Analysts: Fedex, UPS differ on more than Amazon
Online shopping has been both a blessing and a challenge for delivery rivals Fedex and UPS, and the two seem to differ on how to best succeed in the new era.
On one hand, e-commerce provides millions upon millions more packages to deliver. On the other hand, that type of shipping isn’t as profitable as shipping in bulk to businesses. Fedex and UPS spend big to make their business-toconsumer (B2C) segments efficient enough for their liking.
E-commerce strategy is a much-discussed topic among transportation analysts, and the discussion shouldn’t go away any time soon. Fedex has said daily U.S. e-commerce volume is expected to grow from 50 million to 100 million packages by 2026.
Here’s how Fedex and UPS are handling e-commerce in their own ways.
Analyst: Fedex strategy ‘a little jarring’
Fedex is diving further into the B2C fray, pushing for more “short-haul Zone 1” shipments that bring items from local inventories to residential customers. CEO Fred Smith has said Fedex will be “industry leading” in this sector.
Fedex has historically focused on business-to-business (B2B), but it’s growing its B2C activity, said Cowen analyst Helane Becker. With Fedex being “a relatively late entrant” to B2C shipping that requires heavy investment, its costs should be lower than those of its peers, she said.
Another e-commerce-linked goal is for Fedex Ground to become the premier low-cost shipper for residential deliveries, as executives said earlier this year. But Dean Maciuba, a former Fedex employee now at Logistics Trends & Insights LLC, wrote that Fedex hasn’t yet reached this goal.
“The argument can be made that the growth of e-commerce is what’s hurting Fedex domestically, as those ugly, lowrevenue, ground e-commerce shipments grow more quickly than the highly profitable B2B shipment,” Maciuba said.
Fedex said in a statement that it’s upping its B2C offerings to address newfound volume coming from e-commerce.
“While B2B has historically represented the majority of our overall revenue, in the U.S. more than 90% of the incremental domestic parcel volume from 2018 to 2026 is expected to come from ecommerce,” Fedex said.
The continued e-commerce push hasn’t affected Fedex Ground’s yield, or revenue per package, much. Fedex Ground had a yield of $9.13 per package in its most recently reported quarter, a small bump from the year-before quarter ($8.96).
Fedex Ground’s volume, however, took a big leap. Average daily package volume was more than 8.8 million in the most recently reported quarter, up from 8.2 million the year-before quarter.
Loop Capital analyst Rick Paterson said in a note his firm found Fedex’s appetite for last-mile delivery business “a little jarring.” “While this is no doubt where a lot of the future growth will occur, it’s also the shortest, lightest, least dense, and lowest-margin parcel business,” Paterson said. “Fedex seems confident it can build a low-cost model to handle it and appears eager to do so.”
Is UPS pulling back on last-mile shipping?
UPS has fared better than Fedex has of late. UPS said it achieved profit growth in all segments in its most recently reported quarter, aided by a sharp increase in its Next Day Air volume driven by ecommerce deliveries.
In its quarterly filing, UPS said B2C shipments were up 7% year-to-date, while business-to-business shipments were up 2.3% year-to-date. B2C shipments made up about 51% of UPS’ average daily domestic volume that quarter, the filing said.
Still, UPS appears to be limiting its business in last-mile residential shipping, Paterson said. UPS emphasized to Loop Capital that its goal for last-mile B2C is for it to “be kept to a controllable percentage of what customers give them in the rest of the network,” according to Paterson. “This is worth watching and could be a real strategic differentiator in terms of how these competitors approach last mile,” Paterson said of Fedex and UPS.
UPS said in March that residential delivery speeds are crucial. Its manager for global e-commerce strategy, Jon Bell, said there is a “new two-day delivery expectation.” Fedex Ground is faster than UPS in 28% of its delivery lanes, while UPS has the speed edge in 3.3% of delivery lanes, per a recent Fedex analysis. Fedex’s speed advantage used to be 30%, according to Maciuba.
E-commerce is not just about shipping to residential consumers, according to UPS. E-commerce shipments to businesses is expected to become a $1.8 trillion business in the U.S. by 2023, it said, citing a report from market research company Forrester.
UPS still remains more exposed to the B2C market than Fedex does, said Morgan Stanley analyst Ravi Shanker, much of that due to Amazon.
How does Amazon factor in?
The B2C approach adds another area where the two shipping titans differ. They have also handled Amazon in different ways, with Fedex ending two Amazon contracts and UPS continuing to ship for the company.
Fedex won’t be able to lean on a flow of Amazon packages to keep its trucks full and delivery routes efficient, meaning it will have to lean on the “other half ” of e-commerce: merchants outside of Amazon.
“The ‘growing with others’ strategy is not going to be easy,” said Shanker.
Shanker thinks UPS has “more serious” structural issues than Fedex does, however, because an Amazon breakup would hurt UPS much more than it did Fedex. About 1% of Fedex revenues were attributable to Amazon in 2018, while Morgan Stanley estimates roughly 10% of revenues and up to 25% of volume at UPS is linked to Amazon.
Although Amazon has become a major UPS customer, it’s also ramping up its own logistics capabilities.
Amazon insourcing its own shipments could contribute to a less appealing B2C market a few years down the road, Shanker said. Morgan Stanley sees Fedex “as relatively better positioned than UPS” in part because of that.
Max Garland covers Fedex, logistics and health care for The Commercial Appeal. Reach him at max.garland@ commercialappeal.com or 901-529-2651 and on Twitter @Maxgarlandtypes.