The new kids in town

If you are planning to gift an iPad this Christmas and haven't booked one yet, it might be too late. The global chip shortage that hit Apple’s product lines is extending shipping times of the iPhone 13 by a few weeks and so Apple is accelerating holiday sales shipping by diverting components and production lines from the iPad to the iPhone.

While Apple’s woes are more to do with the scarcity of chips at manufacturing sources, the holiday season shipping headaches may not add to its woes like last year. Apple is now a major eCommerce player with a busy online DTC channel and relies on shipping and fulfillment like any other DTC brand. The iPhone is particularly shipped using UPS and this year, UPS has already worked with its largest customers including Apple months ahead of the season to manage holiday shipping. It has added more than 2 million square feet of additional sorting space and acquired more cargo planes.

Amazon is a freight airline

Someone else has been acquiring cargo planes as well. While Amazon remains the single largest customer for UPS (13% of its total business), it is fast becoming a competitor to both UPS and FedEx. Amazon now owns the fifth largest dedicated fleet of cargo aircraft that enable it to (in the words of its CFO Brian Olsavsky)

Control the whole flow of products from the warehouse to the end customer.

This is not only enabling Amazon to keep its flock together but also entice (coerce?) small and medium( DTC) sellers to move into its embrace and this will steadily eat away the customer base of UPS and FedEx.

We had seen this coming

We had seen this coming and spoke about it back in 2019. Amazon and big retailers have shifted expectations on shipping, which can be very difficult to meet for a small seller. Expectations have only increased in the intervening years. Even before the pandemic, a Scalefast report revealed that 43% of consumers surveyed preferred Amazon for its free shipping, while 36% preferred it because Amazon ships faster.

DTC brands have caught up on shipping

Back in 2019, we observed that at least 17% of SMB offered same-day shipping while up to 26% offered one-day delivery. The pandemic situation not only accelerated demand in e-commerce causing a strain on shipping capacities but also strained revenues of many small and medium DTC brands due to curbs on non-essential deliveries through lengthy lockdown periods. But through the period, many DTC brands scaled up on free shipping and quick delivery

Our recent data on US DTC companies reveals that at least 33% of SMB now offer same-day delivery while up to 72% of them offer free shipment. While  Amazon itself is a high volume low margin customer for someone like UPS, SMB is a low-volume, high-margin business for shipping carriers.  

Make or break

Shipping expenses have a bigger impact on small businesses that don't have the clout to negotiate shipping prices.

This holiday season can make or break many of them, with rising pricing, labor shortages, and supply chain issues already plaguing some of them. But then the shortages with larger retailers and shippers (like Apple) can be an opportunity with demand shifting to products that smaller DTC brands ship.

Shippers’ opportunity

The 27% share of the business that UPS is getting from small and medium businesses is all the more important to UPS. It signals a new but fragmented source of revenue that naturally repels Amazon’s dominance. Many of these DTC eCommerce businesses come with lower volumes but frequent shipping. They are scaling up to offer same-day shipping as we saw earlier but they need a better solution for the last mile delivery if they wish to keep most of their business out of marketplaces and have control on customer data.

In 20 years Amazon has evolved from an online retailer into a cargo airline. Perhaps we may see UPS or FedEx evolve into a new ecosystem of eCommerce working with the SMB segment as it works with Apple or large retailers?

Nah, who am I kidding? There is a new last-mile megalith that will come up and it won’t be FedEx or UPS. Who has your money?