- Industry experts are projecting another year of strong retail sales this holiday season.
- Courier and delivery companies are poised to benefit from higher online retail sales.
- FedEx is preparing for the holidays, but its recent split from Amazon could make things dicey.
Expectations of strong retail holiday sales
Industry experts are projecting another year of strong retail sales this holiday season. According to NRF (National Retail Federation) forecasts, holiday retail sales could increase in the range of 3.8%–4.2% to $727.9 billion–$730.7 billion. This YoY (year-over-year) retail sales growth projection is also higher than the average growth rate of the last five years’ worth of holiday season sales at 3.7%.
Of the total, online or nonstore retail sales could contribute between $162.6 billion and $166.9 billion. The online retail sales projection reflects impressive YoY growth of 11%–14%. Per NRF estimates, the contribution of online sales to overall holiday retail sales will increase 200 basis points to 22.6%. In 2018, retailers registered total holiday sales of $710.2 billion, of which online sales contributed $146.5 billion.
What’s in store for FedEx this holiday season?
Courier and delivery companies are poised to benefit from higher online retail sales. However, things could be surprising for FedEx (FDX) as it enters its first holiday season since cutting ties with Amazon (AMZN).
Over the last six months, FedEx has ended two domestic delivery services agreements with Amazon. In June, the company didn’t renew the express delivery contract for the e-commerce giant’s domestic packages. Later in August, FedEx terminated the ground-delivery agreement for Amazon’s small parcels in the US.
The delivery giant doesn’t think cutting ties with Amazon will have a significant impact on its financials. According to FedEx, Amazon contributed less than 1.3% to its fiscal 2019 revenue. Despite splitting with the e-commerce giant, FedEx expected to move a record 33 million parcels on Cyber Monday. It also expects to deliver record packages this holiday season.
However, industry experts have a slightly different view. Citing projections from SJ Consulting, Commercial Appeal revealed that Amazon’s exclusion would negatively impact FedEx’s volumes by approximately 6% this holiday season.
Per SJ Consulting estimates, the company is likely to carry 510 million packages during the 2019 holiday season. However, if it had continued its business with Amazon, the number of parcels would have been approximately 540 million.
The Commercial Appeal article also states that FedEx’s volume growth will lag behind United Parcel Service’s (UPS) this year. Commercial Appeal revealed that SJ Consulting expects FedEx’s volumes to grow 3% and UPS’s to grow 5%. UPS is likely to carry 840 million packages this holiday season compared to FedEx’s 510 million.
Why did FedEx split with Amazon?
Once a strategic customer, Amazon has turned into a potential competitive threat to logistics companies such as FedEx and UPS. In the last few years, Amazon has been aggressively investing in enhancing its own logistics infrastructure.
In the last three to four years, the e-commerce giant has added a significant number of ground-delivery vehicles and air-cargo fleets. Currently, it has over 10,000 delivery vehicles and 70 cargo planes. It’s also trying to gain access to rail and ocean routes.
FedEx thinks Amazon might venture into becoming a third-party logistics service company in the long run. We believe Amazon could build a vast logistics infrastructure quickly, given its enormous financial strength. Such a development could edge out players such as FedEx and UPS.
Therefore, by splitting with Amazon, FedEx is trying to free up its resources to focus on the broader e-commerce market. FedEx hopes the strategy will help it extend its business relations with Amazon’s main competitors, including Walmart (WMT) and Target (TGT). These retailers are undergoing significant business transformations and focusing on more e-commerce instead of just being brick-and-mortar retailers.
We believe FedEx’s decision to cut ties with Amazon might negatively affect its near-term financials. However, it could also open a new scope for the logistics giant to tap a larger market share in the e-commerce delivery space.
FedEx prepares for the holiday season
Fast and timely delivery is key to online retail success. Therefore, e-retailers always prefer those logistics companies that can provide quality delivery services. Hence, FedEx has enhanced its logistics services to tap a larger market share in the e-commerce delivery space this holiday season. In September, FedEx announced that it would hire 55,000 seasonal workers this holiday season to handle the expected increase in packages.
Furthermore, the company recently started its seven-day ground delivery service as part of its strategy to enhance e-commerce capabilities. It’s also announced that it will forego its residential peak surcharge this holiday season. The move is likely aimed at helping it convince more small and medium e-retailers to use its delivery services.
Last year’s Extra Hours service is likely to continue driving package volumes for FedEx this holiday season. Using Extra Hours, e-retailers can make local deliveries the next day. Additionally, the service allows online sellers to deliver their products anywhere in the US within two days.
In the last few years, FedEx has been investing heavily in expanding its e-commerce delivery services. The company has expanded its OnSite service to 14,000 locations across the US. FedEx OnSite offers pickup and drop-off services to online retailers as well as buyers.
FedEx is also investing in autonomous delivery solutions for short distances. Automating last-mile delivery could drastically reduce its operating expenses and help render better services to customers.
In connection with this effort, FedEx is experimenting with an autonomous delivery robot, the FedEx SameDay Bot. Big retailers, including Walmart, Target, Pizza Hut, and Walgreens (WBA), have joined hands with FedEx on the SameDay Bot program.