For several years, questions have surfaced over when, or even whether, Amazon.com Inc. would begin to leverage its expanding delivery network to divert traffic from its largest vendor, UPS Inc., and move it in-house.
The issue has gained on-and-off traction since Amazon (NASDAQ: AMZN) and FedEx Corp. (NYSE: FDX), UPS’ chief rival, parted ways in 2019. It has since somewhat receded into the background. Now, however, it has resurfaced.
The catalyst is Amazon Logistics, the company’s delivery arm, expanding its operations amid a slowdown in e-commerce volumes that has left it with excess capacity. One way to fill it, the theory goes, is to begin insourcing volumes that have traditionally been handled by UPS.
Ravi Shanker, Morgan Stanley & Co.’s (NYSE: MS) transportation analyst, said in a Monday note that his firm estimates that Amazon may have excess fulfillment capacity equivalent to 3.3 billion boxes. Shanker acknowledged that Amazon’s spare fulfillment space doesn’t mean it possesses the delivery capabilities to support traffic that could fill its fulfillment centers. However, the gap between Amazon’s fulfillment and logistics capacity has narrowed in recent years, Shanker said.
As Amazon’s logistics network catches up with fulfillment needs, it is better positioned today to migrate “at least a large part of its volumes” from UPS, he said.
How large would be anybody’s guess. UPS has publicly said that Amazon accounts for about 11% of its annual revenue of $102 billion. That percentage will fall under 11% by the end of 2022 as UPS continues to cull lower-margin Amazon shipments from its system.
UPS reported that second quarter U.S. daily package volumes missed its forecast by about 222,000 packages. More than half of that came from shedding volumes from large shippers like Amazon.
UPS never comments on customers’ volume figures. However, in an eye-popping estimate, Shanker said that Amazon could account for between 35% and 40% of UPS’ domestic volumes. “Those are huge numbers if they are accurate,” said John Haber, chief strategy officer of Transportation Insight Holding Co., a consultancy.
Other factors that could trigger delivery diversion, according to Shanker, include Amazon’s launch in April of Buy With Prime, which allows selected merchants to offer Amazon’s ubiquitous Prime offering, including deliveries, through their online stores. Another is Amazon’s service begun in May to enable last-mile deliveries for brick-and-mortar retailers, he said. Both initiatives could cut into UPS’ delivery volumes with the e-tailing giant, Shanker said.
In his note, Shanker warned of multiple risks for UPS (NYSE: UPS) heading into 2023. Shanker also cut his 12-month price target on the stock to $100 a share. That would be nearly $63 a share below UPS’ current price.
Shanker’s reduction is based on macroeconomic pressures felt across the transportation industry, as well as a mean reversion in UPS’ earnings per share following two years of pandemic-related bottom-line pops.
Haber said that Amazon has the warehouse and fulfillment infrastructure in place to be able to bring UPS business in-house. The question becomes whether it has enough drivers to support the influx of volume. Haber said that Amazon will continue to shed UPS volumes in favor of its internal delivery network. The issue is how fast it will occur, he said.
Neither company responded to requests for comment. In the past, each has said that it is satisfied with the status quo.
Satish Jindel, founder and CEO of consultancy ShipMatrix Inc., said the relationship works well for both. Amazon relies heavily on UPS for long-haul, typically two-day deliveries of goods normally not stocked in Amazon’s warehouses, according to Jindel. Amazon does not offer pickups and uses the vast UPS network for critical end-to-end service, Jindel said.
At the same time, UPS is happy with the margins it generates from the Amazon business, he said.
Marc Wulfraat, head of consultancy MWPVL International, said UPS handles volumes that Amazon can’t because Amazon lacks the geographic sweep to do it itself. Until Amazon populates more remote areas with its own buildings, UPS will remain a key part of its delivery program, Wulfraat said.
As an example, Amazon Logistics does not serve Billings, Montana, so it ships there via UPS, Wulfraat said.
A logistics executive familiar with Amazon’s operations said the company is “glad to keep UPS as a partner, as it has traditionally needed all of the available capacity.” With parcel delivery demand projected to remain elevated — though nowhere near that of the past two years — Amazon can dramatically grow its delivery business and still use UPS, the executive said.
