FedEx (FDX 4.36%) has ended its domestic relationship with Amazon.com (AMZN 1.31%) for express packages. The move allows the shipping giant to focus on other retailers. It's a smart move for a company that got only 1.3% of its revenue from the online retailer. Not being an Amazon partner may make FedEx more attractive to major retailers such as Walmart and Target, which are looking to match Amazon when it comes to shipping speed. This news, however, may not be so good for UPS (UPS 3.33%).
In this segment of Industry Focus: Energy, host Nick Sciple and Motley Fool contributor Dan Kline talk Amazon and FedEx. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on June 20, 2019.
Nick Sciple: On June 7, FedEx announced a strategic decision to not renew its FedEx Express U.S. domestic contract with Amazon. FedEx says that they intend to focus on the broader e-commerce market. They believe there's significant demand and opportunity for growth in e-commerce. They intend to serve those retailers outside of Amazon. When you saw this news, Dan, what was your first reaction to hearing that FedEx is breaking up with Amazon?
Dan Kline: Do you have any couple of friends that, when you go out to dinner with them, you can tell they're going to get divorced at some point or break up, and maybe they don't know it? This is one of those relationships. Amazon was never that big of a FedEx customer. It's about 1.3% of FedEx's revenue. It was always like, "Yeah, we'll work together, but we'll use the Post Office or UPS first." And for FedEx, this is one of those, if you're not going to have a major chunk of your business come from Amazon, you're better off going to Walmart and Target and all the other big retailers out there and saying, "Look, we don't deal with Amazon. They don't know any of our secret sauce. They don't have any special pricing. We want to work with you." So, this makes them more palatable.
Sciple: Yeah. I was talking about before the show, for our listeners who listen every week to Industry Focus, a couple of weeks ago, I talked with Tim Beyers, we talked about Redfin, which is an online real estate brokerage service. This is a company that announced a new offering that led to RE/MAX, which is another big nationwide brokerage firm, to end its partnership with Redfin. And we said then that this is one of those things, the path that Redfin was taking, sooner or later, it was going to be antagonistic to these other brokers that we were going to have this breakup take place. That's what took place for Redfin. I think that's what it took place for Amazon as they pushed into e-commerce and became more vertically integrated in logistics and showed that was a clear intent of the path of business going forward. Sooner or later, they were going to become antagonistic to FedEx or maybe UPS eventually that this breakup had to happen.
We've seen some analysts say the same thing. Ravi Shanker from Morgan Stanley said, "We believe FedEx's strategic break up with Amazon is a watershed moment for the parcel industry that signals Amazon's emergence as a significant player in the industry and brings a new level of risk to numbers at both UPS and FedEx." Dan, when you see this shift in the industry, are you concerned for UPS and FedEx going forward?
Kline: I'm not worried about FedEx. This is FedEx saying, "You weren't that important to us anyway. We'll give up this 1.3% of our business in order to be able to work with many other people." They expect the size of this business to double from 50 million to 100 million packages a day by 2026. If you're FedEx, you're basically saying, "We're not going to let any one company become too important to us."
Now, UPS, I'm absolutely worried for UPS. Roughly 26% of their business is from Amazon. If Amazon keeps ramping up its shipping business, which is something they've been doing and are going to continue to do, and they say to UPS, "Hey, we don't need you quite as much. We can do a lot of this on our own," that is a material irreplaceable part of their business. UPS is in so far, I don't know that they can even get out of it. And yeah, eventually, Amazon is either going to crush them or buy them.
Sciple: Yeah, you can look at a chart -- you sent this over to me, Dan. Wolfe Research had this chart out. In 2013, UPS was 49% of Amazon's shipping business. Today, in 2018, their numbers have UPS being 22%, with much of that market share being taken away by Amazon, which now represents 26% of the logistics that are run through that website. Obviously, in the near term, this is going to be a benefit to UPS. Only UPS and FedEx have these express networks, which is the business that FedEx pulled. But as you say, Amazon is pushing more into logistics. They want to put more logistics in-house because it's less expensive to them than fulfilling orders through UPS and FedEx. And they have called out specifically in their filings that the transportation and logistics services are an area in which they compete. Amazon has been making some recent investments in these areas to build out their presence. Can you talk about that a little bit, Dan, and what that means for the company?
Kline: Amazon has been investing everywhere from last mile -- we've talked about their van network, where they're literally getting entrepreneurs to lease vans, helping them do that, and doing last mile delivery. Then, they're massively building out their plane fleet. That's where they're encroaching on what these other companies are doing. In addition to that, of course, they have their trucking fleet. They're actually selling space against UPS and FedEx. Amazon isn't just delivering its own stuff, it's become a full-fledged shipping company. It wants to control as much of its own process as it can. That includes testing things like building new, smaller warehouses, shipping out of Whole Foods stores, maybe shipping out of some Kohl's locations where it has a partnership. This is something that you're outsourcing it, you see that you're spending more money, and they are building as fast as they can possibly build, but they are hitting some brick walls in that. We've done shows about the trucking shortage. It's hard to hire truck drivers. It's also incredibly difficult to hire pilots.
