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FedEx decides against the renewal of FedEx Express contract with Amazon


  • The FedEx Express contract with Amazon
  • An inside overview of Amazon

 

June 2019 marked an important event in the world of logistics and e-commerce when two big names decided to part. The logistics giant FedEx decided on the non-renewal of its FedEx Express contract with Amazon. Moreover, apart from FedEx Express, the other contracts of FedEx with Amazon will continue as usual. In the present Blog, Televisory has explored the possible causes for FedEx to discontinue its contract with the global e-commerce giant.

FedEx is a global logistics giant, which provides domestic and international shipping services to businesses and customers through its fleet of trucks, aircraft and delivery vehicles. Amazon has been using its services for the delivery of products ordered through the website by customers. The FedEx Express delivered Amazon products within the United States through its fleet of aircraft. Amazon accounted for a mere 1.3% of the total revenue for FedEx and the loss of the contract is not going to have a big impact on FedEx. But still, it was a surprise that FedEx chose to dissociate itself from such a big brand. This decision is no doubt a strategic move by the FedEx, which took into account the future prospects. A deeper look into Amazon can perhaps reveal the strategic thinking behind the move to terminate the contract. What is Amazon? Is it a logistics company that has forward integrated into retail or is it a retail company that has backward integrated into logistics? Anybody, who knows the history of Amazon will without an iota of doubt say that it is an online retail company that delivers products to its customers from its fulfilment centres. The products are delivered by Amazon and also by its logistics partners; FedEx, UPS and USPS. However, anybody who delves deeper into Amazon is most likely to call it a logistics company. It has established a number of fulfilment centres in geographies where the firm began its operations. Amazon mainly competed with the traditional brick and mortar retail stores. In order to entice people to buy products online, the company occasionally gave discounts or at the maximum sold products at a similar price as that of brick and mortar stores. This strategy forced Amazon to operate at negative to low margins. It, therefore, decided to use operational optimization as a technique to improve its margins. Logistics has been one of the greatest core competencies for Amazon that has helped it curb its operating expenses and improve margins. It very well learnt from its logistics partners and also developed its own system of logistics.

At present, Amazon has big plans when it comes to logistics. In addition to investing in the fleet of trucks and delivery vehicles, it is now also investing in aircraft. Currently, Amazon has 39 Boeing 767 aircraft and in June (2019) the company announced its decision to add 15 Boeing 737 to its fleet and also decided to increase its fleet size to 70 aircraft by 2021. Amazon is also a technology company. It is using this to its advantage in the logistics for operations optimization, cost reduction, output maximization and inventory management through the use of Business Intelligence (BI). In one of Televisory’s previous blogs on warehouse automation, we discussed how Amazon acquired the Robotics company Kiva for USD 775 million in 2012, this was done to bring in elements of automation in its fulfilment centres. Amazon holds the patent for its Kiva robots and it has also been granted a patent for perforated parcel shipping containers. It is working on its in-house technology for fully automated drone delivery of parcels and has recently acquired an urban delivery robotic start-up. In addition to this Amazon has also invested in an electric vehicle company Rivian. All these examples point towards a big strategic plan and to sharply refine its core competency in logistics. When it comes to logistics, it has a solid foundation base with its steep learning curve, experience curve and technological innovations. Amazon is now making more deliveries to its customers on its own than earlier. The below chart shows that 7% of the total packages were delivered by Amazon directly in 2013, whereas this proportion rose to 26% in 2018. Televisory expect direct deliveries to continue to increase in the near future. On one hand, Alibaba chose a complete asset-free business model for its online retail business, but, on the other hand, Amazon, which started with an asset-heavy business model, is continuing to acquire heavier assets. Amazon seems to be confident about the success of its asset-heavy business model.

History tells us that Amazon is a very ambitious company. It started as an online retailer of books in 1994 but today it sells everything online including furniture, electronics gadgets, apparels, fashion accessories and personal products. It also launched a segment for grocery, vegetables, fruits and meat in the form of Amazon Fresh. It forayed into the video streaming business and it competes with Netflix and YouTube in this segment. It is also present in the cloud business and competes with Microsoft and Alphabet. It has also launched its own electronic devices such as the Firephone, Kindle and Alexa. In short, Amazon is competing with almost every big contemporary name and FedEx is no exception. The investment in logistics assets and patents is a clear indication of its intent. In fact, Amazon has described itself as a transportation and logistics company in its Annual Report 2018. In order to compete in the logistics industry in the present era, one needs IT expertise in the form of BI tools and algorithms. These tools have been the recipe of success for FedEx and UPS and currently, Amazon too possesses these tools. It is possible that Amazon may foray into the third-party logistics business and compete directly with FedEx and UPS in the near future. Thus, the decision to dissociate itself from Amazon seems to be a highly strategic move by FedEx and was taken to keep its potential competitor in check.

FedEx is the second largest player in the parcel shipping industry after the UPS and one may argue that Amazon is not a big threat for the firm. However, any failure on the part of the company to stay up to the mark with the changing marketplace and technology can spell doom for its survival. The patents held by Amazon and the investment in research and development for automation and optimization may prove destructive to the existing players in the industry. FedEx has also announced a number of new schemes in June (2019) such as after-hours pickup, all seven days of week deliveries and increasing capabilities for large packages. After all, no matter how big a company is, it still needs to evolve in order to sustain and maintain its competitive edge.

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