FedEx delivery trucks in Pasadena, the US. Picture: REUTERS/MARIO ANZUONI
FedEx delivery trucks in Pasadena, the US. Picture: REUTERS/MARIO ANZUONI

New York  — FedEx is snipping another tie with Amazon.com as the ecommerce giant emerges as a competitor by building its own shipping network.

The ground-delivery contract with Amazon will not be renewed when it expires at the end of August, FedEx said. The decision quickens the company’s retreat from the largest online retailer just two months after FedEx said its Express unit would not extend an agreement to fly Amazon’s packages in the US.

“This change is consistent with our strategy to focus on the broader ecommerce market,” FedEx said in the statement. Recent moves to bolster service “have us positioned extraordinarily well” to handle demand, it said. The courier will still have a contract with Amazon for international deliveries.

FedEx is reducing its dependence on Amazon as the online retailer builds up a logistics network with hundreds of fulfillment centres and adds next-day air capacity with leased jets. Amazon is also starting a home-delivery service modeled after the contractor-based ground unit at FedEx, which flagged the competitive risk in its latest annual report to US regulators.

“We are constantly innovating to improve the carrier experience and sometimes that means re-evaluating our carrier relationships,” Amazon said in an e-mail on Wednesday. “FedEx has been a great partner over the years and we appreciate all their work delivering packages to our customers.”

FedEx dropped 2.1% to $157.80 at 11.08am in New York amid broad market declines. Amazon fell less than 1% to $1,779.45.

Amazon made up about 1.3% of FedEx’s sales in 2018. To scoop up more ecommerce business, FedEx announced in May that its ground unit would begin a seven-day service in January, deliver more packages that had been handed off to the US Postal Service and invest to handle oversized packages.

The Memphis, Tennessee-based company has also signed up more drop-off and pick-up points, including with Dollar General. FedEx is even testing a ground-delivery robot.

‘Near-term pain’

By walking away from Amazon, FedEx is looking to increase its profit margins, even though the company could feel “some near-term pain”, Lee Klaskow, an analyst with Bloomberg Intelligence in a Wednesday note.

“This move is a logical progression after letting its Express contract expire in June,” Klaskow said. The Amazon contract “we believe was a low-margin business”.

United Parcel Service (UPS), the largest US courier, is taking a different tack by continuing its relationship with Amazon. Analysts have estimated that the retailer’s pledge to expand overnight deliveries fuelled a 30% spike in UPS’s domestic next-day volume in the second quarter.

UPS has not said how much revenue it generates from Amazon, but if the total were more than 10%, the courier would be obligated to disclose the information in regulatory filings. The amount is probably close to that threshold, according to analyst estimates.

Some of the ground packages that FedEx handled for Amazon will migrate to UPS, said David Ross, an analyst with Stifel Financial. FedEx’s international deliveries for Amazon are likely very small, he said.

Double-edged sword

Amazon-related revenue as a percentage of FedEx’s total probably fell to less than 1% after the courier’s June decision not to renew the domestic air-delivery deal, Ross said in a note to clients. Ending ground delivery will make FedEx’s Amazon revenue “not worth mentioning”, he said.

The surge in ecommerce business has been a double-edged sword for FedEx and UPS by spurring sales growth while squeezing profit margins, since home-deliveries are more costly to handle than drop-offs at commercial customers.

In June, FedEx said it was in a “transition year” as it seeks to drive down costs and fix an ailing European business. The company forecast a mid single-digit percentage drop in earnings for the current fiscal year, which ends in May.

Bloomberg