How Amazon Will Eat FedEx and UPS

We all dutifully pay our membership fee for the perks of free shipping, free movies, and dozens of other lesser-known perks.

For many of us, Amazon has won over our hearts and minds because it has almost anything we could ever want all in one place. On the surface, this endless digital shelf seems like Amazon’s greatest strength and what keeps us coming back. However, what we’ve all really fallen in love with is Amazon’s supply chain and logistics network.

What we’ve all really fallen in love with is Amazon’s supply chain and logistics network.

Behind the Scenes

Behind all the searches, one-click add-to-cart, subscribe and save, and “buy now” conveniences we’ve become accustomed to, it’s Amazon’s shrewd insight and capital-intensive supply chain that has given it the platform to dominate ecommerce for years to come.

To build this dominant network, Amazon started with warehouses, of which it now has hundreds of facilities across the world. Amazon then moved to the actual transportation network by building out a fleet of trucks, trailers, vans, and airplanes, to control the movement of goods into and out of its warehouses.

As a result, Amazon itself now delivers over 70% of all its packages and is on pace to become the largest package delivery carrier in the US by early 2022.

Amazon itself now delivers over 70% of all its packages and is on pace to become the largest package delivery carrier in the US by early 2022.

But it wasn’t always this way. How did Amazon come to dominate the package delivery industry seemingly overnight and disrupt industry stalwarts like UPS and FedEx? The answer, order data and the US Postal Service.

Big Orders, Big Data

First let’s talk about the order data. For years Amazon has dominated ecommerce to the point that now over 40% of all ecommerce sales happen on the site. For perspective, the next nine largest ecommerce sites, Walmart, eBay, Apple, Best Buy, Target, The Home Depot, Kroger, Costco, and Wayfair, combined account for only 26.5% of total ecommerce sales.

Put another way, Amazon sold ~$367 billion in 2020 compared to the other nine companies that combined sold ~$241 billion – Amazon outsold the other combined sales of the next nine top ecommerce sites by $126 billion dollars.

All these orders gave Amazon mountains of data about customer orders and behavior as well as essential information about the logistics infrastructure that would be required for Amazon to service its own orders.

Armed with all that order data, Amazon rapidly scaled its own package delivery network to the point that in 2019 Amazon was able to drop FedEx entirely. The share of Amazon packages delivered by UPS and USPS are also rapidly declining, but the postal service in particular plays a vital role for Amazon that will linger for years to come.

It is this second component, the role that USPS plays, that when combined with order data, is turning Amazon’s package delivery business into a juggernaut. The role for USPS long-term with Amazon can be summarized in one word: rural.

Packages, Partners, and Profit

It’s no secret that if you’re in the business of delivering packages, efficient operations and route density (the number of packages to deliver per route) mean everything. What’s challenging for Amazon is that when it offers Prime Customers “Prime Shipping” irrespective of the customer’s location, rural deliveries have the potential to destroy any notion of efficiency, drive up program costs, and hemorrhage money. But Amazon can’t market a service like “Prime” and exclude millions of rural Americans.

FedEx and UPS have dealt with this challenge for decades. Both companies have tried to mitigate the economic difficulties for rural deliveries by adding residential surcharges and providing slower delivery services, but no matter what they do, rural deliveries must always be offset by more profitable high-density delivery routes. FedEx and UPS are also at a significant disadvantage compared to Amazon because they don’t originate the order, FedEx and UPS only play the role of package delivery vendor.

In contrast, as Amazon was launching its own package delivery service, Amazon was able to cherry pick the orders and delivery routes that had the best economics and pass on the worst routes with the least concentrated orders to the US Postal Service.

Amazon turned the entire business of package delivery into a feature of their much larger business.

Why the US Postal Service?

But why did Amazon pick the Postal Service as its rural delivery partner? It came down to the law. The USPS has to accept a large portion of these low density deliveries from Amazon due to the Universal Service Obligation that requires the USPS “provide service to people in all communities.”

For Amazon, the Postal Service’s USO gives Amazon the ability to offer a nationwide service like Prime Shipping to its customers without bearing the full cost of the low-density rural deliveries. Amazon gets to keep the package delivery routes that are economical for its business and delegate those that aren’t to the USPS.

And now that Amazon’s package delivery network is getting big enough, mostly from its own demand, Amazon can take the lucrative non-rural delivery routes and begin competing with UPS and FedEx for off-Amazon delivery services.

Don’t be surprised if, by the end of 2022, Amazon is a major package delivery services competitor to UPS and FedEx for non-Amazon purchases.