Consultant Insight: A ‘mutually beneficial relationship’ benefits both UPS and Amazon

UPS and Amazon ended 2019 on a high note as both reported positive earnings for the final quarter. An eye-opening detail in UPS’ earnings announcement this week included UPS referring to Amazon as its largest customer, representing 11.6% of UPS’ total revenue. Consequently, it was no surprise that Amazon was the main driver of UPS’ strong earnings report. Overall revenue was up 3.6% and all divisions reported positive operating profit.

Domestic volumes were impressive, up across all products by 9% with Ground volumes alone up by 6.3%, but it was the Air products that really soared: Next Day volumes were up 25.9% while Deferred volumes increased 13.3%. However, average revenue per piece slipped 1.0%, 12.6% and 5.1% respectively. According to UPS, lower weight and customer mix contributed to declines in revenue per piece across all products.

Meanwhile Amazon reported net sales of US$87.4 billion, up 21% for the fourth quarter. Amazon Web Services (AWS) led the company once more, with net sales increasing by 19.2%. North American net sales slipped from the same quarter in 2018 by 15.6%, and international sales improved, with lower losses as compared with 2018.

Despite the slip in its biggest division, Amazon highlighted a strong holiday season in a previous press release. Amazon customers worldwide ordered more than 25 million home items on Black Friday and Cyber Monday combined; for the year, Amazon’s dedicated last-mile delivery network delivered more than 3.5 billion customer packages globally.

The North American division slip is due to higher operating expenses, up by 23.6%, mostly related to Amazon’s investments in its quest for free next-day delivery for Prime members.

Indeed, UPS is focusing on “speed and ease” as its investments include expanding weekend deliveries, extending package pickup hours for retailers who ship online orders from their stores and in its network. To meet its goals, UPS recently announced plans to build a new “super hub” in Harrisburg, Pa., along with three new Pennsylvania sortation and distribution facilities in Carlisle, Lehigh Valley and Philadelphia.

Next-Day Air and 2-Day Air are “resonating with customers,” said UPS on its earnings call. “Air and Ground go hand and hand” and particularly, one would imagine, with Amazon as such a strong customer. The UPS and Amazon bond, which has grown in recent months due to FedEx dropping Amazon as an Express and Ground customer last year, is certainly interesting. UPS CEO David Abney described the relationship as “mutually beneficial” and said the companies would continue to work together while it remains thus.

The question of how long that may be is on many analysts’ minds as Amazon continues to invest in its own air and ground networks. Phase 1 of Amazon’s air hub at Cincinnati/Northern Kentucky Airport (CVG) is expected to be completed by 2021.

“This hub [at CVG] is going to let us get packages to customers faster,” said Amazon founder and CEO Jeff Bezos. “That’s a big deal. We’re going to move Prime from two-day to one-day, and this hub is a big part of that.” As we await the completion of the hub’s first phase, it’s unclear whether the startup will lead to Amazon packages diverted from UPS

In addition, as of December 2019, there were 800 Amazon Delivery Service Partners in the last-mile network, employing 75,000 drivers in the United States. As this network grows, will packages be diverted from UPS or will UPS continue to be a valuable partner?

To be fair, UPS has other customers experimenting with their own last-mile delivery networks, including Target and Macy’s, but the Amazon relationship offers its own risks, as history has shown, for example XPO Logistics and New England Motor Freight.

Amazon’s costs remain high and will continue to be so for the foreseeable future, with fulfillment increasing 21% and shipping increasing 42.5% for the final quarter of 2019. Meanwhile, net sales from third-party seller services continue to grow, up 30.4% to almost $17.5 billion, which is more than the annual revenue of some global 3PLs.

Until costs improve and its network matures, bonding with UPS is a good move for Amazon, as long as UPS has the available capacity in its network. In a smart and necessary move for the express company, UPS has expanded its network, invested in additional air capacity and is also focusing on acquiring other customers. Time will tell whether UPS’ efforts allow it to build up its non-Amazon operations and push the e-commerce giant’s share of total revenues to a safer percentage of less than 10%.

What about the anti-Amazon FedEx? It believes it will achieve success without Amazon as a customer.

“I have this completely iconoclastic — it’s not a belief, it’s a certainty — they [traditional retailers] are going to disrupt Amazon,” said FedEx founder and CEO Fred Smith in a recent Bloomberg interview.  “We came to this fork in the road that we had to ally with one side or the other. They want to become more adept in the e-commerce space, and we intend to allow them to do that.”

Within the same article, Smith said “I will say to you unequivocally: In the next two or three years, I’m firmly of the belief we will pass UPS in terms of size and be the largest by-revenue transportation and logistics” company.

So, it seems battle lines have been drawn between these three last-mile delivery providers. Which strategy prevails has yet to be determined. In the end, the customer will benefit as all three invest in speed and additional options for shippers.