Commentary: FedEx and UPS need to move up the e-commerce food chain

To be sure, the two integrators have made shipment quality a priority, rejecting light, low-priced last-mile delivery business from Chinese e-commerce sellers and Amazon (NASDAQ: AMZN) in favor of multizone, heavyweight and high-value packages that can support higher rates. 

To achieve lower cost of last mile delivery, UPS acquired same-day delivery platform Roadie for $586 million in 2021. And last February, FedEx announced it is investing $3.4 billion in InPost, a European courier with a large parcel locker network in Europe.

Instead, FedEx and UPS should invest in e-commerce platforms like Etsy (NYSE: ETSY) and others, where they would sit at the top of the food chain and be able to influence all aspects of fulfillment and delivery for online orders while helping millions of e-tailers better compete with sellers using Amazon’s marketplace.

An optimized shipping experience will create a virtuous flywheel that will generate additional orders from satisfied consumers, driving more parcel business with higher delivery density to FedEx and UPS.

Amazon has long taken a broad view of its core competency. First, it invested in Fulfillment by Amazon to help e-tailers on its online platform with fulfillment and delivery. FBA has generated great returns as about 60% of Amazon online sales and parcel deliveries come from merchants supported by FBA, enabling Amazon to build its own delivery network.

It extended that thinking even to its suppliers when it contracted with Air Transport Services Group in 2016 to operate Boeing 767 freighter aircraft for its logistics network. It secured warrants to purchase a minority stake in ATSG, which generated a great return when ATSG was acquired last year for $3.1 billion by private equity fund Stonepeak. 

If FedEx had such a broad view before, and had invested just $1 billion in Shopify a decade ago, instead of $4.8 billion in Europe’s TNT Express, that investment would be worth $50 billion today. Besides the great return on investment, FedEx would have become the primary delivery partner, instead of the U.S. Postal Service, for millions of small e-tailers selling products using Shopify.

While too late to invest in Shopify (NASDAQ: SHOP) given its market cap is about two times its own, it is not too late for FedEx or UPS to make a friendly investment in Etsy, or another e-commerce marketplace, or engage one of them in a strategic partnership. 

 FedEx, for example, could leverage its Dataworks capabilities to help millions of small merchants manage fulfillment and delivery. Instead of someone receiving five packages on five different days, only to accumulate on the porch and be susceptible to rain and thieves, FedEx could offer affiliated merchants a better value proposition than available for those on Amazon’s marketplace.

An e-commerce partnership would also reduce diversion of more parcels to Amazon Logistics, which last year delivered more parcels than any of the Big Three carriers. And it would help FedEx and UPS attract small-and-medium shippers faster than with their current approach.

FedEx and UPS have made many acquisitions over several decades, but only the FedEx purchase of ground-delivery specialist RPS as part of Caliber System and Viking Freight in the less-than-truckload sector, were game changers. 

RPS became FedEx Ground and by 2012 it had $1.8 billion of operating income compared to $1.2 billion for FedEx Express despite one-third the revenue — demonstrating the superior operating model of RPS for B2B parcel delivery. FedEx Ground is the primary foundation for the consolidation of Express and Ground networks now underway. 

Meanwhile, FedEx shareholders stand to make lots of money with the spin-off of LTL division FedEx Freight into a separate company on June 1, 2026.

At a reunion of RPSers on March 11, 2023, former FedEx CFO Alan Graf commented on the significance of the RPS deal: “I can’t imagine what FedEx would be today without RPS’s unique low-cost operating model. . . In 1997, I was very certain that RPS would be a game changing acquisition. It has proven to be the best acquisition in the history of FedEx.”

So, instead of limiting e-commerce delivery only to B2C shipments priced to offset their higher operating cost, FedEx and UPS need to find ways to align with companies that influence consumers buying behavior and then support them with better delivery and customer experience to ensure that the B2C market is not controlled by just Amazon and Walmart (NASDAQ: WMT).

(The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.)

(Satish Jindel is founder and president of ShipMatrix, Inc. He was a key founding member of RPS and led its growth from 1985 to 1992, then advised FedEx on its acquisition of RPS and Viking Freight in 1997. Alan Graf’s full remarks can be viewed at https://jindel.com/rps-reunion/)