“There is no specific reason to insource UPS volumes unless it becomes cost-prohibitive,” the executive said.
The U.S. Postal Service is the provider that remains most at risk of package leakage, Jindel said. The Postal Service, once Amazon’s largest vendor, has seen its share of Amazon’s business shrink as Amazon insources more deliveries in areas of high population density where the Postal Service traditionally operated for Amazon.
The diversion picked up pace at the start of the year, Jindel said, when the Postal Service introduced pricing based on a shipment’s dimensions, a practice that often results in higher rates for parcels that fall outside the carrier’s stated dimensional requirements. Amazon, along with other Postal Service users, pulled business from the agency once that policy took effect.
Paul
Amazon does not handle packages over a certain weight size or weight . 70 lbs or more for example . Their in house system is not designed to handle those size and weight packages so ups will continue to handle Amazons packages
Troy Tomasko
can you say monopoly, funny how the government ignores this fact.
#boycott Amazon
J M
UPS has several issues in play here, First, based on our empirical street observations, Amazon is developing its own oversize network for B2C, and potentially B2B, the latter which has always been the ‘bread and butter’ for UPS ground. This is a separate Amazon delivery network of routes consisting of Class 4-5 city delivery vans. Second, we estimate Amazon’s UPS business is closer to 20%. Third, we believe UPS has a backhaul problem, meaning they have more deliveries going out than they have pickups coming in along the delivery routes. This is based on the types of ‘backhaul’ accounts they are chasing, to fill empty delivery cars, e.g., returns of spent Nestle expresso capsules to Nestle’s Recyling center, and Xfinity cable box / modem equipment from disconnected cable customers who are ‘cutting the cable’.
Robert Allen
Amazon has no expertise in linehaul operations and they are employing the FedEx Ground contractor model
This will leave them looking like FedEx Ground 2.0
They have a long way to go
Further they have major safety problems witness the Wall Street Journal article from two weeks ago.
Clint Sauder
I predict UPS will launch it’s own residential subscription service (with an online market place) if and when Amazon pulls there volume.
Jane
It’s been in the works.
Rob
The only way I see this is for ups to purchase eBay?
Clint
I predict UPS will launch it’s own residential subscription service (with an online market place) if and when Amazon pulls there volume.
Jennifer Pinion
Amazon has ruined my job as a rural mail carrier. I am no longer a mail carrier but a package carrier. I use my own vehicle, a Honda CRV. I have 70 miles and 600 boxes. I am driving from the passenger seat with 2 trays of mail in my lap
and pulling up to mailboxes but I have to keep getting out with big packages every couple of houses. I often get packages too long for my vehicle. I usually have to go back out in the evening with packages that would not fit in the morning with all the mail. Amazon does not deliver in my rural town anymore. I doubt USPS is charging Amazon enough for these huge and heavy packages. I have been a mail carrier for over 20 years. It used to be a desirable job. Now we can not keep subs. People are quitting left and right. I am praying that Amazon will start delivering their own crap here.
Dale Dribble
If the USPS loses Amazon packages they will need a lot less city and rural carriers. There is no letter volume to speak of anymore. Package delivery is the only thing that is going to keep the Postal Service afloat.
ka
Shanker is an idiot. its not profitable for amazon to pull all its volume from UPS. They wont have the density to deliver to every zip in the USA. The way they have done it is the smartest way — pull small packages in the high density areas and deliver those.
Those little Sprinters which constitute the majority or Amazon’s delivery are best suited for smaller packages. amazon ships it all, they know its a bad idea to load a sprinter with only 10 huge packages, they let UPS handle those.
Listen to Jindel and Wulfraat, they clearly have better thought processes for this relationship.
Reality
Split up Amazon. You can’t sell products and haul and make movies and whatever else. They control too much. Time for them to be split up. And workers rise up. Bezos at his height was making 200 million a day. He could have paid the workers who created that 200 mil more. I am no socialist but I am sick of what’s going on.