Every day at least one delivery truck from UPS (NYSE:UPS) and one from FedEx (NYSE:FDX) pulls up in front of my apartment building. A half dozen boxes, each, on average are loaded on a cart and wheeled into the building to be delivered to residents. These days, an Amazon (NASDAQ:AMZN) driver periodically pulls up with a box or two as well, cutting UPS and FedEx out of the delivery process.
It's no secret that Amazon is both the elephant in the room in online retail and shipping as well as building out its own delivery network. The company has leased planes, contracted with drivers to deliver packages, and even invested in delivery drones. And while Amazon may be trying to cut UPS and FedEx out of the equation, if they're smart they have a very bright future with other retailers.
The retail landscape is changing
If you pay close attention to retail, you've noticed there's a fundamental shift in the way products are developed and sold today. Lots of new companies are foregoing trying to get the big sale to a big box retailer and going straight to consumers. Blue Apron, Meundies, Nature Box, Bombas, and many others are introducing products that are advertised online or on podcasts straight to consumers. Purchases are made with no middleman and UPS, FedEx, and the post office handle the delivery.
Big brands like Nike, Apple, Samsung, and Disney are trying to cut out the retail channel altogether as well, building direct marketing campaigns. As they grow direct sales, they'll lean on UPS and FedEx to get products to customers, adding another growing customer base to the delivery companies.
As more large brands go direct and direct sales product companies pop up, they'll be a growth market for UPS and FedEx. And many, like food delivery services, are recurring revenue businesses, not tied to the holiday season. They'll create a foundation of growth outside of Amazon's enormous shipping demands.
The big risk in parcel delivery
What UPS and FedEx have to avoid is being a cheap peak demand shipper for Amazon's business, particularly during the holidays. Amazon wants to be able to build its own logistics operation it can run full steam, offloading peak demand to companies like UPS and FedEx. But if they're not compensated appropriately, they'll lose money building capacity to meet peak need that's then idle during slower seasons.
But here's where the duopoly these two companies have in shipping may come in handy. They'll compete with each other for Amazon's business, but neither is desperate enough to make Amazon a loss leader as a customer.
Don't be afraid of shipping stocks
The risk of being disrupted is one of the biggest risk factors investors should watch for. And with Amazon building out its own delivery infrastructure and growing its online retail market share, it may appear that UPS and FedEx are going to be disrupted by one of their biggest customers.
But as Amazon grows, so does the network of innovative product companies who will disrupt retail, going directly to customers, including big brands. And as that base of customers grows they'll lean more and more on UPS and FedEx to get their products out to the world. That's a great base to grow from and makes both stocks great buys long-term because the number of online direct-to-customer sales is only going up.