Amazon blocked its third-party sellers from using FedEx a few weeks before Christmas — ahead of the busy holiday season.
This attempt to “embarrass” FedEx is a sign of the shipping giant’s looming collapse, says Scott Galloway, professor of marketing at New York University's Stern School of Business and author of “The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google.”
“The analogy I would use is staging a mock homecoming queen ceremony and then pouring pig's blood on somebody. This was really calling FedEx out and doing it at the worst moment possible,” he says. “This was a strategic stabbing, if you will.”
Galloway predicts in the next 24 months, FedEx will either be acquired or lose an additional 40% of the company’s declining value.
He says Amazon’s attempts to use fulfillment to establish greater loyalty with its Prime customers means FedEx is being “featurized” — a term he uses to describe when a high-margin, scalable business invests in a low-margin, difficult business as an in-house component.
But that doesn’t mean there are more Amazon trucks on the road than FedEx right now. That’s because FedEx has more capital expenditure than Amazon, but the online retailer has several advantages of its own, he says.
On top of Amazon’s superior technology, the company does not offer drivers benefits like health care or paternity leave, he says, making its costs lower than FedEx’s. Though some FedEx drivers are contractors who don’t receive benefits, Amazon’s costs will still be lower thanks to the “algorithm of exploitation” used by many big tech companies, he says.
“To be blunt, fulfillment and delivery is all about trust,” he says. “And the most trusted brand in the world right now is Amazon.”
Amazon had better on-time delivery performance over the holidays compared to FedEx. Part of that is reality, part perception, he says — but perception is important in financial markets.
In the last two years, FedEx has lost 40% of its value while Amazon has increased its value 30%, he says. Now that Amazon is in the business of fulfillment, the company can perform what he calls a “Jedi mind trick against FedEx,” he says.
“You continue to see further erosion in the stock price of FedEx, even if it's not supported by the fundamentals,” he says, “because the markets have come to believe that once Amazon sets its sights on an industry, that every other player in the industry begins to shed value to Amazon.”
This phenomenon gives Amazon an advantage because it decreases their cost of capital and enables them to “make their own future by massively investing in that category to the extent that other players can't invest,” he says.
Amazon Logistics ships over 2.5 billion packages annually in the U.S. — compared to 3 billion for FedEx and 4.7 billion for UPS, according to Morgan Stanley estimates.
Amazon saw an opportunity to “go vertical” by controlling the front and back ends of its business, he says.
“This is exceptionally complicated, takes incredible operational excellence, a facility with data and quite frankly, access to billions and billions of dollars and cheap capital,” he says. “And Amazon has all of those things.”
FedEx, on the other hand, is in a worse position than other delivery companies like UPS because the company has not innovated, he says. Chief Executive Frederick Smith has been focused on tax avoidance, he says, while the company’s user interface and delivery times are “substandard” relative to its competitors.
Galloway says FedEx is so behind the curve, he recommends Smith sells it to a company like Walmart which can use the infrastructure to go vertical — just like Amazon.
“So my advice — sell,” he says.
This segment aired on January 10, 2020.