- FedEx and UPS are recalibrating their strategies now that the pandemic e-commerce boom is over.
- The logistics giants are taking different paths when it comes to e-commerce platforms like Shopify.
- Analysts have told Insider the stakes are high, with small online sellers a target of all carriers.
As e-commerce growth slows down after the all-out sprint of 2020 and 2021, delivery firms are waking up to a new reality.
There are fewer packages to go around. The cost of delivering them has gone up. But the companies still need to grow.
FedEx executives got a central question regarding the challenge to come on Thursday’s tense earnings call, in which they explained how they would climb out of a hole by drastically cutting costs. FedEx also announced an average rate increase of 6.9% coming in January — its highest ever.
“How do you reconcile pushing through your biggest rate increase in history at a time when your volumes are falling double digits? I mean, isn’t that going to exacerbate the volume decline?” asked Morgan Stanley analyst Ravi Shanker.
The answer was that they believe their customers are “sticky” and accustomed to inflation by now. But there’s a fight coming that will put that idea to the test for FedEx and its rival UPS.
For both delivery giants, staying ahead (or maybe afloat) now requires winning over the small and midsize businesses that have less negotiating power and therefore pay close to top rates. They’re target customers that both companies have been prioritizing for years. But in the current environment, the stakes just got higher.
SMBs make up 25% of the market and an essential source of growth for these companies, Shanker told Insider. “Every entity in the parcel-delivery market — ie, UPS, FedEx, USPS, Amazon Logistics, and every third party out there — is looking to that SMB customer,” Shanker said. “Someone’s not going to hit their target.”
UPS and FedEx are taking opposite approaches
Many small e-commerce businesses buy their shipping services through the online platforms they use to sell their products. Shopify, eBay, BigCommerce, and others offer multiple carrier options at the press of a button.
UPS has embraced these platforms for years, in some cases negotiating deals that provide discounts for merchants selling through them.
“UPS saw the platform opportunity five years ago, partnering with Shopify in 2017 and Auctane, formerly known as Stamps.com, in 2019,” said Nate Skiver, a parcel consultant who was previously a logistics executive at Gap.
UPS CEO Carol Tomé has said these programs are on track to bring in $2 billion in revenue this year. In the first quarter, packages from small businesses were growing faster than those from large shippers, Tomé said on the company’s April earnings call.
FedEx has taken a much more cautious approach.
“We’re being very selective with the platform partners that we are choosing because we want to have that direct relationship with the small customer,” FedEx’s chief customer officer, Brie Carere, said on the company’s March earnings call, according to Sentieo.
When an e-commerce business buys shipping through Shopify, for example, the carrier doesn’t own the data for the transaction, so it can’t analyze that customer’s shipping needs and market directly to them. FedEx is committed to holding on to that element, Career said.
“When you’re working through a third party, you end up a price in a box on an application,” Carere said at the company’s investor-day presentation in June. “And we do not think that is the right way to sell the value and the premium that we provide to small businesses.”
The stakes for managing the pandemic “unwind” were already high, since the spike in package volume encouraged delivery startups to form and smaller competitors to gear up, creating more competition in the space UPS and FedEx have dominated for decades.
They got higher last week when FedEx warned it would deliver first-quarter results way off projections, suggesting a more dramatic downturn than expected.
Shanker said FedEx’s intention to avoid competing simply on price was understandable. “They don’t want you to click on the FedEx button because FedEx was the lowest price of the four, which they’re never going to be and they probably shouldn’t be,” he said. “They want you to click on the FedEx logo because you think FedEx is great.”
Other analysts said that so far the downsides of FedEx’s approach outweighed the upsides.
“I think while FedEx talks about its focus on SMB shippers, I think UPS is actually executing on it,” said Rick Watson, the CEO of RMW Commerce Consulting.
Dean Maciuba, a 35-year veteran of FedEx who is now a managing partner at Crossroads Parcel Consulting, said the firm was “in a catch-up mode” when it came to third-party platforms, suggesting that as time goes on, the Memphis company’s strategy might evolve.