FedEx (FDX +0.90%) made a bold move this summer by announcing that it will discontinue its shipping and delivery contracts with Amazon.com (AMZN +2.55%). In June, the giant shipping company said that it will not be renewing contracts for air services with Amazon, and in August, it upped the ante with a statement that it would not be renewing ground contracts, either.
Theoretically, this shouldn't be big news, and it shouldn't bother anyone in either industry. Along with its first announcement, FedEx said that business from Amazon "represented less than 1.3% of total FedEx revenue for the 12-month period ended Dec. 31, 2018." And Dave Clark, Senior Vice President of Operations at Amazon, tweeted "they were [a] very small piece of our network and vice versa."
So why does everybody care? These are two powerhouse brands, each of whom has the potential to cause a massive shakeup in their respective industries and in the general economy. And, perhaps the impact isn't as negligible as the companies think.
Image source: Getty Images.
Is Amazon taking over the world?
In its quest to solidify its position as a dominating force in the U.S. economy and on the world stage, Amazon has started to develop its own delivery infrastructure. It will have a fleet of what is expected to be 50 airplanes by the end of 2019 in addition to their own ground delivery vehicles. So now, besides offering fierce competition in the books, music, shoes, and groceries categories, the company is looking to match its shippers' power as well and eventually move them out.
Amazon has some innovative methods of execution, including taking over the "last mile" of a shipment and recruiting small shipping teams to collaborate with its delivery services. With $9 billion in shipping costs, and the drive to keep Prime customers happy with their free shipping, it has every incentive to keep costs down while delivering fast and well.
Ganging up against the bully
Even if Amazon's business isn't integral to FedEx's bottom line, why make the cut? Couldn't they all just get along? There are a few reasons why regardless of the amount of business it's bringing in, FedEx decided to split with Amazon.
First, FedEx hasn't been thrilled to pull Amazon's weight while Amazon is working to undercut it. With the knowledge that this business will eventually go away in any case, it makes sense for the company to pull out now and focus its efforts on building relationships with other partners where it can continue to grow.
Second, it may be making a statement about where its allegiance lies. The New York Times quoted Satish Jindel, an industry insider, who conjectures that the move shows FedEx's commitment to a stronger relationship with Walmart. Both Microsoft and Alphabet have linked up with Walmart in competition with Amazon's new in-store retail setup. With the power of all these major players marshalled against the largest online retailer in the world, they're offering a strong alternative for customers.
Short-term pain, long-term gain
When the news first came out in August, it made headlines but didn't make waves until FedEx's first-quarter report came out in September showing lower revenues as compared to the previous year. In a statement, FedEx blamed "weakening global economic conditions, increased costs to expand service offerings and continued mix shift to lower-yielding services," and afterwards added, "The impact of one fewer operating day and the loss of business from a large customer also negatively impacted results." Apparently that 1.3% of total revenue FedEx claimed a few months ago that Amazon represented made a bigger difference than the company originally imagined.
However, the other factors FedEx mentioned also made a difference in the numbers. FedEx has a lot on its plate, including tariff wars and a slowing global economy, which directly affects shopping and shipping. The company had expenses related to investments in its growth and infrastructure, as well as the integration of TNT, which cost it $71 million this year.
While this could sound like a crisis for a business, FedEx isn't a blue-chip stock for nothing. It's investing in its services, such as offering residential delivery seven days a week all year. It's increasing rates to cover costs, and looking for better alliances, such as the Walmart connection and a relationship with Target.
Although FedEx stock continues to plummet, it's a great opportunity for investors to grab it at a low price.
