The Duopoly of UPS and Fedex has been the Catalyst for Amazon Entering the Parcel Sector
For the last 10 years, UPS and Fedex have been able to increase prices in the US without any competitive challenge. The average increase has been 5.3% per year and the increases have mirrored each other year after year. During this same period, inflation has been running at 1.8%. This means during this period the price increases have been 75% versus a CPI increase of 20%.
This means that Amazon had to absorb 3.5% net profit margin. In the world of e-commerce, passing on delivery cost increases to the consumer is a non-starter. They operate on razor thin margins, and as their business grew dramatically, other issues such as peak capacity also arose. These could have been dealt with by the carriers, if not for the alarm bells ringing in Seattle as their distribution cost grew at a faster pace than their revenue growth.
Much has been written in the press on the impact this will have on the UPS and Fedex financial results. Some things to consider:
- UPS and Fedex don’t like residential deliveries. Especially those that are highly discounted and cause additional capex to build out capacity. They don’t make a lot of money on these, but they do fill out a sizable part of the network capacity.
- Amazon will start by cherry picking the densest areas. This will further put pressure on the carrier’s operational results. This has already started. The 20 planes that they leased run at 100% utilization, as any additional capacity requirement they pass on to UPS or Fedex.
- Filling in the capacity that Amazon vacated, will be more problematic than before, if in fact Amazon starts offering other vendors their delivery service. (They will)
- This will not happen overnight. But give it 5 years, and I believe there will be a material change in the US parcel sector.
- Five years ago, we had no (or little) Uber, shared economy, AI, robotics, driverless cars, and smart phone apps. All of these will become part of the new landscape of the US parcel sector, which I believe Amazon will be a significant player.
Thanks for reading and I look forward to your comments…..Juan Sotolongo