E-commerce growth pace expected to quicken because of COVID-19

By , Daily Memphian Updated: April 20, 2020 6:42 AM CT | Published: April 20, 2020 4:00 AM CT

Online shopping could take a quantum leap forward because of the coronavirus pandemic.

But whether FedEx profits from the increase depends, as it did before COVID-19, on the success of company efforts to reduce the cost of residential delivery.

Residential shipments have spiked as consumers turn to the internet to buy essential supplies amid sheltering-in-place measures.

FedEx’s business-to-consumer (B2C) deliveries are up 35%-40% during the pandemic, while business-to-business (B2B) shipments are down 25%-30%, said shipping industry consultant Satish Jindel.

The shift is important, because B2B shipments have traditionally been the largest and most profitable part of FedEx’s business, while the company is still working on reducing delivery costs for lower-yielding B2C shipments.


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E-commerce, which had been growing at about 14% annually before coronavirus, will likely grow at 20% annually for the next couple years, Jindel believes.

“It will speed up growth of e-commerce, absolutely,” Jindel said. “I already can see it in my data for ShipMatrix. It’s up by a huge percent, it’s not just for food and essentials, even for the other items.”

ShipMatrix is Jindel’s service that tracks the package delivery industry.

Brie Carere, FedEx Corp. executive vice president and chief marketing and communications officer, recently told eMarketer she sees pharmacy and groceries leading the e-commerce surge. She said brick-and-mortar stores are increasingly fulfilling online orders, which some had been slow to do before the crisis.

“The No. 1 thing that we have seen is an explosion in e-commerce due to the physical store closures,” Carere said. “If we thought e-commerce was growing faster before, we’re going to see even greater acceleration.

“My guess is that — and I don’t have the data yet to substantiate this — e-commerce growth is going to be led by pharmacy and grocery,” Carere said. “We’re also seeing a lot of retailers use their physical stores as fulfillment locations. Those that had been slow adopters to ship from store, they are innovating very quickly to use their in-store inventory,” Carere said.

Bradley Jacobs, president and chief executive officer of XPO Logistics, said in a letter to shareholders Thursday, April 16, “...e-commerce growth, which was already at a double-digit rate, could accelerate in the post-pandemic world.”

“Millions of consumers have become more accustomed to online shopping for food, household goods, pet supplies, health and beauty products, furniture and appliances without leaving their homes. If this proves to be secular, it will drive even more demand for e-fulfillment, omnichannel retail, reverse logistics and last mile logistics,” Jacobs said.

One measure of the extreme pressure put on the shipping industry by COVID-19 is Amazon’s recent decision, first reported by the Wall Street Journal, to pause a wider launch of Amazon Shipping, which would compete with FedEx, XPO, UPS and others for third-party shipping business.


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Amazon had been testing the service in a select markets since 2016, but said it was halting the rollout because staff, facilities and vehicles were needed to handle Amazon’s core business.

“FedEx and UPS continue to experience strong volumes in their B2C business while seeing declines in volume in their B2B business,” Cowen analyst Helane Becker wrote in research note April 9. “Earlier this week, Amazon indicated it would stop handling third party packages as their network was too busy handling its own.”

Bank of America analyst Justin Post said it appeared to be a temporary move, driven by the pandemic, although Amazon Shipping remains a long-term growth opportunity.

“In our view, the suspension of Amazon Shipping is likely a temporary move in unusual times when capacity limits are stretched,” Post wrote.

“In the future, Amazon Shipping should position (Amazon) to increase utilization of its existing logistics network by shipping non-Amazon packages,” Post wrote. “The eCommerce shipping opportunity is vast, with eCommerce penetration expected to increase from 15% today to over 30% long-term.”

Bank of America estimates Amazon has close to 40% share of U.S. e-commerce.

Amazon’s decision to pause Amazon Shipping was cited in an April 13 ratings upgrade for FedEx stock by Bank of America analyst Ken Hoexter.

It was part of the rationale for upgrading to “buy” from “neutral” and increasing the target price for FedEx shares to $140 from $117.

“We believe the recent decision by Amazon to pause its Shipping with Amazon (SWA) third-party delivery business highlights the difficulty to efficiently enter the business,” Hoexter wrote.


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Hoexter also highlighted moves by FedEx to reduce costs for residential deliveries, including moving some FedEx Express packages into the lower-cost FedEx Ground network and increasing volume in the Ground network by taking back SmartPost packages previously delivered by the U.S. Postal Service.

FedEx began putting some Express packages into Ground in Greensboro, North Carolina, in March and expanded it to Cincinnati, Phoenix, Minneapolis, Newark and Salt Lake City in April. Integration of about 2 million a day SmartPost packages into Ground is scheduled to be completed before the next holiday peak season.

FedEx investor relations officials told analysts recently the company didn’t plan to accelerate the Express-to-Ground shift, but anticipated it would be nationwide by this time next year.

Jindel, president of SJ Consulting and founder of ShipMatrix, agreed the suspension of Amazon Shipping was only a temporary response to COVID-19.

“It’s only until they get back to the routine business,” Jindel said. “Right now their own business is growing so fast that they need to use the capacity for their own network and their own fulfillment, so it is dropping ... for several months and then I’m sure they will resume it. It just makes sense of them to do that also.”

FedEx, which canceled contracts with Amazon last year to provide delivery services, believes its future as an e-commerce shipper lies with Amazon’s competitors such as Walmart and Target.

However, business-to-business shipments are still the company’s bread and butter, amounting to about 80% of total business and about 84% of FedEx Express shipments.

“Logistics is bigger than e-commerce, and e-commerce is bigger than any one player. Our goal is to provide solutions for the rest of the e-commerce players,” Carere told eMarketer.

It doesn’t help FedEx’s bottom line to gain more volume in e-commerce if it cannot profitably deliver it.

The surge in e-commerce because of coronavirus means moves to lower delivery costs are “starting at a faster pace than they were planning,” Jindel said.

“They are challenged in making profits on B2C volume, so that challenge remains. They just need to speed up dealing with that challenge faster now,” Jindel said.

COVID-19 in Memphis and Shelby County: April

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Topics

FedEx Corp. e-commerce Amazon logistics industry
Wayne Risher

Wayne Risher

Business news reporter, 43-year veteran of print journalism, 35-year resident of Memphis, University of Georgia alumnus and proud father and spouse of University of Memphis graduates.


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