New chapter in ugly FedEx-Amazon divorce puts merchants in middle

As happens in many divorces, the breakup of Inc. (NASDAQ:AMZN) and FedEx Corp. (NYSE:FDX) has descended into pettiness and vindictiveness. And as happens in many divorces, those who stand to be hurt the most are the ones who did nothing to deserve it.

Nine days before Christmas Amazon said it would bar companies enrolled in its Seller Fulfilled Prime (SFP) program from using FedEx’s Ground and Home Delivery services, saying the FedEx’s unit’s on-time delivery performance has resulted in unacceptable delays. (FedEx Home Delivery falls under the FedEx Ground business unit.)

The ban, set to take effect at 2 p.m. ET on Dec. 18, will force SFP customers to use other delivery services, some of which may be more expensive than FedEx Ground. One SFP customer, who stopped using FedEx Ground more than a year ago because of service problems, e-mailed FreightWaves a rate chart for an 8-ounce shipment. Of nine delivery options, FedEx Ground was by far the cheapest for a two-day delivery window.

Under SFP, companies can select their fulfillment methods and still maintain their Prime selling designation as long as they meet delivery metrics set by Amazon. SFP customers will no doubt abide by Amazon’s decision because they will lose their coveted Prime designation on the e-tailer’s website. (The FedEx services are still available for Amazon’s standard shipments, it said.)

For third-party sellers, a Prime classification can mean millions of dollars in additional sales. Amazon has made no secret of its desire to capture smaller customers’ fulfillment business, of which it takes a portion of the customer’s selling price. To do so, it looks at ways to convert SFP customers that now don’t use Amazon for shipping into logistics customers who will.

As previously reported on FreightWaves, Amazon has sometimes made it difficult for SFP customers to hit the delivery targets required to remain in the program. Companies shipping through Amazon Logistics, the company’s in-house arm, face no such pressure to hit targets.

“It’s unclear to me why any platform would body slam a small group of associated merchants during a peak season,” said Matthew White, a strategist at iDrive Logistics, a consultancy that works with Amazon’s SFP customers. Various news stories about FedEx “having isolated issues in certain lanes” could have provided Amazon with “convenient cover” to drop the service, White said.

One observer said Amazon would have been better off giving SFP sellers 30 to 45  days’ notice before implementing the ban. This would have allowed them to find other partners and would have taken them through the end of the Christmas rush and the post-holiday returns cycle, the observer said. “It’s petty stuff,” the observer said about Amazon’s edict.

The animus has reached a point where FedEx employees have been asked not to order anything on Amazon, including goods for personal use, said the observer, who has spoken with several FedEx executives. FedEx has not commented on Amazon’s move ahead of the release of its fiscal 2020 second-quarter results after the markets closed Dec. 17. Amazon could not be reached for comment.

In a short memo to SFP customers, Amazon said that FedEx Ground was dropped from the program because of service reliability issues. According to the latest publicly available data from consultancy ShipMatrix, FedEx had a 90.2% on-time delivery rate for the second peak week, which includes the Cyber Monday online ordering extravaganza. Amazon clocked in that week at 93.7%, according to the data. However, Satish Jindel, ShipMatrix’s CEO, highlighted Amazon’s delivery problems, not FedEx’s, in his comments accompanying the data’s release. Beyond that, it is difficult, if not impossible, to quantify Amazon’s claim. 

Amazon and FedEx do no domestic contract business after the two companies severed their air and ground relationships earlier this year. As a result, Amazon’s edict will have a negligible effect on FedEx’s financial results, according to several analysts. However, Rob Martinez, co-founder and CEO of Shipware LLC, said there may be more SFP customers who use FedEx than the company is letting on. Martinez added that he has no access to SFP data.

Observers thought it was feasible that Amazon would contract out some peak-season deliveries to FedEx given the pressure Amazon faces to hit its delivery commitments. This is especially true during this year’s peak, the first since Amazon announced in July that it had shifted its delivery commitment for millions of Prime orders to a one-day from the traditional two-day window. In addition, there are six fewer shopping days this peak than last year’s due to the late Thanksgiving holiday.

FedEx’s absence has likely meant more holiday business for UPS Inc. (NYSE:UPS). It also means that Amazon is carrying more of the delivery ball than ever before. As of August, Amazon Logistics was delivering 46% of the shipments coming from Amazon’s website, up from 17% in the year-earlier period, according to investment firm Morgan Stanley & Co. (NYSE:MS). Since its launch in early 2015, Amazon Logistics has taken 13% of package delivery share from UPS, 11% from FedEx and 7% from the U.S. Postal Service (USPS), Morgan Stanley said.

Amazon has expanded its delivery capability by 127% over the same period in 2018, according to ShipMatrix estimates.