Amazon Considering Options After UPS Delays

Obviously, the holidays are a busy time for shipping companies. Gift-hungry consumers, pouncing on holiday deals and discounts from Amazon.com (NASDAQ: AMZN  ) especially, turn to companies like FedEx (NYSE: FDX  ) and United Parcel Service (NYSE: UPS  ) for their shipping needs.

This year, however, things got a bit messy. UPS especially was unable to handle the massive volume of shipments. As a result, many shipments from Internet retail giants such as Amazon were delayed. Amazon and other online retailers are now reevaluating their delivery options. 

Shippers swamped
The sheer volume of holiday shipments over the Christmas period clearly overwhelmed UPS, turning out to be far greater than the company's initial expectations. According to UPS, severe weather conditions in some places also played a part in the massive snafu. With angry consumers venting on social media, UPS has suffered a serious loss of face.

Original projections for around 132 million deliveries were clearly smashed, which is either an encouraging sign for the American consumer spending environment, or simply a bad job from UPS in terms of predicting holiday traffic. What probably also contributed to the delays was a shorter than usual holiday shopping period and a higher percentage of Christmas purchases being done online. The delays were countrywide, affecting shoppers from East to West.

Main competitor FedEx faced similar issues during the yuletide shopping frenzy, although problems seem to have been less widespread. Between Thanksgiving and Christmas, the shipper handled some 275 million shipments, most of which ended up at their respective destinations on time. However, several local depots became overwhelmed, not even attempting to make some deliveries in the days before Christmas.

Amazon's response
As the major U.S. online retailer, Amazon of course had to deal with some of the backlash. The company's response was brisk: It offered $20 gift vouchers to customers who were affected by the shipping delays. Additionally, the company has offered to refund the shipping costs for delayed items.

Also, Amazon has stated it is currently reviewing the performance of delivery companies. The company seems quite ready to take shipping matters into its own hands, as became clear from CEO Jeff Bezos' plans to use drones at some point in the future. According to Amazon, the company passed on all the deliveries to the shippers on time. Declining to give exact figures on how many customers were affected, Amazon stated that only a small percentage of shoppers faced delays.

The online retail titan has plenty of cash to throw at the venture of developing its own delivery service, and the backlash it faced as a result of the Christmas delays could serve to expedite the development of these options. If major online retailers such as Amazon decide to launch their own delivery services, shippers like UPS and FedEx could potentially find themselves in a lot of trouble.

In fact, Amazon already has its own delivery services. AmazonFresh, which provides consumers with fresh produce, delivers products using its own trucks and employees or contractors. Additionally, the company's Locker service delivers products to pickup points such as 7-Eleven stores using its own logistics. It isn't hard to see how Amazon would theoretically be able to expand upon these services should they find their traditional delivery partners' service unsatisfactory. Also, Amazon recently announced a partnership with the U.S. Postal Service for Sunday deliveries. 

The bottom line
UPS dropped the ball during the holiday madness this year, having severely underestimated the massive volume of deliveries. To be fair, poor weather also contributed to the delays. As such, Amazon has already said it will be investigating the competence of its shipping partners, and may choose to expand on its own delivery options. Online retailers providing their own delivery services could potentially leave shippers in very hot water indeed.

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  • Report this Comment On January 08, 2014, at 9:58 AM, CommonScents wrote:

    "The online retail titan has plenty of cash to throw at the venture of developing its own delivery service, and the backlash it faced as a result of the Christmas delays could serve to expedite the development of these options. If major online retailers such as Amazon decide to launch their own delivery services, shippers like UPS and FedEx could potentially find themselves in a lot of trouble."

    I would be very surprised if Amazon took this path. It would take MASSIVE investments to match the delivery capabilities of UPS, and I honestly don't think that Amazon, or anyone else, has the will to challenge in this arena. UPS has about $18B just in PP&E on their balance sheet....AMZN has about $8B in cash.

    I also think Amazon holds some responsibility here, as they have input into estimating delivery demand. Amazon needs UPS and FedEx just as much as UPS and FedEx need Amazon.

