United Parcel Service (NYSE:UPS) has announced that it will implement pricing surcharges during the peak holiday season. This will impact the all-important few days around Christmas as well as Black Friday, where online delivery demand explodes.
I won't go into the motive for these charges, which is arguably valid. Instead, there's an interesting insight when it comes to Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY). This has to do with how both companies do business.
When it comes to Amazon.com, its business is split between 1P (1st Party) retailing - where Amazon.com is the seller and fulfiller of customers' orders - and 3P (3rd Party) retailing, where third parties do the selling. Furthermore, 3P retailing is then further divided into business where third parties fulfill the orders, and business that's "fulfilled by Amazon".
As of Q1 2017, third party units sold represented 50% of all paid units sold on Amazon.com.
eBay is different. eBay is entirely a 3P marketplace. It does not possess fulfilment capacity, and thus all units sold by third parties are also fulfilled by third parties. Indeed, some of those units will even be fulfilled by Amazon.com.
The difference between Amazon.com and eBay is thus that Amazon.com's mix is more geared towards 1P sales. This carries consequences when it comes to paying the UPS increased pricing.
Those consequences stem from the fact that Amazon.com is a huge shipper of goods through UPS. Indeed, Amazon.com is likely UPS' largest customer, representing an estimated 7% of UPS North American volumes. As a result of this, Amazon.com doesn't get retail prices for its shipping needs. Instead, it gets its pricing from a contract with UPS. The contract, naturally enough, is unlikely to be affected by these new peak charges.
I should also add that both Amazon.com and eBay offer integrated UPS shipping services to its marketplace vendors (third parties). However, the pricing on these services is likely to be affected by the new peak charge. Finally, third parties shipping through Amazon.com's FBA (fulfilled by Amazon.com) are unlikely to see an impact from the peak charge (since those shipping charges will be covered under Amazon.com's contract with UPS).
The result of all of this is that relatively speaking, eBay will be more impacted by UPS' move, simply because third parties are a larger part of its business.
I should also add that traditional retailers having a large online presence are also unlikely to be affected by this move, since they're also likely to have contracts in place with UPS.
We can draw a few conclusions:
- eBay will be more exposed to UPS peak charges because its business mix relies more (indeed, totally) on third party sellers.
- This will also impact a part of Amazon.com's 3P sellers, though fewer than 50% of units sold will be affected. Since the mix is 50% of paid units to start with, and then part of those 50% are fulfilled by Amazon, the impact is necessarily on just a smaller slice of those 50%.
- Overall, the impact is small on either company. This applies to just a few days around Christmas and Black Friday. Also, it applies to late buyers, which will be less price sensitive at that point in time. Moreover, right now it applies to UPS alone, but I'd expect this at the very least to expand to FedEx (NYSE:FDX).
- On the other hand, the online retail business affected - 3P marketplaces - is the highest margin business. Also, the impact is concentrated on Q4, which can magnify its impact since it's expressed over the highest-volume days on a single quarter.
Overall, I expect this to go unnoticed. But it does represent an attempt by UPS to flex its pricing power muscles, something which has been in evidence for many years. I expect the move to be followed by FedEx.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.