Why FedEx ditched Amazon and is all for Walmart e-commerce

  • FedEx terminated its air and ground delivery contracts with Amazon this summer.
  • Amazon claims 49% of the e-commerce market. Brie Carere, FedEx's head of marketing and communications, 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 cashier has invested heavily in e-commerce.
  • It is strategic for FedEx to move from Amazon to Walmart, but analysts say the huge retailer's e-commerce could potentially have the same challenges Amazon did.
  • Visit the Business Insiders homepage for more stories.

FedEx made waves this summer when it terminated its US air and ground delivery contracts with Amazon.

In the background, FedEx has driven the e-commerce ambitions of Amazon's largest retail competitor ̵[ads1]1; Walmart. Data from Rakuten Intelligence indicates that FedEx delivered around 55% of all Walmart's packages in Q2 2019.

FedEx moves nearly 60% of Walmart's e-commerce packages over the last mile.
Rakuten Intelligence; Andy Kiersz / Business Insider

When FedEx dumped Amazon, which accounted for less than 1.3% of FedEx & # 39; s revenue in 2018, the shipping giant emphasized the opportunities available to online retailers outside Amazon.

The Seattle-based retailer accounts for 49% of e-commerce. Outside of Amazon, the e-commerce industry in the US is No. 2 eBay, big box retailers like Walmart and Target, new platforms like Shopify and Wish, and others. That's where FedEx focuses.

"E-commerce drives the volume of the package in the US domestic market at a rate we have never seen before, quite frankly," Brie Carere, FedEx & head of marketing and communications, 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 is very important to remember that it is driven by e-commerce as a broad market, not by a single player."

Read more: FedEx will no longer fly your Amazon packages – and now the pressure on the company is increasing as it collects its own air freight network

The non-Amazon e-commerce field is fragmented, but provides a massive growth opportunity – 12% CAGR from now until 2026, Carere said. Walmart, for its part, has also focused its e-commerce strategy on attracting a variety of brands, seen from acquisitions by companies such as Moosejaw, Bonobos and

In e-commerce, FedEx and Walmart have a particularly close relationship. Along with moving most of Walmart's online broadcasts, FedEx rolls out Office locations in 500 Walmart stores across the country where customers can print, send and retrieve deliveries – a move that analysts said provides a benefit for Walmart against Amazon.

"We obviously have relationships with dealers of all sizes, and that certainly includes Walmart," Carere said. "Our relationship with Walmart is very strong."

The threat of low margins complicates FedEx & # 39; e-commerce pressure

E-commerce is far from the perfect fit for FedEx networks; It is more equipped for air freight from business to business (often international), rather than moving a plethora of cheap packages.

And so far, the avalanche of "free shipping" packages has not been good against FedEx's margins, as a Business Insider analysis of the company's accounts showed. The volume of FedEx US non-priority shipments jumped by 24% in Q2 2019, while sales per package in the air segment dipped by 7%. (UPS, FedEx's largest competitor, has also struggled with falling margins in recent years.)

See also: Apply here to attend IGNITION: Transportation, an event focused on the future of transportation, in San Francisco 22. October.

The discrepancy between profit and volume is one of the main reasons why FedEx ended its relationship with Amazon, analysts said. "Amazon packages are very small and they don't take up much space, but at the same time, there's not a lot of money to be made by moving them," Cathy Roberson, an analyst at Logistics Trends & Insights. LLC, previously told Business Insider.

FedEx is moving more and more e-commerce packages, but that service may hit margins.
Daniel Betts / Flickr

Walmart, on the other hand, has a distinct advantage in lowering the cost of delivering e-commerce deliveries to the last mile: the network of more than 5,000 retail outlets across the country. Big box retailers' physical assets are an important part of FedEx Extra Hours – a new service offering where FedEx retrieves a customer's order from a store and then delivers it to the customer's home.

Online orders through Extra Hours can be fulfilled the following day, even if placed as late as 2am. "Traders love it," Kevin Sterling, CEO of Seaport Global Securities, previously told Business Insider. "(T) hey was able to sell it as & # 39; Hey, look, we're better than Amazon Prime. & # 39;"

And by using the dealers' existing network of brick-and-mortar stores, Extra Hours can save money by emptying national central traffic and refill centers. It makes execution of online orders cheaper for the delivery giant. "E-commerce especially with the big retailers is going to run shorter distances," Carere said. "I think what the market has not yet understood is lower price, does not mean lower margin."

Amazon is rapidly cashing out its delivery system. This eliminates a major customer for UPS and FedEx, and also adds a new competitor in the industry.
Rakuten Intelligence; Andy Kiersz / Business Insider

Amazon is also expanding its own e-commerce network of aircraft, trucks, vans, trains and sea freight which now delivers most of Amazon's packages. FedEx has highlighted Amazon's logistics offering as a competitor.

Read more: Amazon took over the $ 176 billion market for cloud computing. Now it uses the same logbook in logistics.

"I think FedEx made a very informed and forward-looking decision not to go to bed with Amazon," said Nicholas Farhi, an OC&C Strategy partner. "It is quite obvious that Amazon is trying to expand its own network in all parts of the United States and replace UPS and USPS."

But pulling one's car to Walmart can be bad

Walmart is not the perfect partner. Some are wondering if Walmart, after all, could pull off an Amazon and build their own e-commerce delivery service that fits the online shopping sector they're growing fastest in: online groceries.

Walmart's e-commerce sector generated $ 4.3 billion in revenue in Q2 2019, up from $ 3.2 billion in Q2 2018, according to the latest quarterly report. This represented 1.4% of all sales this year, compared with 1.0% last year. The increase in e-commerce was "driven" by traditional ship-to-home as well as online groceries.

Read more: Walmart and Kroger reconsider stores as the electronic grocery store intensifies

The average online grocery order at Walmart is $ 125. These orders are fulfilled by Walmart personal buyers and delivered to consumer cars, or delivered by third parties such as Skipcart or AxleHire.

Walmart is actively purchasing its grocery logistics network, according to Morgan Stanley analyst Ravi Shankar. The dealer already has a massive truck fleet of more than 8,600 drivers.

Walmart's online store has driven the growth of e-commerce.

This complicates FedEx & # 39; s partnership with Walmart, Shankar said.

"The question is, how much chance is there to grow with Walmart over the last mile if Walmart is going to do much more from ships from store and click to collect in the future?" Shankar told Business Insider. "We don't think the strategy for & # 39; Hey, we're going to grow with everyone else & # 39; necessarily being sustainable because everyone else is also looking for other e-commerce delivery options."

Still, FedEx has not much choice but to embark on e-commerce – and, fortunately for the delivery giant, few retailers have the cash flow to Walmart or Amazon to build their own logistics network.

"You can either sit there with your kind of existing existing B2B business that has become a legacy business and see big chunks of the slow decline," Farhi told Business Insider. "Or you can seek growth. They clearly decided to seek growth and the big growth area in everything that looks like what FedEx is doing is e-commerce."

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