FedEx Ends US Ground-Delivery Contract with Amazon

On Wednesday, FedEx (FDX) confirmed a Bloomberg report. The company terminated its ground-delivery agreement with Amazon (AMZN). The agreement was for Amazon’s small packages.

FedEx ends Amazon’s contract

According to the report, the company won’t renew the contract. The contract will expire at the end of August. However, the decision won’t impact FedEx’s ground-delivery deal for Amazon’s international parcels.

FedEx Ends US Ground-Delivery Contract with Amazon

The move reflects the company’s strategy to reduce its ties with Amazon. Amazon could be a competitive threat for FedEx. In June, the company didn’t extend the air-shipping Express agreement for Amazon’s domestic packages.

In a statement given to Bloomberg, FedEx said, “This change is consistent with our strategy to focus on the broader e-commerce market.” The company reiterated its stance about focusing on the broader e-commerce delivery market behind terminating Amazon’s deal.

According to a statement on June 7, FedEx said, “There is significant demand and opportunity for growth in e-commerce which is expected to grow from 50 million to 100 million packages a day in the U.S. by 2026. FedEx has already built out the network and capacity to serve thousands of retailers in the e-commerce space. We are excited about the future of e-commerce and our role as a leader in it.”

To justify the decision, FedEx said that Amazon isn’t its largest customer. Notably, the company represents less than 1.3% of FedEx’s total annual revenues. As a result, losing business from Amazon won’t have a significant impact on the company’s financials.

Why is FedEx cutting ties with Amazon?

Amazon has been FedEx’s strategic customer for a long time. However, Amazon’s aggressive approach toward enhancing logistics infrastructure turned into a potential competitive threat for FedEx.

Within a few years of Amazon starting its own logistics services, it added a considerable number of air-cargo fleets and ground-delivery vehicles. Currently, Amazon owns 70 cargo planes and more than 10,000 delivery vehicles. Also, the company wants to gain access to rail and ocean routes.

Industry experts think that the company wants to foray into a third-party logistics service company. Considering Amazon’s enormous financial strength, it might build a vast logistics infrastructure quickly, which could edge out players like FedEx.

Therefore, cutting ties with Amazon could help FedEx focus on the broader e-commerce logistics market. The company will extend business relations with Amazon’s main competitors like Walmart (WMT) and Target (TGT). The two retail giants want to transform their businesses with more e-commerce instead of just being brick-and-mortar retailers.

FedEx has taken several initiatives to expand its foothold across the e-commerce delivery market. The company will start a seven-day ground delivery service year-round in January 2020. Currently, the company only provides the service to retailers during the busy holiday season. The move reflects FedEx’s counter-strategy against Amazon, which already provides delivery services seven days a week.

The decision will likely have a negative impact on FedEx in the near term. However, the decision will likely open a new scope for the company to tap a larger market share in the e-commerce logistics space.

Amazon reacted to FedEx’s move

In an email reply to Bloomberg, Amazon said, “We are constantly innovating to improve the carrier experience and sometimes that means reevaluating our carrier relationships.” The company also said, “FedEx has been a great partner over the years and we appreciate all their work delivering packages to our customers.”

We don’t think that FedEx’s latest move will impact Amazon much in the near term. The company has several options to fulfill its logistics requirement. Lately, Amazon relied on United Parcel Service (UPS). Amazon reached better rate agreements with UPS. Industry experts think that Amazon might contribute nearly 10% to UPS’s total revenues in fiscal 2019. Amazon could also use UPS and regional logistic carriers to handle domestic ground-delivery.

Stock performance

FedEx stock has been on a downward trajectory for the last year due to its back-to-back lackluster results. Concerns about the global trade slowdown and uncertainty about US-China trade negotiations hurt FedEx’s business operations.

Notably, the company is stuck in the middle of US-China trade tensions. In early June, China started a probe on FedEx for the wrongful delivery of Huawei Technologies’ packages. The Chinese government’s decision came after the US banned companies from doing business with Huawei. FedEx generates 6% of its revenues from its operations in China. During the company’s fourth-quarter results in June, FedEx stated that the ongoing US-China trade dispute and contract termination with Amazon would hurt its performance in fiscal 2020.

In the last 12 months, FedEx has lost more than 35% of its value. At the closing price of $160.66 on Wednesday, the stock is trading near its 52-week low of $150.68 reached on June 3. The stock is also down 38% from its 52-week high of $259.25 attained on September 17, 2018.

The one-year fall in the stock price is higher than the iShares Transportation Average ETF’s (IYT) decline during the same period. IYT has lost 9.6% over the last year. IYT invests in Down Jones US transportation stocks.