UPS Prepares to Take on Amazon

Has UPS thought of “Fulfilled by UPS?” It could be its best bet to defend against Amazon.

Last mile logistics has been an expensive segment of the ecommerce value-chain, and Amazon has decided to take matters into its own hands. The company has acquired its own delivery trucks, plans to deploy 40 jetliners out of a Kentucky airfield, and we have all heard of the drones1. Amazon ships about 3.5 million packages a day. In contrast, UPS, the largest package shipping company in the US handles 15.8 million packages a day2. UPS claims that no single customer (a.k.a. Amazon) accounts for more than 10% of its revenues. However, UPS has been reconfiguring its operations to focus on retail ecommerce for many years now, and with the platform disruption heading its way, UPS must now figure out a plan to compete with Amazon logistics. The competition may focus on ecommerce in the short-run, but Amazon would surely attempt to go after the prized B2B business in the long-run.

Let’s begin by taking stock of UPS’ capabilities. The company has a massive distribution network consisting of warehouses, planes, delivery trucks, and store fronts. The company has been reconfiguring its store front location and layouts to be more ecommerce friendly, leading to a better customer experience and “stop economics.”3 But while UPS has 27% market share in the US, it only holds about 8% market share in the next-day delivery business.4 Amazon has deep pockets, but deploying new physical assets to reach UPS’ scale will take some time.

So where should UPS choose to compete with Amazon? We have all experienced the seamless service of the “Fulfilled by Amazon” model. But we ultimately do not care who delivers that package. In this case, multi-homing could actually help UPS. Let’s consider a scenario where vendors selling online, either through their own website or through Amazon, store their inventory in UPS warehouses. UPS can present a value proposition where it would innovate to provide a seamless access to not only domestic but also international shipping services. The company would also promise NOT to become a direct competitor with the vendors. UPS also has the advantage of pre-existing relationships with its customers who make B2B as well as B2C products. Bundled deals with access to UPS warehouses would create a win-win situation for both vendors and UPS. In particular, the vendors still benefit from the Amazon marketplace, they get a partner who has the resources to deliver just as quickly as Amazon, and the partner promises not to compete. In the meantime, UPS could invest in further optimizing its logistics network and developing automated solutions for its warehouses. UPS would also have to invest in increasing warehouse capacity, but this effort would be well within the company’s current realm of expertise. As vendors attempt to multi-home between Amazon and UPS, UPS would hold a significant advantage because of its 3.5x scale. Even if UPS accepts low-to-zero returns on increased inventory risk, growth in the shipping volumes should be attractive. UPS could also leverage its retail locations to improve upon the HK-stores concept – display high-touch products, accept orders in the store, and guarantee quick delivery.

UPS is fortunate to be in a position where it already holds many pieces of the architecture required to compete with Amazon. But it must move quickly to reconfigure its business model, and present a new value proposition to the ecommerce. Delivery has been UPS’ bread-and-butter. If it takes one more step towards integrating one more level up the value-chain through fulfillment services, it would be able to present a strong defense to Amazon logistics. If Amazon later tries to target the B2B shipping industry, UPS would have created a barrier-to-entry through pre-existing bundled deals.

Sources:

  1. http://www.andnowuknow.com/quick-dish/amazon-steps-sea-transport-and-logistics/robert-schaulis/52412#.WLCKcRiZORs
  2. http://www.citylab.com/work/2012/12/how-ups-delivers-millions-more-fedex/4226/
  3. http://www.pymnts.com/in-depth/2015/how-ecommerce-shipping-has-been-disrupted/
  4. http://csimarket.com/stocks/competitionSEG2.php?code=UPS

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6 thoughts on “UPS Prepares to Take on Amazon

  1. Completely agree with this. If UPS (and Fedex) don’t take matters into their own hands soon, it will only be a matter of time before Amazon “in houses” a big chunk of their business. A couple of weeks ago, Fedex actually announced a platform called “Fedex Fulfillment”, that is exactly what you describe in your post.

  2. Great post. I couldn’t help thinking: isn’t it similar to the SF Express v.s. Alibaba case that we discussed in class? Is it possible that UPS could partner with FedEx or DHL to compete with Amazon? Also, UPS faces the same challenges that SF Express had: How can it leverage the logistics networks to do e-commerce?

    1. I see certain differences in that UPS’ logistics network and hard assets in terms of retail stores are already deployed (a.k.a fully depreciated), so the marginal investment to pursuing a fulfillment model would not be as high as it would be for SF Express. Also, UPS does not have to move to a full e-commerce model right away. They should start by being the “behind-the-scenes” guy. Don’t try to develop your own marketplace right away. Let vendors sell on their own websites and on Amazon (where all the traffic accumulates), but simply maintain inventory and fulfill the orders.

  3. A very interesting approach to taking on the behemoth that is Amazon. I think suppliers that have developed somewhat tense relationships with Amazon’s fulfillment services would see the value in this proposition. One thing I might add is thinking about a partnership with a robotics company on fulfillment center automation. When Amazon acquired Kiva, it left a hole in the space. That was 4-5 years ago, and several startups have entered to fill that hole. I bet one of them would be eager for the opportunity to partner with a large player like UPS.

  4. My understanding is that part of the reason Amazon has moved to creating its’ in-house logistics ops from factory to last-mile has been that carriers UPS, FedEx have struggled to deliver and meet Amazon’s on customer promise (e.g. Prime 2 day delivery). Do you think UPS taking on this strategy will create significantly more work? If so, how can they create the additional capacity?

  5. Thank you Kunal, but frankly speaking, I don’t believe UPS is a viable competitor to Amazon for the following reasons:
    1)UPS doesn’t have technology and expertise to become a marketplace for goods. It only has expertise in delivering these goods.
    2)UPS platform is very limited to shipping goods, while Amazon platform is integrating buying and selling goods along with their shipping.
    3)Amazon is rapidly developing and diversifying its business, while UPS is not.
    4)Amazon is twice the size of UPS in revenues, thus acquisition of Amazon will be problematic for UPS.
    In sum, therefore, for the reasons above, I believe that Amazon is way superior than UPS as the marketplace and very soon will be as the shipping company. Then Amazon might take on UPS.

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