fedex ups shipping international package delivery logistics transportation
Johan Nilsson, AFP/Getty Images
By Alistair Barr

SAN FRANCISCO -- UPS and FedEx might be worried about international shipments to slowing economies such as China, but perhaps they should be more concerned about what's going on in their own backyards.

Major U.S. retailers are experimenting with new e-commerce strategies that could dent demand for package delivery services, particularly demand for shipments over long distances, according to analysts and industry executives.

Amazon.com (AMZN) is building its distribution warehouses closer to customers to save millions of dollars in shipping costs. The world's largest online retailer is also increasingly using its own delivery trucks, cutting United Parcel Service and FedEx out of some parts of its fulfillment network.

Meanwhile, major brick-and-mortar retailers such as Walmart Stores (WMT), Best Buy (BBY) and Gap (GPS) are shipping more online orders from stores close to shoppers, rather than from warehouses hundreds of miles away.

"UPS and FedEx are not only watching this, they are likely concerned about it," said Lou Tapper, an executive at third-party logistics company Longistics, who worked at FedEx for 18 years. "Big companies like Amazon and Walmart will dictate which direction this goes. Those are the companies that FedEx and UPS need to fill their planes and trucks."


United Parcel Service (UPS), the world's largest package delivery company, on Friday cut its earnings forecasts, blaming overcapacity in the global air freight market, customers trading down to slower but cheaper shipping services, and a slowing U.S. industrial economy.

The move came after FedEx (FDX) said in June that it was raising shipping rates and cutting jobs and costs, as excess capacity in the air freight market had more than offset increased shipments.

Both package delivery companies set their fees according to zones that correspond to the distance a package has to travel.

For instance, FedEx's Zone 2 is zero-to-150 miles from origin to destination, while Zone 4 is 301-to-600 miles. Shipping a 10-pound package in two days through Zone 4 costs $25.80, while the same package in Zone 2 costs 32 percent less at $17.50, according to FedEx's latest rate card for consumers.

UPS uses similar zones for its domestic ground delivery service, which takes four to five days. Zone 4 costs $9.20, while Zone 2 costs $7.94 for a 10-pound package.

Retail companies get discounts for shipping big volumes of goods, but the percentage differences between the zones are similar, according to Joel Anderson, president of walmart.com.

Reducing Shipping Distances

Walmart, the world's largest retailer, has been shipping online orders from its stores for several years. This year, it is expanding the program to 50 locations from 25.

"We are at least two zones closer by utilizing the stores," Anderson said. "The closer we can inject the order into our network, the more this saves the customer time and reduces what it will cost us to get it to the customer."

He declined to say how much Walmart is saving from this.

To be sure, ship-from-store retail initiatives can also benefit package delivery companies if they accelerate the growth of online shopping -- even if delivery distances are shorter.

UPS spokesperson Susan Rosenberg said the company is benefiting from the spread of e-commerce distribution centers built by Amazon and other companies. UPS also helps retailers ship online orders from stores, she added.

FedEx didn't respond to requests for comment Friday.

"If I buy a shirt from Gap online, the shipping route length may be shorter, but then more people are buying online, too," said analyst Joshua Herrity of Telsey Advisory Group.

Still, the risks that these retail strategies pose to package delivery companies are beginning to be discussed on Wall Street. The topic came up during a UPS conference call with analysts in April.

"Some of the questions I get asked ... are whether these same retailers are going to try to build a network that doesn't incorporate the current parcel carriers in ways that they could actually end up being a competitor," Morgan Stanley (MS) analyst Bill Greene said during the call.

Ship from store may be a problem for UPS and FedEx in five to 10 years, but it will take some time for lots of retailers to figure how to make the strategy work well at high volumes, according to Fiona Dias, chief strategy officer at ShopRunner.

A more immediate threat is Amazon, Dias and others said.

Amazon has a growing fleet of delivery trucks, which are already a common sight in its home town of Seattle, where it has been operating an online grocery delivery service for years.

In 2011, Amazon changed its fulfillment strategy and began building new distribution warehouses closer to large, heavily populated areas such as Los Angeles and San Francisco. In the first quarter of 2013, Amazon's shipping costs were 4.7 percent of revenue, down from 5.1 percent a year earlier.

