In a prior Supply Chain Matters commentary published last week, we provided highlights and observations related to Amazon’s Q4 and full year 2019 financial performance. That included the online retailer’s massive 43 percent increase in its transportation spending during 2019 coupled with an over $2 billion added investment in one-day shipping fulfillment capability.

Similarly, last week, parcel logistics and transportation provider United Parcel Service (UPS)  reported its financial performance for the all-important December ending quarter, that included some eye-popping revelations.  UPS Electric Van

Quarterly financial performance headlines included:

  • Total Q4 segment revenue growth of 3.6 percent to $20.6 billion.
  • Operating profit increase of 6.4 percent with reported margin improvements across all segments.
  • The all-important daily package volume total exceeding 26.6 million packages, up 7.5 percent and an all-time record.

Full-year 2019 financial performance included:

  • Total annual revenues of $74.1 billion, a 3.1 percent increase over the year-earlier period.
  • Total operating profit of $8.2 billion, an increase of 10.4 percent.
  • Average revenue per package declining one percent.

 

The global parcel carrier for the first time, disclosed its dependency on Amazon, reporting that the online retailer provided $8.6 billion of revenues for UPS in 2019, accounting for 11.6 percent of the carrier’s total revenues.

This Editor was amused by the associated reporting by The Wall Street Journal regarding the UPS financial performance. With the headline: UPS, Amazon Grow Closer as FedEx Goes Its Own Way, the opening paragraph states:

United Parcel Service Inc. continues to cozy up to Amazon.com even as its rival FedEx Corp. charts a path without the largest online retailer in the U.S..

The reporting amplified the now exposed reality that Amazon’s spending with UPS was nearly ten-times that of FedEx.

Our readers could surmise that that is why FedEx elected to suspend all service contracts to the online retailer, namely the costs-to-serve were no longer worth the operating profit and revenue upside.

UPS CEO David Abner indicated to analysts that: “As long as there’s a mutually beneficial relationship, then we (UPS) will continue and we will find ways to win together.

To that statement, the report noted that the carrier’s reliance on Amazon, coupled with the overall shift to e-commerce among many consumers, drove down the revenue per shipment metric by 2.5 percent across its business lines.

Readers might recall that in 2019, regional trucking line, New England Motor Freight, was forced to declare bankruptcy after losing business from a “very influential customer.”. Industry insiders indicated that the customer was Amazon, and that Amazon leverage in transportation rate negotiation was driving down rates to where many carriers could not make an operating profit.

 

Reader Takeaway

Our takeaway from our Amazon financial performance commentary declared that the online provider understands that customer fulfillment and logistics are a fundamental component to all forms of online retailing and continues to outperform critics and skeptics in market aggressiveness, as well as bold investments, defying Wall Street’s shorter-term focused profitability expectations. However, the behind the scenes reality is that the online retailer has a deserved reputation for being a ruthless negotiator of service contracts.

UPS similarly appears to be willing to ride the online fulfillment wave with Amazon, despite the need for continuous multi-billion-dollar network expansion and volume handling investments to serve as Amazon’s fall back carrier.

One could argue that how that relationship continues is all about balancing risk and reward, with negotiation leverage.

 

Bob Ferrari

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