.

FedEx's freight business actually has been gaining market share steadily, the company said in a presentation to institutional investors dated June 10. The company holds about a 20% market share, which has doubled since 2004, the company said.

FedEx details a list of what it thinks are its advantages in the less-than-truckload business. Its June 10 investor presentation says it is the only company in the category that offers both priority and economy shipping prices (95% of customers use both, it says) and that it has better integration than rivals with rail networks. Small- and medium-sized business clients also are heavy users of FedEx's more familiar Express and Ground services, the company says.

"Small and medium businesses speak simplicity and generally desire one-stop shop, and they want a transportation provider who can handle their local, national, rural and peak needs," FedEx president Raj Subramaniam said in the company's most recent earnings call in March.

A booming market sector

Across its businesses, FedEx is trying to deliver more flexibility, lower costs — and a dash of the future.

The FedEx Ground business, where its e-commerce business is concentrated, contributed 28% of the company's $65.5 billion in 2018 revenue. It will begin year-round seven-day delivery in January 2020, after being offered during the holiday rush. A voluntary buyout of employees that took effect in May is part of a larger plan to cut costs by $450 million to $575 million company-wide to cope with an unexpected slowdown in international trade, said FedEx CFO Alan Graf.

The first part of the plan to deal with Amazon is to overcome the loss of Amazon's shipping business, and that is not a big short-term problem, since fees on Amazon shipments were only 1.3% of FedEx's revenue last year, Becker said.

The company argues that growth in e-commerce businesses not owned by Amazon are enough to make that up. It is a view endorsed by Deutsche Bank's Mehrotra. Cowen's Becker also speculates that the business has low profit margins because of volume discounts granted to the world's largest online retailer. But Morgan Stanley's Shanker says pulling even a small amount of revenue suddenly could cut yearly earnings by 50 cents to 70 cents per share. FedEx's new fiscal year began June 1.

Fedex president Raj Subramaniam on seven-day delivery
Fedex president Raj Subramaniam on seven-day delivery

"Pulling that amount of business out of a fixed-cost network ... at very short notice could result in significant decremental margins," he wrote.

But FedEx is also not shy about arguing that Amazon can't yet match all of FedEx's advantages.

"There's an intense media focus on the 'last mile,' but very few people think about the first few thousand miles," Subramaniam said on the March call. "When you see a FedEx truck on the road, it not only is carrying those local last-mile shipments but also the other shipments that are originated from all parts of the globe, creating density for last-mile delivery and higher revenue per stop."

The company is also rushing to make its e-commerce support services more flexible. Last Christmas it rolled out FedEx Extra Hours, a service to allow late pickups for things consumers order at night, in time for next-day delivery. Customers can have packages delivered to local grocery stores or Walgreen's outlets, through FedEx OnSite, if they don't want them left unattended at their homes, and merchants can streamline returns with the company's upgraded return solutions products. The company is even testing a robot it calls the FedEx SameDay Bot to make deliveries.

Most of all, the company argues that the market for package delivery is simply big enough to help it keep growing. FedEx expects the U.S. package market to double in volume over the next seven years, to more than 100 million packages per day by 2026, Subramaniam said.

Still, there is saying it and then there is doing it. And FedEx's recent growth hasn't been stellar. The company saw international express revenues fall in the third quarter after a strong 2018, thanks to weakness in China and trade concerns more broadly. The company in December slashed its guidance for the fiscal year 2019 ending in May, to $15.50–$16.60 of adjusted profit per share, down from $17.20–$17.80. For the quarter that ended in May, analysts predicted on average that FedEx earned $4.93 a share on sales of $17.88 billion, according to Thomson Reuters.

But FedEx's long-term edge is that it simply has more money than Uber and more ability to scale up and ride out economic cycles than either Amazon or the ride-hailing leader, Corridore argues. That's showing up in leadership moving toward more fuel-efficient trucks and driverless technology, he said.

"There is room in the space for other entrants because of the growth in shipments," Corridore said. "FedEx and UPS both have the capabilities to invest in these businesses.''