FedEx Completely Cut Ties With Amazon. Here’s Why UPS Won’t (or Can’t)

FedEx Completely Cut Ties With Amazon. Here’s Why UPS Won’t (or Can’t)

That's because, even though both companies spent years building out robust delivery capacity in large part to accommodate ecommerce sites like Amazo

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That’s because, even though both companies spent years building out robust delivery capacity in large part to accommodate ecommerce sites like Amazon, last week FedEx announced that in addition to no longer delivering Amazon’s air packages, it would be discontinuing its ground contract as well. 

Two different approaches.

As I wrote previously, FedEx is weaning itself from Amazon as the ecommerce retailer increasingly transitions to using its own delivery network for more and more of its deliveries, becoming a threat to FedEx, UPS, and the US Postal Service as it does.

According to The Wall Street Journal, that transition meant that in July, Amazon’s own drivers delivered 45 percent of its packages, while FedEx delivered essentially none.

That’s quite the difference in direction compared to UPS, who either won’t let go of the retailer’s business, or simply can’t.

That same Wall Street Journal article also points out UPS still accounts for roughly one-fifth of Amazon’s deliveries, and those account for as much as 10 percent of the shipping company’s revenue. UPS is sticking with Amazon in hopes that, at least in the short-term, that amount will like increase as the holiday shipping season ramps up.

What’s far more interesting is what happens in the long term.

Preparing for the future.

FedEx has already been positioning itself to provide delivery services for retailers like Target and Walmart and had reduced its business related to Amazon to just over one percent of its overall revenue. That made it far less painful to break up, since it expects to make up that loss from increased deliveries from other customers.

UPS, on the other hand, is doubling down with Amazon. Right now that looks like it could pay off, at least as the company is able to pick up the capacity lost by FedEx. In the long run, however, it’s a different story. Amazon isn’t going to suddenly stop building its own end-to-end delivery infrastructure. 

That’s the thing– in the long run Amazon will only become a greater and greater threat to UPS. 

Granted, UPS is a huge company, but after years of investing in a massive delivery network to largely because of customers like Amazon, the loss of revenue would be real and painful.

Partially, that’s because it’s not likely that Amazon is significantly more profitable a customer for UPS than it was for FedEx. Customers like Amazon receive steep discounts in exchange for locking in large amounts of package volume. 

Know when it’s better to let go.

Either way, it’s a valuable lesson in what happens when your biggest customer largely decides it’s cheaper to cut you out, and why it’s worth preparing for the day when you may have to make a decision like UPS and FedEx. 

The distinction couldn’t be more different, and the companies have vastly different short, and long-term goals. Still, the challenge they face is similar despite ending up moving in opposite directions.

UPS, at least at this point, can’t seem to let go– even if it’s not in it’s best interest long term to continue to depend on what is now its fastest growing competitor. Or, for whatever reason, it simply won’t.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

This article is from Inc.com

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