In June, FedEx Corporation announced plans to raise their shipping rates and cut jobs and operating costs, citing an excess capacity in the air freight market, which had offset the increase in shipments. On Friday, United Parcel Service Inc (UPS) announced they were cutting their earnings forecast, saying customers were choosing slower, cheaper shipping services and blaming a slower growth in the industrial sector in the U.S. The companies have also cited a slowing economy in China for the problems. But a larger, more lasting trend could be their worst fear.
Amazon, which pays out 4.7 percent of their overall revenue in shipping costs, is building distribution warehouses in certain areas of the country. This puts the products closer to the consumers who buy them, which is grim news for shipping companies like UPS and FedEx, which base their charges on the distance a package is shipped. Further contributing to the fear is Amazon’s increasing use of their own trucks, especially near their headquarters in Seattle. Distribution warehouses are going up in heavily populated cities, particularly along the west coast, in Los Angeles and San Francisco.
Other huge retail companies, such as Wal-Mart Stores Inc., Best Buy Co., and Gap Inc. have started shipping merchandise from stores near the customer, instead of using long distance shipping companies to drive or fly the packages all the way across the country. Most companies aren’t releasing how much they’re saving with these practices, but no doubt it has a huge impact on the revenue of these large shipping companies.
The upside is, even though packages are shipped shorter distances, an increase in online shopping is driving up demand for the number of packages shipped. Unless large retailers, such as Amazon, decide to do their own package toting, the package may help offset losses from distance shipping. Only the future can say for sure what the long-term impact on the shipping industry will be.