Wednesday, December 23, 2015

AMAZON LOOKING FOR ALTERNATIVES TO UPS AND FEDEX

LTD talked about this months ago. 


Amazon Seeks to Ease Ties With UPS

Rising costs have Amazon seeking alternative delivery routes, straining relations with its longtime shipping ally



UPS delivery trucks drive in New York City. The symbiotic relationship between UPS and Amazon.com has come under increasing strain. ENLARGE
UPS delivery trucks drive in New York City. The symbiotic relationship between UPS and Amazon.com has come under increasing strain. Photo: mike segar/Reuters
As the clock counts down to Christmas, workers at United Parcel Service Inc. UPS -0.79 % are busy hustling packages along loading docks and conveyor belts at its Louisville, Ky., hub—part of a costly, intricate system built in part to cater to Amazon.com Inc., AMZN 0.12 % its biggest customer.
But the symbiotic relationship between the two giants has come under increasing strain, according to interviews with more than a dozen current and former UPS and Amazon executives.
Rising package volumes and costs have Amazon seeking alternative delivery routes—shifting the online retailer’s role from key ally to a potentially disruptive competitor.
Amazon has held talks with air-cargo companies to lease airplanes and build its own freight operation. The company is already using its own trucks, drivers and a fleet of couriers for the final and most-expensive leg of an order’s trip.
It has been making its own deliveries in certain high-density regions and relying more heavily on the U.S. Postal Service. Eventually, it hopes to get drones to drop packages into backyards.
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Such steps are part of a much broader plan at Amazon, which counts shipping costs as one of its fastest-growing expenses, totaling 11.7% of revenue in the third quarter, up from 10.4% a year ago. The goal is to reduce its reliance on carriers like UPS, according to people familiar with the matter.
“Amazon’s interest is not in doing what may be good for UPS,” said Satish Jindel, a parcel-industry analyst with SJ Consulting Inc. “Their interest is in getting control over logistics.”
Amazon declined to comment. A spokesman for UPS said “we will continue to work closely with Amazon and all our customers to help them solve their growth and customer service challenges.”
There is more than loyalty at stake for Atlanta-based UPS. This year, its Amazon account exceeds $1 billion, say former Amazon and UPS executives. That is roughly a fivefold increase since 2005, according to an estimate by a former executive with direct knowledge of the company’s spending.
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While UPS investors generally view growing volumes as a sign of health, the company’s cost-per-package has actually risen since more than a decade ago, putting margins under pressure.
The average cost to handle a parcel was about $8 last year, up from roughly $6.50 in 2000, according to the company. Much of the increase was attributed to a growth in e-commerce, as UPS has invested more than $11 billion over the past five years to upgrade and expand its network.
It hasn’t helped relations that Amazon was a factor in UPS’s last two back-to-back Christmas snafus—each of which cost UPS an unexpected $200 million. Two years ago, Amazon overwhelmed UPS with hundreds of trailers of last-minute Christmas orders. It later got UPS to help underwrite millions in customer refunds.
Last year, UPS increased capital spending by 10% to be ready for a prolonged holiday surge that never came.
This year, the company is expecting record volumes and has already seen parts of its network strained from a surge of online holiday spending over the days before and after Thanksgiving.
On UPS’s earnings call in October, an analyst pushed management to address possible tension in the companies’ relationship.
“How do you make sure that you’re guarding against the potential outcome where your customers might increasingly become competitors?” asked Alexander Vecchio with Morgan Stanley. MS 0.61 %
Alan Gershenhorn, UPS’s chief commercial officer, said it would be “very difficult to match.”
The customer-as-competitor dynamic is upending various business models. Pay-TV providers like Comcast Corp. CMCSA 0.23 % and Dish Network Corp. DISH 0.09 % , for example, could feel the pain as HBO bypasses them to reach consumers. Ditto for retailers like Macy’s Inc. M 0.93 % as Estée Lauder sells direct to online shoppers.
At Amazon, plans to handle more of its own parcels have accelerated over the past two years, according to current and former executives. Amazon also fears that UPS’s hub-and-spoke system—moving a package from shipper to sorting hub to brown van to your home—is growing obsolete, according to the executives. So the retailer is building regional distribution and package sorting centers, while adding thousands of truck trailers. It is even trying delivery by newspaper carriers.
For a long time, UPS and Amazon were a harmonious pair. The two had worked together for years, even as FedEx Corp. also shipped for Amazon. In 2013, FedEx refused to lower prices enough to meet Amazon’s demands on a big chunk of its business with the retailer, according to people familiar with the negotiations. Amazon asked UPS to take on much of it instead. The company agreed, although some UPS executives questioned whether to assume the low-margin business.
When Amazon launched Prime unlimited two-day shipping in 2005, UPS went all in, giving the retailer discounts of as much as 70% for the new business.
Lately, though, the companies’ relationship has been strained. A few years ago, UPS shared some of its routing data with Amazon, according to an executive. When Amazon requested additional data, UPS—by then wary of the retailer’s intentions—refused, that executive added.
Amazon has poached more than 40 UPS supervisors, managers and executives in the last three years, according to an analysis of LinkedIn data. In September, Kniffen Kelly, a 16-year veteran working on engineering UPS’s transportation networks, left to become Amazon’s director of sort center engineering.
UPS and Amazon have also been engaged in a rare public debate over low postal rates. In government filings, UPS has argued that the U.S. Postal Service calculates some pricing incorrectly; Amazon defends the model.
For all its efforts, it is still unclear whether Amazon can outrun its delivery partner—or if it might ever be able to break away from UPS. Building a logistics network is costly, and the retailer may never have the necessary infrastructure, industry analysts say.
Some customers have already complained about missed or late deliveries from Amazon’s in-house service, known as Amazon Logistics.
David Konigsberg said a camera he ordered this month seemed to vanish. “Amazon said the package I ordered had left the carrier facility, but it never came to me,” said Mr. Konigsberg, a 27-year-old software developer in Alexandria, Va. “It’s a good thing I didn’t need it right away.”