As far back as 2016, diginomica was deeply skeptical about the ‘King Canute’ like comments of Fedex founder and CEO Fred Smith about the disruptive impact of e-commerce - and particularly Amazon - on his business:
The concerns about industry disruption continue to be fuelled by fantastical - and let me emphasize I chose this word carefully - articles and reports which are devoid of in-depth knowledge of logistic systems and the markets which FedEx serves.
Flash forward to 2020 and it’s a very different story. Whereas back in 2016, e-commerce mattered, but not that much, in 2020, Raj Subramaniam, CEO of FedEx Express, says:
E-commerce is the fastest growing segment in our business. We are working to position FedEx Ground as the B2C player. We have spent years enhancing our network, and today our FedEx Ground Network is well-equipped for handling this rapidly growing market, including seven-day operations for the majority of the US and the dedicated large package operations for handling the growth and heavy and bulky items moving to the ground network.
It’s the same story at UPS, where CEO David Abney explains:
We are embracing the e-commerce structural shift to faster delivery which brought a surge in next year volume of more than 22% in 2019… we are focused on serving the entire e-commerce ecosystem. And that includes large e-tailers, that includes the large retailers and that includes the SMBs, the thousands and thousands of SMBs that we have to compete and to punch above their weight with the larger companies…when it comes to the major retailers, over 90% of the larger retailers utilize our innovative services and we’ve seen their business grow.
USPS next up?
But it’s not just the private sector delivery providers who’ve felt the e-commerce disruption. The US Postal Service (USPS) is 245 years old and, according to one recent study, is the Most Trusted Brand in the US . It’s also bled red ink over its balance sheet for the past 13 years, $8.8 billion in 2019. The crisis is so engrained that Postmaster General Megan Brennan and Chairman of the USPS Board of Governors Robert Duncan admitted in a public statement lately that:
The most significant issue facing the Postal Service today is that our business model is unsustainable.
The situation hasn’t been helped by a decision by FedEx to take back its SmartPost volumes - around 2 million packages a day! - to support its own ambitions to beef up its e-commerce related revenues. But the wider issue is more simple - people don’t send letters anymore. Clearly that’s a sweeping generalization, but in an age of email and Twitter and WhatsApp, sitting down to write a screed isn’t an everyday activity for most people.
It’s a problem that’s replicated in other postal services around the world. For example, in the UK Royal Mail is pursuing a £1.8 billion, five-year turnaround plan, January 2024, to reshape the organization into an international parcel-led business that can exploit a market demand dominated by e-commerce. Stuart Simpson, COO Royal Mail, explains:
Letters [are] challenging. The future is parcels. Our plan is all about pivoting to that parcels-focused organization, and we need to get on with it. In terms of the competitor landscape, it has changed, no question. Compared to five years ago, the competitors are better than they've ever been. They've put in capacity. They've all had their problems they launched their capacity, their hubs taking time to get up to speed, etc. But they're doing a pretty good job now and the pressure is really on us to continue to do that.
Back in America, USPS has come to similar conclusions and has plotted out its own USPS 5 year strategic plan which built around the premise that it can disrupt its own business model and become a digital services platform provider in its own right. The plan states:
The rapidly changing business conditions under which the Postal Service competes, coupled with the evolving needs of our customers, require us to adapt in order to maintain our relevance to the American consumer and to strengthen our business The next five years are likely to usher in dramatic technological, social, and environmental changes that will fundamentally change the way we live, work, and relate to one another We are seeing rapid technological advances across many areas that include artificial intelligence, advanced energy storage devices, next-generation broadband, autonomous machines, augmented reality, social networks, Internet of Things, and quantum computing.
Getting on top of the e-commerce sector is crucial, it goes on:
We believe there is an opportunity to reposition the value of mail with businesses, retailers, and marketers by integrating digital features with the physical delivery experience to enhance their omni-channel communication and marketing campaigns Successfully repositioning mail as a value-added feature to digital communication opens new opportunities to retain existing customers and reach new ones.
We believe that the growth in domestic mobile e-commerce sales will continue to outpace the growth in brick-and-mortar retail sales Historically, the growth in domestic e-commerce sales has correlated well with the growth in the number of domestic parcel shipments We see this relationship changing in the future as consumers buy more expensive items online and e-commerce companies combine more products within a single shipment.
The goal is that by 2024, there will be “a financially sustainable Postal Service that enables all Americans to connect, businesses to grow, and communities to thrive in an increasingly digitally-connected world, including individuals in rural or urban communities that are digitally under-served”:
This means a shift from physical delivery towards a service that is built on a digital connection and provides other value-added services. Examples of specific objective includes the enhancement of USPS’ Informed Delivery platform. This is essentially the kind of notification and tracking service that the likes of FedEx, UPS and Amazon provide. The goal now is to get the USPS version working on all major smart devices and enable it to “seamlessly connect to key e-commerce and social platforms”.
There will also be a push to overhaul the so-called ‘last mile’ operations to become “the most efficient local logistics and e-commerce delivery platform”. The plan says:
A key to this vision is the enhancement of our local processing and delivery network to enable retailers and other logistics companies the capability to deliver e-commerce orders securely and affordably within 24 hours from local businesses and within two calendar days from businesses located within the contiguous United States. To enable this, we will build out our platform to enable flexible and frictionless returns from every home and expand seven-day-a-week parcel delivery service. This transformation will be enabled by our ability to equip our employees with the latest technologies and predictive analytics tools, connect our employees to our customers, and empower our employees to deliver the best customer experience at every touchpoint.
That ‘last mile’ dominance is the Holy Grail now for everyone playing in the digital economy delivery market. It’s the reason that Amazon is building out its own delivery capabilities, freeing it from any dependency on third parties. The retail behemoth first began making its own deliveries back in 2013, when the all-important Holiday season saw UPS and Fedex overwhelmed by orders coming via Amazon.
From there the company has built out its own expertise and capabilities to the extent that it delivered 3.5 billion parcels in 2019, around half of its global total. To put that in context, FedEx executed on 3.8 billion deliveries in its last full fiscal year, while UPS clocked up 5.5 billion, about half of which are Amazon-originated…for now. Analysts reckon that within a couple of years Amazon will be moving more packages every year than either FedEx or UPS, while the USPS and Royal Mail will only be halfway through their own attempts at digital transformation.
For the likes of FedEx and UPS, the wake-up call around Amazon in particular is still ringing out. FedEx is playing catch-up after being in denial, while UPS is far too dependent on the business it gets from Amazon for the long term prognosis to be healthy.
But it’s what the state-owned postal services around the globe do to survive the e-commerce business model disruption that really intrigues. I can’t remember the last time I set foot in a post office. To be honest, I couldn’t even tell you where my nearest post office is! My only interaction with my postal service is when I have to drag myself to a collection office the day after their staff have failed to deliver a package, something that seldom happens with Amazon deliveries.
Back in 2016, diginomica reckoned that the prospect of Amazon as a dominant global logistics provider was possible. Nothing's happened to change that view.