Amazon is UPS’s biggest customer and biggest competitive threat

United Parcel Service and its maroon delivery trucks dominated America’s streets for decades.

But Amazon, UPS’s biggest customer and competitor, could overtake the company as the nation’s biggest package carrier this year.

The rivalry has its roots in the holidays of 2013, when a collapse in the UPS shipping network led to millions of ordered gifts not arriving in time for Christmas. Amazon issued gift cards and refunds to appease angry customers — and quickly set up a home delivery network so it wouldn’t have to rely so heavily on UPS.

High-stakes competition is another stark example of how tech titans are disrupting industries and pushing old-economy stalwarts to reinvent themselves.

How the battle unfolds could have a major impact on how consumers shop, how quickly they receive their packages, and the price they pay to have the goods delivered. The fortunes of UPS’s 534,000 employees and union jobs that pay drivers nearly $40 an hour are also at stake.

It’s not just Amazon’s warehouses, planes and trucks that are making things happen. The e-commerce giant has also popularized the idea of ​​”free shipping” – an existential threat to UPS, which has long been paid handsomely for delivering goods to stores, offices and homes.

Amazon delivered more than 5 billion packages in the United States in 2021, while UPS delivered about 5.5 billion packages in the United States, according to company figures and industry estimates. Amazon’s numbers are far from accurate, as the company does not share all of its shipping data.

Amazon has said it could outperform UPS this year, and it’s not alone in making that prediction, even though UPS has a more extensive air and ground network than it’s built over a century.

Marc Wulfraat, president of logistics consultancy MWPVL International, believes Amazon will overtake UPS in U.S. package volume by 2022 — and five years from now will have a logistics network large enough to not have to depend on from UPS or the US Postal Service.

So far, UPS’s revenues and profits have continued to grow despite the competitive threat. Indeed, the number of parcels is increasing in the context of the broader rise of e-commerce. This push has kicked into high gear during the pandemic, with consumers ordering anything and everything to be shipped directly to their doorstep.

UPS has increased its own revenue by two-thirds since 2014, including a 15% increase last year. It expects its revenue to exceed $100 billion for the first time in its history this year. Its profit margins, while volatile, have remained generally high.

Unlike FedEx, which severed ties with Amazon a few years ago, UPS continues to treat Amazon as a customer, not just a competitor. Amazon and its affiliates accounted for about 11.7% of UPS revenue last year, more than any other retailer.

“We have a great relationship with Amazon. And we mutually agreed on how much volume we should take and how much volume they should hold that works best for both companies,” UPS Chief Executive Carol Tomé told investors earlier this week. year.

But Tomé also recognizes that the playing field is changing. Since taking the reins of the shipping giant, her rallying cry has been “better not bigger” – a marked shift in approach for a company that bills itself on its website as “the biggest company delivery of parcels in the world”.

As part of this strategy, UPS is increasingly targeting areas with minimal Amazon presence. They include logistics for small and medium-sized businesses without their own warehouses or shipping departments, business-to-business shipping, and the specialized world of delivery of pharmaceuticals and other temperature-sensitive medical shipments.

Amazon, for its part, says it’s expanding its shipping network “to bring even faster delivery to more customers.”

UPS started in Seattle in 1907

UPS has depended on the cash cow of package delivery for about a century.

The company started in Seattle as a courier service in 1907, which became United Parcel Service in 1919. By 1975, it served all addresses in the United States and began to expand internationally.

For decades, UPS and FedEx had a shipping duopoly across the country, with UPS becoming best known for its extensive ground network and FedEx for its overnight air shipments. The Postal Service is also a major player, but it is focused on slower mail delivery.

UPS’s vast global shipping network has long been a bulwark against its competitors, due to the cost of building the infrastructure needed to move so many packages around the world so quickly. DHL made a major breakthrough in the United States after being taken over by German mail monopoly Deutsche Post, promising that “yellow is the new brown” in an advertising campaign. By 2008, it had backed off, shifting air parcel deliveries to UPS and reducing its ground network.

Amazon proved a much tougher challenger as it is a giant online retailer. Through its own distribution network, it can ship products for the millions of businesses that sell them on its website.

The company started as an online bookseller in 1994, partnering with national bookstore chain Borders Group in 2001 before filing it for bankruptcy. After expanding its product offering, other retailers like Circuit City, Sears and Toys R Us filed for bankruptcy protection.

Today, Amazon’s revenue is nearly five times that of UPS and its market capitalization nearly 10 times greater.

Amazon’s retail strategy has succeeded in part by promoting two-day and next-day delivery, as well as free shipping.

On its website, Amazon offers e-commerce businesses to raise prices to cover the cost of free shipping. For consumers, shipping costs become more opaque, integrated into the total price of the product.

“Free shipping doesn’t exist,” said Bill Seward, president of UPS global customer solutions. “Even if you don’t want to charge for it, it’s expensive.”

Still, Amazon doesn’t view shipping as a profit center and is likely willing to accept lower shipping profit margins than UPS.

Amazon founder Jeff Bezos “has long said, ‘Your margin is my opportunity,'” said Satish Jindel, president of shipping technology company ShipMatrix. If Amazon is using a service that makes better margins than Amazon, Bezos “will want to bring it in-house,” Jindal said.

John Haber, chief strategy officer of Transportation Insight, believes that Amazon subsidizes shipping costs with revenue from its massive cloud computing business.

“Free shipping doesn’t exist. Even if you don’t want to charge for it, it’s expensive,” said Bill Seward, president of UPS Global Customer Solutions.

Global shipping network difficult to replicate

It’s still unclear how the battle between Amazon and UPS foes will play out.

UPS remains formidable, with more than 1,800 installations worldwide and a fleet of more than 280 aircraft and hundreds more that it leases or charters. It sees its hard-to-replicate global maritime network as a competitive advantage.

“We expect there will be new competitors in the future,” UPS’s Seward said. “Bring it on. We’re ready to go.

UPS is also diversifying and specializing in lucrative areas like healthcare, making it less dependent on its traditional business.

UPS can use its network of cold and freezer warehouses and shipping technology to transport pharmaceutical and biological products that need to be kept at specific temperatures. By playing a key role in shipping COVID-19 vaccines around the world, UPS has gained even more experience and significantly increased its freezing capacity.

And he launched a drone delivery airline, using drones to deliver CVS prescriptions, urgent deliveries to remote areas and medical samples to a hospital campus.

While Amazon has a network of Amazon Flex on-demand delivery contractors and delivery drivers, UPS acquired on-demand delivery technology platform Roadie last year. Roadie has more than 200,000 outsourced drivers, who may prove cheaper than unionized UPS drivers. Amazon is facing the prospect of greater labor organization after workers at a New York warehouse voted to form a union earlier this month.

One thing is not disputed: the world of maritime transport is changing considerably.

“I don’t really see FedEx and UPS failing and disappearing,” said Managing Director Sriram Sridhar. Nonetheless, he predicted, they “will have to find ways to reinvent themselves over the next decade”.

About Marilyn Perkins

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