Typically the news of an Internet giant like Amazon becoming a potential competitor sends stocks tumbling. And so it probably wouldn't have been surprising to anyone had UPS and FedEx taken a dive on a Bloomberg news report Tuesday that Amazon is setting its sights on the shipping industry.
Instead, at least for one day, shareholders of both companies took it in stride:
They should be a little more concerned. And the companies should consider themselves on notice.
Amazon, having already conquered brick-and-mortar retailers, is now moving forward with a plan to take on the responsibility of transporting goods sold on its site from factories in places such as China to consumers in places like New York, Bloomberg News's Spencer Soper reported. The move would essentially take companies such as FedEx and UPS out of the equation.
A full-blown Amazon transportation network could cost FedEx and UPS a big chunk of the hundreds of millions in revenue they book from the e-commerce company each year. That's not great news. And while giants such as Wal-Mart may not be keen to sign up a key competitor as their delivery company, loads of smaller vendors that have already essentially made Amazon their e-commerce platform would probably be agnostic about making it their shipping service of choice, too.
Adding to the fun, Gannett -- the newspaper publisher -- is also reportedly thinking about trying its hand at parcel delivery. It seems like an odd match, but Gannett has a massive national and local distribution network for its collection of publications and could offer lower delivery costs than FedEx and UPS.
So why the muted reaction? Let's focus on Amazon. For one thing, the e-commerce giant's shipping dreams shouldn't come as a surprise. It's been exploring alternate ways of getting packages to consumers for a while now. While the extent and aggressiveness of Amazon's shipping ambitions was somewhat of a bombshell, many of the fears may be already priced into UPS and FedEx shares.
It's also going to take some time for Amazon to build up the kind of scale necessary for a national, let alone global, operation. In the beginning, Amazon's network may be more of a supplement to the companies' services, rather than a replacement option, says Kevin Sterling of BB&T Corp. So FedEx and UPS have some time to figure out a next move before Amazon starts moving in with a fury.
They should start strategizing sooner rather than later. It's hard to imagine Amazon setting up a massive hub-and-spoke system like FedEx and UPS have and hiring the hundreds of thousands of people you would need to transport packages all over the world. But it was also at one point hard to imagine Amazon displacing stores as the shopping destination of choice for many consumers. And equally hard to think Amazon would uproot companies like Hewlett-Packard and Microsoft in the cloud-services industry.
UPS and FedEx have been investing in technology to improve their delivery process and introduced new pricing systems to encourage customers to use smaller packages, creating more space on the trucks. The efforts will make the companies more efficient at handling the surge of e-commerce deliveries that have inundated their networks. But eventually, FedEx and UPS will have to think about the next step. Figuring out how to compete with Amazon on things like cheap same-day delivery and automated paperwork or how to replicate the local scale of a company like Gannett may be a good start.
FedEx and UPS may not have much to worry about now, but they're going to have to think fast because Amazon is usually 10 steps ahead.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Amazon is the biggest customer for both UPS and FedEx, according to supply-chain data compiled by Bloomberg.
Many already use Amazon's Fulfillment service (which provides storage and shipping) and this would be a logical extension of that.
Amazon has also been giving more and more of its business to the U.S. Postal Service and regional shippers, which can transport packages faster, cheaper and in the case of the Postal Service, on Sundays. Satish Jindel, a logistics consultant, estimated in December that about 70 percent of Amazon's business during the peak holiday period would go through the Postal Service. Arguably, the Postal Service be harder hit by this whole operation.
The Seattle Times reported in December that the company was considering leasing 20 Boeing jets to use for deliveries. That's squat compared to the massive fleets of FedEx and UPS.
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