"For a company the size of Amazon, that's a pretty big deal," said R.J. Hottovy, an equity analyst at Morningstar. "That could be potentially very disruptive to UPS and FedEx."

-Additional reporting by Nivedita Bhattacharjee.


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31 Comments

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Bob

I worked for UPS from 96-02 and they are and will always be just fine. If the do not have one account then they will just get connected with someone else believe me. I sorted Yankee Candle mostly the last few years of my time.

July 16 2013 at 11:48 AM Report abuse rate up rate down Reply
cec2474

I work for fedex And I want to tell you that you must think that this is new we see the all the time. Sipping is like baseball it look easy but to be good it take a lot of skill. Regardless of the bad comments we have 99% on time service that with hard numbers not just joe bobs blog. we welcome any challenge we are always working to become better. By the way we get little new of all the new facilities we open around country. this is actually for us old news.

July 16 2013 at 9:45 AM Report abuse rate up rate down Reply
dexrmerritt

isn't that just special YOU CAN'T HAVE IT ALL ...U-OOPS AND FED-UP-EX

July 16 2013 at 8:23 AM Report abuse rate up rate down Reply
nancycshack

Free Shipping is a group cost afforded to companies doing volume shipping on a day basis. When One on one shipping is done it cost a bit more to provide. Both Fed EX & UPS have raised there prices every year due to cost increases. Neither one of them really see USPS as a competitor and uses them as an extension of business.

July 16 2013 at 6:05 AM Report abuse rate up rate down Reply
unced

Gene is correct however those companys delay the delivery by doing just that. I know because i've had items shipped to me that way. I also just had an order delivered direct from UPS in three days. It is also adding to the cost of shipping not decreasing. They use FEDEX to ship to a local Postal facility then in turn it is sent out by local mail. Where's the savings.

July 15 2013 at 8:58 PM Report abuse +1 rate up rate down Reply
Gene

Fedex and UPS both bring parcels to the Postal Service for delivery. So you pay for then to take it to the Post Office for you. Look for USPS delivery comformation number.

July 15 2013 at 7:04 PM Report abuse +1 rate up rate down Reply
1 reply to Gene's comment
Brian Joslyn

UPS does NOT deliver to post offices for package receivers. Only FedEx does. However, not all packages sent via FedEx can/will be sent that way because there are places that insist on a physical delivery address even when they ship via FedEx.
The ONLY possible way UPS delivers to post offices is if/when post offices order something that is sent via UPS.

July 16 2013 at 1:15 PM Report abuse rate up rate down Reply
rypperjack

Use the United states Postal service best delivering system on Earth..UPS AND FEDEX greedy corporations!

July 15 2013 at 6:57 PM Report abuse +2 rate up rate down Reply
1 reply to rypperjack's comment
SweetfeetBaby

Yes of course. ALL corporations are greedy, and the whole world ought to revolve around a single world socialist government. Lazy, uncreative, trembling people everywhere demand it.

July 16 2013 at 5:28 AM Report abuse rate up rate down Reply
dtapcat

Fedex could be giving customers TWICE the servce they now receive, but the company has been taken over by the efficency experts. Station managers have NO say in how deliverys should be made.

July 15 2013 at 6:54 PM Report abuse +1 rate up rate down Reply
dt1064

With the high cost of shipping, and now the added tax on items bought over the net, I have slowed down shopping. My small town never has what i'm looking for and neither does the big city 40 miles away. It's a shame people have to and can find almost anything on the net but not in "brick and mortor" stores.

July 15 2013 at 2:39 PM Report abuse +2 rate up rate down Reply
1 reply to dt1064's comment
nf1stinks

Who pays for shipping.. it is always free for me.. You just have to surf the net to find it.

July 15 2013 at 10:48 PM Report abuse rate up rate down Reply
1 reply to nf1stinks's comment
jaguar6cy

Shipping is never free. It can't be. It is just included in the price you pay.

July 16 2013 at 12:34 PM Report abuse rate up rate down
mike at home

The whole system is now being redone to fit the new economy their will be jobs lost by some and gained by others that is how business is done

July 15 2013 at 2:31 PM Report abuse +2 rate up rate down Reply