Amazon vs. FedEx: From Colleagues to Competitors

Tonight, at 6 p.m. Eastern, we’re taking down Dr. Martin Weiss’ urgent video briefing 2020 Preview: Megatrends and Megaprofits. In this timely video, Martin details the four megatrends that will shape the next decade, plus the top seven picks from me and my colleagues Tony Sagami, Mike Larson and Sean Brodrick, that will best position you to ride those megatrends.

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Here’s another trend I’m watching …

FedEx (FDX) shares crashed 10% Wednesday following dreadful second-quarter financial results.

We can blame Amazon.com (AMZN) for that.

It was a trifecta of bad news for shareholders. Net income, sales and guidance all trended lower. Amazon forced the shipping giant into a war it can’t win. At least, not in the current configuration.

This is a lesson that competitors often learn the hard way …

For many years, package delivery from FedEx demanded a premium price. The Tennessee company became the gold standard in logistics by reliably delivering packages all over the world.

FedEx clients may have groused about the high delivery costs, but their customers were happy.

Then Amazon.com came along.

The rise of e-commerce should have been a blessing for the world’s largest logistics business. FedEx managers had been urgently investing in infrastructure and cutting-edge technologies to get ready for the explosion in growth.

The company announced an 8.5% increase in capital investment in June 2018. Managers said they would beef up systems and capacity at the Memphis and Indianapolis hubs. The company also ordered 12 new Boeing 767 aircraft to keep up with increased cargo.

According to data from the U.S. Commerce Department, e-commerce grew from about 5.1% of all domestic retail sales in 2017, to a staggering 14.3% in 2018. Online sales were $518 billion in 2018, a 15% year-over-year jump.

Amazon.com played a big role in that growth. FedEx was a reliable delivery partner.

Then everything fell apart.

The online retailer wanted to reduce shipping times to build customer loyalty while simultaneously cutting shipping costs. Something to had to give.

It began innocently. Amazon logistics managers said they were investing in cargo aircraft and overseas ships to build capacity around peak shipping periods.

Result: Fewer smiley-face boxes began showing up in FedEx delivery vans.

The New York Times reported in August that FedEx decided to end Amazon ground deliveries. The package deliverer made the tough choice to quit the biggest online company because it was clear Amazon was building a competing logistics business.

It’s classic Amazon:

• Use the scale of the existing e-commerce platform to build other large service businesses.

• Then, methodically, make those services scalable to reach a larger audience.

The company launched Amazon Web Services to the public in 2004. Prior to that point, the cloud-based data storage and processing business had a single client, Amazon.com. Today AWS generates $30 billion in annual sales, is very profitable, and has a huge roster of Fortune 500 customers.

FedEx managers should worry. Amazon is about to follow the same game plan for logistics.

Expect the rollout to begin with Amazon Marketplace merchants in the near term. In the future, expect the company to actively court larger enterprises.

Second-quarter profits at FedEx fell to $560 million vs. $935 million a year ago. Sales slipped modestly to $17.3 billion. The company also reduced guidance going forward as the business copes with the loss of Amazon.com and transitions to a more-competitive pricing environment.

Pricing is key. As Amazon.com moves toward a broader offering of logistics, falling prices for ground delivery is certain to become the norm.

FedEx is not going away. Its offerings are still best-in-class. However, the days of premium pricing are over. That’s bad news for margins and shareholders.

Amazon shares are up 19.2% in 2019, while FedEx shares are down 8.7%. We’ll just have to wait and see what the new year has store for both companies.

Best wishes,
Jon D. Markman