Here's why FedEx ditched Amazon and is throwing itself into powering Walmart's e-commerce aspirations
Spencer Platt/Getty Images
- FedEx ended its air and ground delivery contracts with Amazon this summer.
- Amazon claims 49% of the e-commerce market. Brie Carere, FedEx's chief marketing and communications officer, told Business Insider that the delivery giant will focus on the other 51% of e-commerce.
- FedEx has a particularly deep relationship with America's largest retailer - Walmart. The big box giant has been investing heavily into e-commerce.
- It's strategic for FedEx to move away from Amazon to Walmart, but analysts say the massive retailer's e-commerce arm could potentially have the same challenges Amazon did.
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In the background, FedEx has been powering the e-commerce aspirations of Amazon's biggest retail competitor - Walmart. Data from Rakuten Intelligence indicates that FedEx delivered some 55% of all of Walmart's packages in Q2 2019.
Rakuten Intelligence; Andy Kiersz/Business Insider
When FedEx dumped Amazon, which accounted for less than 1.3% of FedEx's 2018 revenue, the shipping giant underlined the opportunities available for online retailers outside of Amazon.
The Seattle-based retailer accounts for 49% of e-commerce. Outside of Amazon, the e-commerce industry in the US hosts No. 2 player eBay, big-box retailers like Walmart and Target, emerging platforms like Shopify and Wish, and others. That's where FedEx is focusing.
"E-commerce is driving the parcel volume in the US domestic market at a rate that we've never seen before, quite frankly," Brie Carere, FedEx's chief marketing and communications officer, told Business Insider. "We see a world in 2026 where the market will be 100 million pieces a day, driven by e-commerce. And it's really important to remember that that's driven by e-commerce as a broad market, not by any single player."
The non-Amazon e-commerce field is fragmented, but provides a massive growth opportunity - 12% CAGR from now to 2026, Carere said. Walmart, for its part, has also focused its e-commerce strategy on attracting a multitude of brands, as seen by its acquisitions of companies like Moosejaw, Bonobos, and Jet.com.
Within e-commerce, FedEx and Walmart have a particularly close relationship. Along with moving the majority of Walmart's online shipments, FedEx is rolling out Office locations in 500 Walmart stores nationwide where customers can print, ship, and pick up deliveries - a move that analysts said gives an edge to Walmart against Amazon.
"We've obviously got relationships with retailers of all sizes and, and that certainly includes Walmart," Carere said. "Our relationship with Walmart is very strong."
The threat of low margins are complicating FedEx's e-commerce push
E-commerce is far from the perfect fit for FedEx's network; it's more equipped for business-to-business (B2B) air freight, often international, rather than moving a deluge of cheap packages.
And so far, that avalanche of "free shipping" packages hasn't been kind to FedEx's margins, as a Business Insider analysis of the company's financial statement showed. The volume of FedEx's US non-priority shipments jumped by 24% in Q2 2019, while revenue per package at the air cargo segment dipped by 7%. (UPS, FedEx's major competitor, has also struggled with declining margins in recent years.)
The discrepancy between profits and volumes is one leading reason why FedEx ended its relationship with Amazon, analysts say. "Amazon packages are very small, and they don't take up a whole lot of space, but at the same time there's not a whole lot of money to be made by moving them," Cathy Roberson, an analyst with Logistics Trends & Insights LLC, previously told Business Insider.
Walmart, on the other hand, has a distinct edge in lowering the cost of doing last-mile e-commerce deliveries: its network of more than 5,000 retail locations nationwide. Big box retailers' physical assets are a key part of FedEx Extra Hours - a new service offering in which FedEx picks up a customer's order from a store, then delivers it to the customer's home.
Online orders through Extra Hours can be fulfilled the next day, even if they are placed as late as 2 a.m. "Retailers love it," Kevin Sterling, managing director of Seaport Global Securities, previously told Business Insider. "(T)hey were able to sell it as, 'Hey, look, we're better than Amazon Prime.'"
And by using retailers' existing network of brick-and-mortar stores, Extra Hours can save money by eschewing national line-haul trucking and fulfillment centers. That makes executing online orders cheaper for the delivery giant. "E-commerce especially with the large retailers is going to drive shorter distances," Carere said. "I think what the market has not yet understood is lower price doesn't mean lower margin."
Rakuten Intelligence; Andy Kiersz/Business Insider
Amazon also building out its own e-commerce network of planes, trucks, delivery vans, trains, and ocean freighters that now delivers the majority of Amazon's packages. FedEx has highlighted Amazon's logistics offerings as a competitor.
"I think FedEx made a very enlightened and foresighted decision not to get into bed with Amazon," Nicholas Farhi, a partner at OC&C Strategy, said. "It is entirely obvious that Amazon is trying to build out its own network in all parts of the US and replace UPS and USPS."
But hitching one's wagon to Walmart could get iffy
Walmart isn't the perfect partner. Some wonder if Walmart could, after all, pull an Amazon and build its own e-commerce delivery service that's suited to the sector of online shopping they're growing fastest in: online grocery.
Walmart's e-commerce sector generated $4.3 billion in sales in Q2 2019, up from $3.2 billion in Q2 2018, according to its most recent quarterly report. This comprised 1.4% of all sales this year, compared to 1.0% last year. The boost in e-commerce was "driven" by traditional ship-to-home, as well as online grocery.
The average online grocery order at Walmart is a whopping $125. Those orders are fulfilled by Walmart personal shoppers and delivered to consumers' cars, or delivered by third-parties like Skipcart or AxleHire.
Walmart is actively in-sourcing its grocery logistics network, according to Morgan Stanley analyst Ravi Shankar. The retailer already has a massive trucking fleet of more than 8,600 drivers.
That complicates FedEx's partnership with Walmart, Shankar said.
"The question is, how much opportunity is there to grow with Walmart in the last mile if Walmart is going to be doing a lot more of ship-from-store and click-to-collect in the future?" Shankar told Business Insider. "We don't think the strategy of 'Hey, we are going to grow with everybody else' is necessarily sustainable because everybody else is also looking for other options for e-commerce delivery."
Still, FedEx doesn't have much choice than to throw itself into e-commerce - and, happily for the delivery giant, few retailers have the cash flow of Walmart or Amazon to build its own logistics network.
"You can either sit there with your kind of preexisting B2B business that has become a legacy business and watch big chunks of it slowly decline," Farhi told Business Insider. "Or you can seek growth. They clearly decided to seek growth and the big growth area in anything that looks like what FedEx does is e-commerce."