Amazon Case Study

Typically, the day after Thanksgiving (Black Friday) marks the beginning of the holiday shopping season in the United States. Holiday sales, typically defined as sales occurring in November and December, account for roughly 30 percent of annual sales for U.S. retailers (Holiday Forecasts and Historical Sales, 2015). For 2016, total online sales from November 10 to December 31 amounted to 91.7 billion dollars. And the top retailers for this period were eBay, Amazon, Walmart, and Target (Tasker, 2016). The growth in online sales appears inevitable, but how do the top shippers, UPS and FedEx, manage the sudden upsurge?

Not always so well. In 2013, both FedEx and UPS underestimated holiday demand, and with bad weather conditions as well, struggled to deliver packages as promised. Since then, both carriers have worked hard to keep adequate resources available to handle the end-of-year upsurge. But in 2014, UPS overcompensated and had too much capacity, once again damaging profitability (Livengood, 2017).
Matching retailer expectations to reality is a challenge, and not just for the shipping companies. Although retailers would prefer to know how much to expect in sales, forecasts will be inaccurate, sometimes wildly so. In preparing its forecast for the 2017 peak season, Logistics Management examined economic factors, such as GDP, job growth, retail sales, and inventory levels. It also looked at imports. An informal survey of logistical professionals found that 93.5 percent expect the 2017 season to be the same as 2016 (35.5 percent) or more active (58 percent) (Berman 2017).

In June 2017, UPS announced that it would be adding a surcharge to some peak season rates. According to the UPS website, “During the 2016 holiday season, the company’s average daily volume exceeded 30 million packages on more than half of the available shipping days. In contrast, on an average non¬peak day, the company ships more than 19 million packages” (UPS Establishes New Peak Shipping Charge, 2017). The rate for the 2017 peak season would apply to select services and to oversize shipments, primarily (UPS Establishes New Peak Shipping Charge 2017). Analysts see the surcharge as a signal that UPS is the rate setter in parcel delivery. Such an assessment is not surprising given that the increase in parcel delivery as an outcome of increased e-commerce is seen as a core driver of earnings for UPS (Franck, 2017).

Second-ranked FedEx, in contrast, announced that it would not follow suit but instead would “forgo most holiday surcharges on home deliveries this year” (Schlangenstein, 2017). The surcharges levied by UPS are aimed primarily at small shippers, not the larger contract shippers. By not adding a seasonal surcharge, FedEx might hope to capture sales from individuals and small businesses that are deterred by the UPS surcharge (Schlangenstein, 2017).

Kevin Sterling, a Seaport Global Holdings analyst, believes that FedEx has the existing capacity to absorb additional ground shipments. “[FedEx is] going to let UPS be Scrooge at Christmas” (Schlangenstein, 2017). UPS already has a contract with Amazon, the de facto behemoth of online shopping, for normal shipping, leaving room for FedEx to pick up the slack during the holiday rush (Schlangenstein, 2017).

In contrast, UPS reports that the additional charge is needed to offset the costs of additional resources necessary to achieve expected upsurges in capacity. UPS spokesperson Glenn Zaccara commented, “UPS’s peak season pricing positions the company to be appropriately compensated for the high value we provide at a time when the company must double daily delivery volume for six to seven consecutive weeks to meet customer demands” (Schlangenstein, 2017).

With or without surcharges, price structures at both companies strive to discourage shipment of heavy, odd-sized, or oversized packages because such packages won’t flow through either company’s sorting systems and require special handling. All the same, FedEx has seen a 240 percent increase in such shipments over the last 10 years, which make up roughly 10 percent of all packages shipped using its ground services. And although FedEx is not adding a holiday surcharge, per se, it has added charges for packages that require extra handling, particularly shipments between November 20 through December 24 (Schlangenstein, 2017).

And the global pandemic of 2020 didn’t help the situation.  “Salesforce … says global digital orders continued to grow after Cyber Monday (Nov. 30), peaking to 71% growth year over year on Dec. 5 before slowing down on Dec. 7” (Evans, 2020).  One logistics-saving innovation continued expansion during 2020 to help save valuable last-mile transportation resources:  curb-side pickup.  This ecommerce tool leverages on-line ordering with safe, social-distancing customer pickup. “Retailers with curbside pickup particularly benefitted, Salesforce adds. Digital sales Dec. 1–Dec. 14 grew 52% year over year for U.S. retailers that offered curbside, drive-thru and in-store pickup options” (Evans, 2020).  

Increased customer demand for holiday shipping created the perfect-storm, with the pandemic drastically hitting transportation supply at the same time. “Nearly 19,000 of the [United States Postal Service’s] 644,000 workers are under quarantine after testing positive for the virus or after a close exposure, according to the American Postal Workers Union” (Bogage & Denham, 2020).  It wasn’t unexpected but it was rather unprecedented when “FedEx and UPS enacted restrictions on large-volume retail shippers in early December, according to industry tracking firm ShipMatrix. For the week of Dec. 6, FedEx delivered 93.9 percent of its parcels on time, UPS delivered 96.1 percent, and the Postal Service, 87.5 percent” (Bogage & Denham, 2020).  To many, however, the number of lost and delayed packages seemed even greater.  It appears that Amazon’s investments for additional in-house personnel, trucks, sorting centers and even cargo aircraft paid off in 2020, as they claimed Prime Members could still shop for most items through Dec 23 or even Dec 24 (Steiner, 2020).  When next day just isn’t good enough, many consumers are now willing to pay for two-hour delivery!