United Parcel Service Inc. (UPS) and FedEx Corp. (FDX) are testing strategies for a same-day delivery market fueled by Web retailers trying to match the instant gratification their brick-and-mortar competitors offer shoppers.
Delivery programs under way at Internet retailers such as Amazon.com Inc. (AMZN) and Ebay Inc. (EBAY) signal an opportunity in business- to-consumer shipments for delivery firms where the high-value overnight market between companies has been hurt by a slower economy. It's a space that larger companies have mostly ignored since the collapse of Kozmo.com Inc., which was partially backed by Amazon, in 2001.
Potential industrywide revenue from intra-city delivery of small packages in the U.S. may be as much as $12 billion, triple its size in 2007, FedEx said. While that trails the air-cargo carrier's Express revenue of $26.5 billion last year, it has the potential to grow into a "huge boon" for FedEx and UPS, said Donald Broughton of Avondale Partners.
"Amazon cannot offer me the ability to try it on," said Broughton, who's based in St. Louis. "They can't offer me the ability to hold it in my hands, but we're not that far away from them being able to say, 'Click on it for noon delivery.'"
Traditional retailers are already adapting, offering same- day service through their websites to fend off e-commerce rivals. Wal-Mart Stores Inc. (WMT) enlisted UPS for a holiday pilot program that charges customers a flat fee to deliver popular items such as toys, electronics and sporting goods.
Conducted in four markets, the service costs $10 for buyers in northern Virginia, Philadelphia and Minneapolis and $5 to $10 for customers in the San Jose/San Francisco area, Wal-Mart said.
The pilot program and UPS's investment in Shutl, a London- based firm that connects brick-and-mortar stores with couriers, are helping the biggest package-delivery company evaluate same- day demand and determine how it can best compete. Competitor FedEx entered the market with its SameDay City service, available in 20 municipalities from Phoenix to Los Angeles and New York.
"What we're trying to do is understand the take-rate of what customers are willing to pay for instant delivery," said Jerry Del Gaudio, Atlanta-based UPS's vice president of strategy.
The arrival of large retailers in a market traditionally populated by business-to-business shippers such as health-care customers and lawyers "completely changes the size of opportunity," said Manish Kapoor, the managing director for SameDay City, a part of FedEx Office.
The service's list price for standard deliveries traveling less than 5 miles (8 kilometers) is as low as $13, down from the $25 fee that initial market research had suggested, Kapoor said. By mid-November all FedEx Office drivers will be trained for the same-day program.
FedEx and UPS stand to take market share from the smaller couriers that retailers such as Amazon often turn to for services such as same-day and overnight delivery, said Colin Gillis, an analyst at BGC Partners LP in New York who has used Amazon's same-day delivery service.
"If I've been given that offer for same-day, I'd still take UPS overnight, because it's more traceable," said Gillis, who has a hold rating on Seattle-based Amazon. "Those companies, because of their scale and scope, have some advantages over the smaller ones."
That's a potential bright spot for both FedEx and UPS, which have each trailed a 16 percent gain in the Standard & Poor's 500 Index this year as they grapple with the shift toward slower, cheaper express services by their business customers. Memphis, Tennessee-based FedEx has climbed 12 percent, while UPS gained less than 1 percent.
There are obstacles, including the possibility that same- day delivery demand may be tempered by shoppers' willingness to pay for it.
"Customers will go to extreme lengths to inconvenience themselves to save a few dollars," Sucharita Mulpuru, an analyst at Forrester Research Inc. (FORR), said in an e-mail. "Retailers would be engaging in a race to the bottom if they ever gave something like this away for free."
It's happened before. Kozmo and rival dot-com venture Urbanfetch, which aimed to deliver goods ordered online within hours, both found the business unfeasible.
Urbanfetch closed its consumer arm in 2000 after failed merger talks with Kozmo. And Kozmo, known for its orange-suited delivery staff, shuttered its operations a year later.
Another challenge to FedEx and UPS is the edge that regional couriers have in flexibility. That makes them a better choice for same-day delivery, said Josh Dinneen, vice president of supply chain at LaserShip Inc., based in Vienna, Virginia.
The regional courier has 22 locations on the East Coast and counts Amazon and Barnes & Noble Inc. (BKS) among its same-day service clients.
UPS and FedEx "have a service platform," Dinneen said. "It's very good, but it's very rigid, they're not nimble. We're designing customized solutions that fit into these big-box retailers' supply chains that makes it efficient for them and gives them the flexibility to provide this type of service."
FedEx is banking on its brand recognition and service capabilities to help attract same-day customers who might otherwise use a regional courier, Kapoor said.
"It matters who shows up at the door to make a delivery," he said. "Customers do value the convenience, peace of mind and reliability. At the end of the day, they are willing to pay for that."
The U.S. Postal Service is stepping into the market with a pilot program in San Francisco. The agency is in talks with retailers and anticipates working with as many as 10 companies during the trial, which starts in mid-November.
The post office, UPS and FedEx all see indications that the allure of instant gratification will outweigh the costs for shoppers.
"Customers are quickly moving toward buying more online, and most want to see what they bought right away," FedEx's Kapoor said. "The demand for that is building up. The good thing is we're ready for it."
In 2011, Amazon spent almost $4 billion on shipping, more than double what it spent in 2009. The company was able to make up more than a third of that with shipping revenue.
The company has begun acquiescing to states' demands it collect sales tax in exchange for the ability to place warehouses closer to consumers. The shift has fed industry speculation Amazon is planning to roll out same-day delivery already available in 10 cities on a wider basis, heightening competition with brick-and-mortar stores.
Amazon, which invested in the failed Kozmo and other dot- com ventures, has dismissed such talk. It offers the service in limited areas including Boston, New York and Chicago.
"We don't really see a way to do same-day delivery on a broad scale economically," Chief Financial Officer Thomas Szkutak said on a July earnings call. "We'll continue to work on behalf of customers to try to figure out a way to serve them even faster."
Retailers facing fiercer rivalry with Amazon might get an edge from Shutl, which will make its U.S. debut in New York and San Francisco early next year, said Tom Allason, the service's chief executive officer.
Currently limited to cities in the U.K., Shutl lets shoppers order delivery online, by telephone or in person 24 hours a day. Delivery is typically less than $10 or often free, depending on the retailer, and Shutl makes a profit on every delivery, Allason said. The company won a $2 million investment in August from backers including UPS.
"The fact that Amazon is doing that is wonderful for us because it sets the expectation among consumers and retailers," Allason said. "And expectations only move in one direction."