E-Commerce Drives Changes at UPS and FedEx

One of the most interesting changes which has occurred in the U.S. economy in recent years has been the rise of business to consumer e-commerce. From nowhere, it has blossomed into an approximately $170 billion industry with Amazon.com being the biggest e-commerce vendor. Amazon though is a well-known story to investors.

A more interesting tale may be to look at how e-commerce is completely changing the world for delivery companies like United Parcel Service (NYSE: UPS) and FedEx (NYSE: FDX). Just take a look at the numbers for UPS for example. Residential deliveries have jumped from about 20% of US volumes in 2000 to almost 40% last year.

The growth of e-commerce has been a mixed blessing for these two companies. Sales have increased as more and more consumers buy goods from e-retailers. However, due to the logistical challenges, delivering these type of packages from house-to-house is not a very profitable business especially for companies whose main business had been delivering many large packages to business customers.

Delivering small packages to individual homes squeezed profit margins at the delivery companies. The “last mile” can make up 75% of overall supply chain costs for these firms. Today executives at both UPS and FedEx admit that they have been wrestling with this problem since the early 2000s, but that finally they are getting a handle on it. And they may be right.

FedEx was the first delivery company to really come to grips with solving the problem. The solution? Dump the problem (low-value packages) onto third-parties. In 2004, FedEx acquired a company whose business was to drop off low-weight packages with the U.S. Postal Service for final delivery to individual homes.

This fits right in with FedEx's business model. A large number of packages is delivered to one site – the post office – reducing expenses. And it is a growth business. In the fourth quarter of 2011, average daily volumes at FedEx SmartPost grew 17% to 1.7 million. UPS rolled out a similar product in the U.S. and Europe last year.

Both companies have also tackled the chronic problem of missing customers at home and being forced to re-deliver packages. In October, UPS launched UPS My Choice which alerts customers before their packages arrive. This product both increased driver productivity and consumer satisfaction. FedEx has offered a similar service for several years through its Home Delivery service.

These type of innovative products may be just the beginning of a series of products developed by UPS and FedEx to improve their customers' experience. It is likely we'll see more mobile apps being used as a delivery tool soon, for instance.

Of course, one question remains with a big part of the companies' strategy. What happens when the Postal Service further reduces its services due to fiscal restraints. Piggybacking on top of the US Postal Service may not work in the long term and another solution will have to be found.

This article for originally written for the Motley Fool Blog Network. Be sure to check out all of my daily articles for the Motley Fool at http://blogs.fool.com/.