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FedEx will end US delivery deal with Amazon

FedEx said it would end domestic ground deliveries for Amazon packages when the contract between the companies expires at the end of August. Two months ago, FedEx said it would no longer provide its express shipping service for Amazon.

[NEW YORK] Amazon dominates book sales, online shoe purchases and cloud computing. It owns Whole Foods, the high-end grocery chain, and just got involved in homebuying.

On Wednesday came the latest sign that Amazon has disrupted yet another industry: shipping. FedEx said it would end domestic ground deliveries for Amazon packages when the contract between the companies expires at the end of August. Two months ago, FedEx said it would no longer provide its express shipping service for Amazon.

FedEx is effectively terminating its business relationship in the United States with the company, which has been building its own delivery capabilities and is becoming a serious competitor to old-line shipping companies.

Furthermore, the decision reflects the reality that Amazon's economic reach has grown so great that the company has started to alienate not just rival retailers, but longtime business partners.

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That growth has left companies like FedEx with something of a quandary: keep working with Amazon, even if it could hurt long-term business prospects, or cut ties with the company and try to build a shipping business around other players.

"FedEx has made the decision that is no longer wants to sharpen its executioner's sword," said Scott Galloway, a professor at New York University's Stern School of Business. "It's another reflection of this winner-take-all ‘Hunger Games' economy that is dominated by an increasingly few number of companies."

In just a few years, Amazon has become one of the nation's largest shipping companies, delivering its own packages and those of small businesses that sell their goods via Amazon's website. It has transported those packages using its own trucks, planes and delivery staff, particularly during the so-called last mile, the leg immediately before a package is delivered.

During the holiday season in 2018, Amazon handled 30 per cent of its last-mile shipments. That was up from 8 per cent in 2016, according to an analysis by Rakuten Intelligence, an e-commerce data and analysis provider.

Amazon is also moving more packages through the air. The company is expected to end the year with a fleet of 50 aircraft, up from 40 at the end of 2018. In four years, the company could have as many as 200 aircraft, according to the financial firm Cowen.

Analysts said Amazon had other advantages over shipping contractors like FedEx. By using its reams of customer and geographic data, Amazon can choose to handle the shipping of packages going to densely populated areas, which is more efficient than making deliveries to rural locations. And it can outsource deliveries to far-flung areas to its shipping partners, like the Postal Service, UPS and, for a few more weeks, FedEx.

In a statement, FedEx said its decision to sever its Amazon ties was "consistent with our strategy to focus on the broader e-commerce market."

In May, FedEx moved to bolster its ground-delivery service, announcing that it would soon offer seven-day residential delivery year-round. Then, in June, it said it was stopping the express deliveries for Amazon, typically the fastest way customers can send packages, including overnight shipping. FedEx said on Wednesday that "the recent announcements related to our FedEx Ground network have us positioned extraordinarily well."

Rena Lunak, an Amazon spokeswoman, said the company was "constantly innovating to improve the carrier experience and sometimes that means reevaluating our carrier relationships."

Despite its outsize role in e-commerce, Amazon has never been a major source of business for FedEx. Last year, Amazon accounted for 1.3 per cent of FedEx's total revenue. In theory, Amazon could still ship packages via FedEx, but it would not receive the significant discounts that were built into its ground-shipping and express contracts.

In any case, Wednesday's announcement had the feel of a final divorce. In a tweet, Dave Clark, who runs Amazon's global supply chain and logistics operation, described the situation as "conscious uncoupling at its finest."

Despite its recent investment, Amazon has a way to go before it can match the logistics infrastructure of the major packaging companies. In a recent report, Goldman Sachs analysts wrote that Amazon would need to put US$122 billion into its logistics network to catch up with FedEx and UPS.

But those shipping companies have certainly taken note of Amazon's efforts to build its own logistics infrastructure. In a May regulatory filing, FedEx hinted at the potential threat those moves posed.

"Some high-volume package shippers, such as, are developing and implementing in-house delivery capabilities and utilising independent contractors for deliveries, and may be considered competitors," FedEx said in the filing, which also noted that Amazon was "investing significant capital to establish a network of hubs, aircraft and vehicles."

Dean Maciuba, a former FedEx executive who now works as a consultant, said FedEx had good reasons to cut ties with Amazon. "They could not afford any longer to directly support a competitor," Mr Maciuba said.

But the public nature of FedEx's decision confounded other longtime freight industry experts.

"I am baffled," said Satish Jindel, the founder of ShipMatrix, which provides technology to the shipping industry, and a former employee of a startup delivery company that later became FedEx's ground unit. "It is creating bad blood."