Will Amazon cut the accessorial ties binding parcel shippers?

Accessorials, which are charges for services unrelated to the basic line-haul operation, are a fact of life across all transport modes. Nowhere, however, are they more prevalent than in the parcel industry. At last count, FedEx Corp. (NYSE: FDX) and UPS Inc. (NYSE:UPS), the industry’s dominant players, each have about 85 accessorial charges, according to Shipware, LLC, a consultancy. Of those, about 35 are considered commonplace and have meaningful impact, Shipware said.

Parcel shippers find most accessorials, of which fuel surcharges is probably the most well-known, to be the shipping equivalent of death by a thousand cuts. More accessorials are added every year and the prices of existing ones are often raised annually. The impact of accessorials has reached a point where they can account for 20 to 30 percent of the total cost of a typical residential delivery. This has led many shippers to wonder if the charges aren’t more a way of fattening the carriers’ top and bottom lines than a proffer of fair value for additional services. The carriers defend accessorials as a proper way to be compensated for the cost, and often the hassle, of providing these extra services.

If published reports are accurate, Amazon.com, Inc. (NASDAQ:AMZN) appears to have a plan to free shippers from accessorial bondage. The company plans to lower or eliminate accessorial fees such as fuel surcharges and residential surcharges as part of an expanded pilot program to pick up goods at customer facilities and deliver them directly to consumers within a 7-day window. The story appeared in the Wall Street Journal. As reported by FreightWaves and other media outlets, Amazon has been developing a plan to pick up freight at the shipper’s location and deliver it to one of its fulfillment centers. The pilot debuted in Los Angeles and Orange County, Calif. In December 2017

The program, known as “Shipping With Amazon,” (SWA) has been framed as a way for Amazon to keep up with its burgeoning volumes while maintaining its delivery commitments. It handles about 10 percent of its own traffic. About 62 percent are handled by the U.S. Postal Service, 21 percent by UPS and 7 percent by FedEx, according to data from ShipMatrix. In the process, however, rates for the SWA service have undercut UPS and FedEx by up to 50 percent or more, according to Ravi Shanker, analyst for Morgan Stanley & Co. (NYSE:MS). Shanker, who is bearish on UPS and neutral on FedEx largely due to the threat posed by Amazon, said in a note today that eliminating accessorials would make Amazon’s offerings even more competitive against the established players.

However, Amit Mehrotra, analyst for Deutsche Bank,said Amazon has neither the last-mile delivery scale or density to act on such a purported pledge, which is why USPS still handles so much of its traffic. In a note, Mehrotra said that Amazon is hinting at dis-intermediating UPS, and to a lesser extent FedEx, in order to extract lower costs from its providers just as any big buyer would. Until Amazon is “ready to talk” about the billions of dollars it will need to build out its own network, reports about it throwing its partners under the bus paint an unrealistic picture of the implications for FedEx and UPS, he wrote.

James Thomson, a former top Amazon executive and head of Buy Box Experts, a consultancy that helps companies sell online, said the initiative continues Amazon’s more than year-long strategy of erecting a delivery network to compete with FedEx, UPS, and others for Amazon customers and non-Amazon users who sell goods on other websites. “The bigger this business gets for Amazon, the more shipping capacity it will have for periods when it matters most, which is the fourth quarter,” Thomson said in a LinkedIn post. “So Amazon builds out capacity, lowers its costs, and passes along cost savings to sellers, the whole while continuing to use UPS and FedEx for more (high-cost sorting operations) that it doesn’t immediately want to build itself.”

Jesse Cohen, a long-time air cargo executive and now FreightWaves’ market expert-air cargo, said the “aggressive focus” on residential deliveries “is a natural and reasonable extension of the Amazon product line.” Selling delivery services with little or no accessorials “is not really a model for ongoing profitability,” Cohen said. He added, however, that  Amazon has deep pockets and may choose to operate at breakeven or even take modest losses to get established.

Rob Martinez, Shipware’s founder and CEO, said that if the Journal story is accurate, Amazon is barking up the wrong delivery tree. “Seven-day delivery is not what shippers are asking for. Ironically, they want delivery within 2 days, which is a direct result of the `Amazon Effect,’” Martinez said.

Even if the devil is in the details, what is clear is that Amazon wants to build delivery density to make residential routes profitable, according to Martinez. He added that the incumbents need to be very mindful of the 800-pound gorilla in their midst. “No matter the brave face we’re seeing applied at FedEx and UPS, today’s news has got to leave them feeling extraordinarily vulnerable and uneasy,” he said.