In the past few years, Uber has dramatically upended the taxi business with its cheaper, crowd-sourced alternative to traditional cabs. Its success and rapid growth in this field have scored Uber a $41 billion (and rising) valuation.
More recently, Uber has looked to expand into adjacent markets. If it has thousands of drivers in a big city ready to transport customers from point A to point B at all times, why not have them transport packages, too? That's exactly what Uber is trying to do. And it's not the only tech company trying to get a foothold in the package delivery business.
Naturally, this has a lot of investors worried about the potential damage to FedEx (FDX +3.02%) and United Parcel Service (UPS +1.31%). However, FedEx isn't worried at all, based on comments made by EVP Mike Glenn last month. Here's why.
Package delivery is tough
In a conference call with analysts last month, Mike Glenn, FedEx's executive vice president of market development and corporate communications, gave two main reasons why upstart delivery services like Uber won't eat UPS' and FedEx's lunch.
FedEx isn't worried about having its business model disrupted by Uber. Image source: The Motley Fool.
The first is simply that operating a reliable, efficient package delivery network is tough. (FedEx has been spending upwards of $4 billion a year in capital expenditures to keep its business competitive and growing.) In addition to the big overhead costs, massive scale is needed to be cost-effective.
"I think what a lot of people lose in this conversation is that while technology today has certainly made user interface much more streamlined and easy ... the fundamental input costs have not changed," Glenn said. This statement echoed comments made a few months earlier by FedEx CEO and founder Fred Smith.
To look at it another way, the package delivery business is highly organized. FedEx and UPS drivers have routes that are optimized to get packages between customers and sorting hubs as efficiently as possible. A crowd-sourced delivery service would have trouble replicating that, since companies like Uber generally don't determine who takes what job.
By contrast, the taxi business is incredibly disorganized. (After all, its main organizing principle is that a potential customer sticks out his hand and waits for a car to pull over.) As a result, taxi companies have no moat -- other than perhaps government regulations -- to protect them from tech upstarts like Uber.
People trust the uniform
Aside from these significant logistical issues, Glenn also claimed that research has shown that "a uniformed person with proper identification showing up at your doorstep is an important issue for customers." Presumably that would apply at least equally to the people or businesses sending out packages.
If a significant number of customers would be uncomfortable about sending or receiving a delivery via a non-uniformed Uber driver in an unmarked car, it could be a major barrier to services like Uber gaining a foothold in package delivery. At the very least, retailers offering Uber deliveries might also need to give customers an alternative delivery option.
Long odds
Thus, it appears that Uber and other would-be Fedex and UPS competitors will have a tough slog due to the difficulty of achieving scale and customers' preference for uniformed delivery personnel. Indeed, Uber's package delivery ambitions have gotten off to a slow start over the past year.
But while Uber faces long odds in the package delivery business, FedEx knows something about long odds. According to a widely reported -- though possibly apocryphal -- story, Smith laid out what became the FedEx business model in a college economics paper and got a C from a professor who thought the concept would never work. And in FedEx's early years, he once took the company's last $5,000 to Vegas, where he won $27,000 playing blackjack in order to pay FedEx's fuel bill.
So it would be foolish to write off Uber's disruptive potential at this point. However, for now, FedEx and UPS don't have to worry about having their comfortable oligopoly upended.
