As a consumer, you probably haven't even noticed it, but last month Amazon (AMZN +1.36%) quietly restarted the third-party delivery service it shuttered in the midst of the pandemic.
The service is not for everyone to use ... at least not yet. In fact, its current list of eligible customers is limited to merchants currently using Amazon.com as a selling platform. That doesn't mean the parcel in question must be sold through Amazon's online mall, though. The merchant just has to be an Amazon seller. It's also a low-frills service for the time being, limiting the transportation of these goods to ground-based options and promising no more than a five-day delivery time.
Nevertheless, this is a prospective seed that mainstream logistics companies, like United Parcel Service (UPS 10.47%) and FedEx (FDX 9.11%), don't want to see planted. Both delivery giants are already struggling in their own ways. If and when Amazon expands this rekindled initiative, FedEx and UPS will face even stiffer headwinds.
NASDAQ: AMZN
Key Data Points
Is Amazon laying the groundwork for something more?
For the record, it's not a directly devastating blow to FedEx and UPS. Amazon now accounts for only about 10% of United Parcel Service's revenue, and FedEx cut its ground delivery ties with Amazon as a customer back in 2019 when the e-commerce giant's home-grown logistics network efforts started to gel.
Indirectly, though, the potential threat is still very real and very significant.
The prospect of Amazon building out its own standalone logistics operation -- for anyone needing a package delivered from point A to point B -- has long been in place, bolstered by a fleet of over 100 cargo-carrying jets and tens of thousands of delivery vans. The infrastructure is in place if it wants to go toe-to-toe with FedEx and UPS.
Ditto for the incentive. Even if opening up its logistics service to customers outside of Amazon.com's ecosystem and existing customer base is only a breakeven proposition, it would generate revenue that offsets Amazon's costs of growing this infrastructure.
It's also another potential point of contact with companies and consumers that might eventually choose to become part of this ecosystem. Once in, Amazon can find a way to monetize them.
NYSE: FDX
Key Data Points
FedEx and UPS are already on the defensive
And it's a possibility that UPS and FedEx can't afford to ignore.
See, while neither company is on their deathbed, both companies' best days are behind them. The delivery business has become brutal and less profitable, largely because of Amazon's foray into its own logistics solutions. Pitney Bowes estimates that as of last year, Amazon handled 22.6% of all packages shipped within the United States, topping FedEx's 19.1% and nearing United Parcel Services' 24.3%. Prior to the pandemic, Amazon Logistics' U.S. share was just under 13%.
Connect the dots. Amazon isn't stealing market share from FedEx or United Parcel Service by virtue of venturing into the exact same business. As more and more consumerism moves online, though -- to Amazon.com -- those sellers are opting for Amazon-provided delivery solutions.
In the meantime, FedEx and United Parcel Service are on the defensive in their own right. FedEx's total package volume slipped 7% year over year during the three-month stretch ending in May and was lower to the tune of 10% for the past six reported months. Unit deliveries are down here and abroad despite somewhat healthy consumer spending during this time. UPS's total deliveries were down nearly 10% year over year in Q2 as well, also running into a demand headwind within and outside the United States.
For perspective and comparison, Amazon's international online sales are up 5.3% through the first half of the year, accelerating in the second quarter. In Q2, its North American e-commerce business mirrored Q1's year-over-year growth of nearly 11%. Clearly, people are buying goods that require delivery, which also requires delivery from manufacturers to retailers. UPS and FedEx are just becoming less important to that process.
NYSE: UPS
Key Data Points
Tough to compete with a service that doesn't have to turn a profit
Doomed? No, United Parcel Service and FedEx will survive. They may even find a way to thrive again.
Doing so won't be easy, though. In fact, it could be near impossible if Amazon opts to open up its logistics services to customers other than Amazon's sellers and/or creates a way to offer faster, air-based, one-day and two-day shipping services for anyone seeking a third alternative to FedEx and UPS. Amazon's edge in this regard is simply that it wouldn't even have to turn an immediate profit on a particular delivery. As was noted, it can find ways to monetize newcomers in a variety of other ways that have nothing to do with logistics.
Now, shareholders of United Parcel Service and FedEx have another reason to consider other investment options.
