TIME’s ‘Person Of The Year’: Your UPS Driver?

It’s not out of the question, and here’s why. Global e-commerce sales may reach $1 trillion next year, growing at a rate of 19.4% annually. To handle that demand, a Global B2D (Business-To-Doorstep) Supply Chain is growing at breakneck-speed in hopes of meeting every package, logistic, fulfillment, payment, enterprise resource planning (ERP), radio-frequency ID (RFID), and reverse logistic need.

Buying Versus Building

To move the merchandize to your doorstep at increasing speeds, Amazon Prime – Local Express Delivery (AMZN), eBay Now (EBAY), Wal-Mart To Go (WMT) as well as Mom-and-Pop businesses around the world, are asking the same question. Do we buy or build the B2D Supply Chain technologies and workforces required to satisfy demand?

eBay’s (EBAY) decision to acquire GSI Commerce (supply chain provider) last year at a 51% premium to market, is a textbook example of believing time-to-market and cost will be reduced by buying. B2D Supply Chain companies are also buying their peers. For example, privately-held RedPraire, announced last month that it would pay a 33% premium for peer, JDA Software (JDAS). JDA is well known for its supply chain enterprise solutions.

Rob Martinez, President & CEO of Shipware, LLC said, “Regarding the ‘buy vs build’ question, very few companies have the resources (distributed warehouses, transportation infrastructure, sortation systems, warehouse and driver workforces, global supply chain execution software, etc.) required to build an optimized delivery network. I forecast the majority of announcements in this area will come from acquisition.

Alain Monie, President and CEO of Ingram Micro, says “We are actively pursuing a strategy that combines both “buy” and “build.” To accelerate our relevance in the global e-commerce supply chain, we recently completed our largest acquisition to-date, adding $5 billion in mobility distribution and logistics services from Brightpoint Inc. to our offerings portfolio. “Buying” was the right strategy, as it was important to get big fast in this rapidly growing market and provided us immediate access to critical competencies that would have taken years to build.”

Monie also said, “Organic investment is also highly important, as we have been building out our logistics capabilities. In North America alone, approximately 50% of packages sent for this region’s $15 billion+ in annual sales are now related to meeting the needs of many of the world’s leading e-commerce providers.”

Bob Vormittag, President of mid-market ERP software developer Vormittag Associates revealed, “We have grown our platform organically as opposed to making bolt-on acquisitions. Our strategy is to offer our customers a totally integrated solution with a standardized web interface for all applications, and support from one vendor whenever possible. This single database architecture simplifies the environment allowing for scalable growth.”

Is ‘Showrooming’ Fueling B2D E-Commerce?

Yes, when a customer visits a brick and mortar (B&M) store, tests out a product, and then performs a “price check” using a the bar-code scanning iPhone or Android app in hopes of purchasing the product at a lower price, there is a growing chance that the B&M store will lose the sale and the B2D E-Commerce supply chain will gain more merchandise.

Although the practice of ‘Showrooming’ is relatively new (Wikipedia page created May, 2012), Harris Interactive found that 43% of smartphone and tablet users have already tried it. In addition 13% of online buyers who shopped with a mobile device over the Thanksgiving Day weekend did so while in a retail stores, according to a survey of 10,000 consumers who bought online by comparison shopping site Bizrate and Forrester Research. For more color watch ‘Showrooming’, ‘Price-Matching’ Hurting Retail? on Bloomberg TV’s “Taking Stock with Pimm Fox.”

What Will Amazon Buy Next?

To secure the number one (1) position in the same-day delivery market, one would think Amazon or Wal-Mart might try to acquire United Parcel Service (UPS) or FedEx (FDX). Pimm Fox of Bloomberg TV’s ‘Taking Stock’ told me he thinks an Amazon – UPS combination is unlikely for several reasons, such as the need to be in sync with the company’s union.

Rob Martinez, President & CEO of Shipware, LLC also said, “A merger between United Parcel Service (UPS) or FedEx and Amazon or any big-box shop like Wal-Mart will not happen. The business models, corporate culture & history, leadership and future strategies are entirely incompatible. FedEx and UPS will continue to grow its supply chain business through acquisition and organic growth, but it won’t be in retail (outside of The UPS Store). UPS and FedEx are perfectly content to remain on the delivery side of eCommerce transactions.”

Further hurdles relates to the consideration that would be paid (e.g. % stock versus cash). Market capitalizations of Wal-mart, UPS, Amazon, and FedEx are $241.0 billion, $115.0 billion, $70.1 billion and $28.1 billion, respectively. Amazon and Wal-Mart have $5.3 billion, and $8.6 billion, respectively of cash on the balance sheet. Amazon has no debt, whereas Wal-Mart has $57.5 billion.

Financial Commentary

24 analysts surveyed by Yahoo Finance expect UPS and FedEx to increase revenues next year as global e-commerce sales approach $1 trillion. On an interest, tax, depreciation and amortization adjusted basis, UPS currently trades at a 35% premium (10.5x) to the S&P 500 (7.8xs). At the same time FedEx shares are trading at a 35% discount (5.3xs) to market. Based on that single comparison FedEx may seem like a value buy. However for the second quarter the same 24 analysts surveyed by Yahoo Finance expect earnings per share to drop from $1.57 to $1.41.

According to Ben Gordon, of BG Strategic Advisors, “Other possible winners in the B2D Supply Chain may be Echo Global Logistics (ECHO), which is a technology-enabled transportation management company, XPO Logistics (XPO) which provides third-party logistics services using a network of ground, sea, and air carrier relationships, and Roadrunner Transportation Systems (RRTS), which provides asset-light transportation and logistics services.”

Eddie Capel, President and COO of Manhattan Associates (MANH) said, “The financial community is betting on the success of supply chain specialty companies. Manhattan Associates which develops its technology organically, has seen a 52% increase in its stock price in 2012. Manhattan Associates has also invested more than $250 million in supply chain-focused R&D over the past five years.”

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Disclosure: No positions or plans to initiate one in any security mentioned