  • Report this Comment On January 08, 2014, at 10:55 AM, jwh7610fool wrote:

    CommonScents is spot on. Once Amazon exceeded its own estimates, UPS was the only shipper able to attempt to clear Amazon's docks of excess volume. These companies are partners.

    UPS may have looked better in the public eye if it had told Amazon that they were above their estimates and refused to pick up their volume, but that's not what partners do. UPS maxed their capabilities in severe weather to do all they could to help their partner deliver their higher than expected shipments.

    Now UPS must weather the media frenzy about the poor job they did.

  • Report this Comment On January 08, 2014, at 11:59 AM, Paganpink wrote:

    Surely the author wrote this just to be controversial. UPS has spent more then a century developing not only the largest delivery network in the world but by far the most efficient one. Over 200,000 employees, around 100,000 delivery vehicles and hundreds of billions (if not trillions) of dollars of aircraft and strategically placed and cutting edge facilities? And astounding amounts of technology to control and track every single piece of merchandise and also sort, project and communicate locations and in transit information, as well as billing for every one of those millions and millions of packages a day? Far easier to replicate Amazon then to try to copy UPS as this article so glibly suggests. And the drones? Utter nonsense as well.

  • Report this Comment On January 08, 2014, at 1:07 PM, lbi4ever wrote:

    Amazon prides itself on logistics and supply chain. I would like to see what there volume forecasts where to the carriers who use those to determine their requirements for delivery. If Amazon's volumes significantly exceeded forecasts especially the last 3 days before xmas then you can assume that the ability to lease some extra aircraft to move that volume on a days notice is impossible this time of year. I believe Amazons response to reimburse shipping costs so quickly in some sense accepts some of the responsibility in what was obviously a painfull experience for many consumers. Consumers have grown more accustomed to reliable and timely delivery services and because of that I believe carries over into the behavior of the customer to ship later and expect the same result at the heaviest shipping time of the year.

  • Report this Comment On January 08, 2014, at 4:34 PM, Spoiledraf wrote:

    Amazon can consider its options but will find UPS and FedEx are still the best. Should they attempt to mirror these delivery giants, they will soon discover the difficulty involved in trying to hire, train and mobilize 20,000 drivers to work 12 hours a day for a ten day crush. There were no rental vehicles available to expand the delivery force in most makers. And then there is the acquisition of the aircraft to move those packages, the sorting facility to handle it all and finally the people with experience to actually pull it all off.

    The a average seasonal driver can seldom do 50% of the work of a seasoned professional UPS delivery driver. It's a tough job done by primarily pretty motivated and intelligent people. But Amazon is a pretty smart crew. Smart enough to realize as bad as it seemed, it was still pretty good job done fore likely 99% of the deliveries in December.

  • Report this Comment On January 08, 2014, at 5:39 PM, dgresl00 wrote:

    "The online retail titan has plenty of cash to throw at the venture of developing its own delivery service". Really? They have $7B in cash and $3B in debt and are generating $300-500 million in operating income in 2013. This pails in comparison to UPS with $7B in operating income per year. Amazon is a house of cards and couldn't come close to replicating a UPS.

  • Report this Comment On January 08, 2014, at 6:00 PM, innovator wrote:

    Can you remember the last time a new entry tried door to door shipping to every address in the US?

    DHL......and they lost billions and billions, and now only do international packages.

  • Report this Comment On January 09, 2014, at 10:27 PM, GrrlGeek1968 wrote:

    Amazon can spread their packages around, and I hope it will encourage all their carriers to perform better. I am happy they use the USPS, because I can get stuff delivered on Saturday.

    Having said that, I think this year was the "perfect storm" because of the shortened shopping season, and the weather.

    The weather was a double whammy, since it disrupted carrier operations -AND- encourage people to do more online shopping.

    Also, the fact that Christmas fell on a WEDNESDAY, and all the online retailers were guaranteeing delivery as late as SUNDAY, was just plain stupid. At that point, NO CARRIER has excess capacity. Not only can't you rent a plane on short notice, you can't add staff that late. And those people who had been working for weeks, were running out of hours. (Federal rules for delivery drivers limit hours per week.)

    Used to work for UPS, know all about PEAK. Glad I'm retired.

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