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FedEx's Price Rise Is a Blessing in Disguise for Amazon

FedEx's Price Rise Is a Blessing in Disguise for Amazon

By Claire Cain Miller, The New York Times | Updated: 10 May 2014 14:38 IST

No. 1 on the list of chores the Internet has done away with: dragging yourself to the store to stock up on unwieldy items and carting them home. Many e-commerce companies - led by Amazon.com and the sites it owns, like Diapers.com and Soap.com - have made it easy to order even items like toilet paper and diapers without paying a cent for shipping.

So when FedEx announced last week that it would change its shipping prices to charge for the space a package occupies in a truck, not just its weight, many analysts suggested that Amazon would be the biggest victim. Shipping costs already eat into its slim profits, and as any Internet shopper knows, Amazon has a habit of mailing items from a single order in multiple oversize boxes, often with free two-day shipping.

But FedEx needs Amazon more than Amazon needs FedEx. Instead, FedEx's price increase - which happens in January and which analysts say UPS is likely to match - could further cement Amazon's power over retailing by striking a bigger blow to small Internet retailers, the same ones that are already losing the battle with Amazon. The Internet might have made it possible for the smallest of businesses to sell their wares, but the price of delivering cardboard boxes highlights just how powerful an advantage size can be in the Internet economy.

The main reason is that standard shipping rates simply do not apply to Amazon. The company negotiates its own rates with FedEx and other shipping companies, and gets an enviable deal because of the huge volume of business it supplies.

Put another way: FedEx would rather give Amazon a sizeable discount than lose Amazon as a customer altogether.

"The big guys always do better whenever there's a change, because they can bring clout to the negotiations," said Fiona Dias, chief strategy officer at ShopRunner, an e-commerce service that offers free shipping at a variety of retailers. "Little retailers don't have that clout."

The Web operation of your local book or shoe store also gets retailer discounts from shipping companies, but they are not as deep.

Jon Singer, founder and chief executive of Singer22, a retail store and e-commerce site based in Long Island, New York, said he might try to fit more items into smaller boxes if UPS, his shipping service, also changed pricing, but he would not start charging shoppers more for shipping. Ultimately, he said, "We're going to have to eat it."

Smaller boxes would probably be a relief to people who care about the environment or just want more space in their recycling bins. But for small online retailers, it is another added expense because they have to buy more sizes of box. Now they generally buy only a few.

"You're going to have to weigh shipping air across the country and paying extra for that, or buying more custom-fitted boxes and paying extra because you have all these size of boxes sitting around," Dias said.

And FedEx has added incentive to maintain its side of the deal with Amazon, because Amazon has already signaled to FedEx and the other delivery companies that it doesn't necessarily need them as much as it once did. It is beginning to deliver its own packages, often the same day, and offers lockers in various cities where shoppers can pick up the items they ordered. It has even floated the idea of delivery drones. On Thursday, Amazon announced an expansion of its partnership with the U.S. Postal Service (sorry, FedEx) to deliver to more cities for free on Sundays.

In part to increase their control over shipping times and prices, other Internet companies including eBay, Uber and Google are also trying same-day delivery (perhaps performed someday by a Google driverless car). Walmart.com avoids paying shipping costs by letting customers pick up items in lockers and stores.

Eventually, consumers will pay for the price increases - even if they don't know it. Shoppers will switch to another e-commerce site without a second thought to find free shipping, so retailers will probably raise the price of the items they sell instead of charging more to ship them.

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