Major Retailers Turn Their Backs on FedEx and UPS

When most people order products, they probably expect to see a Fedex (FDX) or UPS (UPS) vehicle deliver them. But the nation’s largest shipping companies are facing a new challenge from much smaller rivals.

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Regional shipping companies have gained popularity with many retailers — including large vendors like Walgreen (WAG), Amazon (AMZN) and Avon (AVP). Smaller shippers have partnered together to extend their reach across multiple regions, sharing the transport and delivery of packages across larger geographic stretches. These regional shipping networks have allowed shippers like Eastern Connection Operation, LaserShip and OnTrac to compete with FedEx and UPS in many markets, the Wall Street Journal notes.

The shipping giants have seen declining demand for their premium air delivery service, where they have the clear advantage over smaller competitors. With consumers and retailers increasingly opting for lower-cost ground delivery, FedEx and UPS have been moving to increase their land delivery reach.

Regional shippers, however, tend to use contracted delivery drivers and have lower overhead costs, allowing them to price deliveries between 20% and 40% below the rates charged by FedEx and UPS. Smaller shippers are often faster than FedEx and UPS in getting packages to their intended destinations, giving them another advantage.

FedEx and UPS are certainly aware of the emergence of regional shipping networks, which serve up to 90% of U.S. zip codes, and are moving to respond. Regional shippers are expected to generate $1 billion in revenue this year, about 3% of the total shipping market. That’s more than twice what they collected in 2009.

Shares of both FedEx and UPS were mostly flat in Thursday morning trading.

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