While that is a counterintuitive conclusion—and one that may generate some skepticism—the growth of e-commerce doesn’t have to doom existing parcel shippers. It could end up helping them.
In April, Amazon.com (ticker: AMZN) said it would move to one-day shipping. Coincidently, that was about the time FedEx stock hit its 52-week high. The two events aren’t directly related, but Amazon’s logistics ambition continues to weigh on shares of United Parcel Service (UPS) and FedEx (FDX).
Consider, FedEx stock is down almost 37% over the past year, far worse than the 0.3% gain of the Dow Jones Industrial Average over the same period. UPS stock has fared better than FedEx, but is still down 5% over the past year.
Tuesday morning, RBC analyst Mark Mahaney, who is bullish on Amazon, published a research report examining the impact one-day shipping could have on the company. He thinks it will accelerate revenue growth at Amazon and help the e-commerce giant lower logistics costs by spreading out investment spending across more volume.
On the surface it sounds as if more competition is coming for incumbent parcel shippers UPS and FedEx. But there is a potential benefit. As all of e-commerce speeds to one-day shipping, spearheaded by Amazon, it will drive other e-commerce competitors to use UPS and FedEx for their express shipping, which is better for the bottom line than ground shipping.
“As Amazon continues to peel deliveries from private carriers to their own logistics network, the potential increase in Express service usage by competitors could soften the blow posed by lower Amazon volumes,” iDrive Logistics strategist Matt White said. Express pricing is much higher than ground rates, so accelerating shipping speed helps UPS and FedEx sell higher-priced services.
Alliance Bernstein transportation analyst David Vernon echoes the potential for mix improvement and adds, “One thing that often goes overlooked is what is actually available for one-day shipping.” He suspects Amazon will have an easier time delivering high-turnover product—merchandise that ships frequently—and will still have to rely on commercial shippers for low-turnover inventory. That means outside logistics providers—such as UPS—won’t lose all of Amazon’s business.
FedEx, on the other hand, doesn’t derive all that much revenue from Amazon, according to Vernon. And it has been severing ties with Amazon recently, choosing to serve other e-commerce competitors.
FedEx wasn’t immediately available for comment. A UPS spokesperson said the shift to one-day shipping creates opportunities. “During [the second quarter], average daily volume for UPS Next Day Air surged more than 30%, the strongest growth in more than a decade.” That is an example of faster shipping upgrading UPS’s product mix. Overnight air is an expensive service, relatively speaking.
Ambitions notwithstanding, it may not be as easy as Amazon expects to internalize its shipping needs. “Amazon is reducing logistics costs massively through usage of their own network, but it is increasingly clear that the methodology is based on cutting normal overhead costs,” White said.
Service levels could suffer and there is a limit to how low costs can go. Amazon, for instance, is relying on contractors to deliver packages, which could generate future friction if contract workers try to seek benefits. “A really interesting question longer term is the sustainability of the contractor approach, which gets more stressed at a higher service level,” Vernon said.
There is a lot of change under way in the parcel-shipping landscape. One thing is certain, all incumbents have to adapt to more e-commerce volumes and shorter delivery windows.
RBC said one-day shipping should be available throughout the U.S. within a year.
Mahaney rates Amazon shares Outperform, the RBC equivalent of Buy, and has a $2,600 price target, up 46% from recent levels. Vernon rates both UPS and FedEx shares Outperform, the Bernstein equivalent of a Buy, with $129 and $195 price targets for UPS and FedEx, respectively.
Amazon rose 0.8% to $1,789.84 on Tuesday. UPS fell 1.1% to $117.33 and FedEx fell 2% to $155.37. The S&P 500 lost 0.7%.