Could One Job Change Be At The Heart Of Amazon's $600 Million Decision To Yank XPO Business?

It seems odd that arguably the world's most powerful company would get bent out of shape over one executive's departure. But Kenneth Wagers was not just any executive, and he didn't go to just any company.

At Amazon.com, Inc. AMZN, Wagers, known to nearly everyone as "Kenny," ran a far-reaching portfolio. As head of the company's global transportation business, Wagers headed up last-mile, middle-mile, Amazon China, air and ocean operations, the "Amazon Fresh" grocery delivery business, and the "Prime Now" same-day operation. Given Amazon's profound transition from simple e-tailing to a complex model emphasizing transportation and logistics, it would be hard to imagine an executive, other than Founder, Chairman and CEO Jeff Bezos, whose loss would be more costly.

To complicate matters, Wagers was wooed from Amazon by transport and logistics giant XPO Logistics, Inc. XPO, which he joined last April as its chief operating officer, adding the title of interim head of its less-than-truckload unit in June. XPO had created a service called "XPO Direct," which integrates contract logistics, middle and last-mile transportation into an end-to-end network aimed at businesses that don't want to manage the process themselves. The service resembles Amazon's "Fulfillment by Amazon" (FBA) operation, where the company provides merchants with an online storefront, warehousing, fulfillment, distribution and delivery. FBA accounts for more than half of Amazon's sales.

As it happens, Amazon is a user of XPO Direct, presumably for heavier consignments, which is XPO's sole business.

Executives move between companies all the time. Wagers didn't sign a non-compete contract with Amazon, so he was free to go elsewhere. Thus, his decision might not have sparked any further discussion. Then last Thursday, XPO disclosed that its largest customer – which it wouldn't identify but whom everyone knew to be Amazon – would pull $600 million in traffic, or two-thirds of Amazon's total annual spend with XPO. The first segment, valued at $200 million, was withdrawn in late December and impacted XPO's postal injection business (it transports goods from distribution or fulfillment centers to postal locations for final delivery). The other $400 million will disappear during the first half of 2019, and will be spread across multiple transportation functions. The remaining $300 million of business that Amazon has with XPO is tied up in long-term contracts, and will stay put for now.

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The loss of the postal injection business caused XPO to report fourth-quarter results that were below its original forecasts. The loss of the remaining business forced the company to lower its outlook for 2019. Traders and investors responded the following day by heavily marking down XPO's share price. The shares have recovered some of that ground since then.

There are a number of plausible explanations for Amazon's move, including it is investing heavily in its own supply chain, and may have decided it was more cost-effective to take much, if not all, of the XPO business in-house. Or it may not have been happy with XPO's performance. Or it may have decided that with the hiring of Wagers and the development of a competing service, tendering so much business to XPO didn't make a lot of sense. Amit Mehrotra, an analyst for Deutsche Bank, published a research note yesterday in which he said the last scenario was the most credible. Mehrotra said XPO should take heart in Amazon's decision because it signals that XPO Direct is gaining traction in the marketplace.

Then there is the more dramatic explanation – that Amazon was so peeved by Wagers jumping to XPO that it took away the business out of spite. An industry source advanced such a theory. Last year Amazon asked XPO to "reconsider" its decision to hire Wagers, effectively requesting that it fire the executive, the source said. XPO denied Amazon's request, according to an industry source.  It is unclear how the two sides left it, other than the fact that Wagers remains employed at XPO.

"This is retribution. This is payback," the source said in describing Amazon's decision to pull the business. Asked if some type of compromise could have been achieved, the source said that "Amazon doesn't compromise." The development of the XPO Direct service was a secondary factor in Amazon's decision, the source said. XPO declined comment on the matter. Amazon called the source's comments "untrue and ridiculous."

Amazon's competitive concerns surrounding XPO Direct are misplaced because XPO doesn't function as an e-tailer like Amazon, the source said. What's more, Amazon, though it is expanding its delivery footprint to include heavy commodities like furniture, still handles mostly small-parcel shipments. This puts the bulk of Amazon's traffic outside of XPO's wheelhouse.

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XPO Direct is the culmination of Chairman and CEO Brad Jacobs' vision of the ideal mechanism to capture the relentless surge in e-commerce traffic, and in particular heavy goods movement. Indeed, no provider may be better positioned to handle the continued double-digit growth of non-parcel orders placed online. The Greenwich, Connecticut-based company has assembled a heavy freight network combining more than 90 contract logistics facilities, the second-largest LTL operation and what is considered the strongest last-mile delivery business for heavy goods in the country.

In an effort to repair the damage to a share price that has been cut by more than half since last September, XPO has bought back $1 billion of its common shares, and it plans to buy back another $1.5 billion over an undetermined time period. Jacobs told FreightWaves on February 14 that XPO is shelving plans to acquire other companies in lieu of the share buybacks, which he said is a far more effective use of its capital.

Jacobs had told investors in late 2017 that the company would make one, and perhaps two acquisitions during 2018. None were made, however, though Jacobs said XPO was close to a deal before a mid-December short-seller's report sent shares plummeting and made the buyback option more attractive. XPO acquired and integrated 17 companies from 2011 to 2015, an unprecedented run in the history of the industry. Its last acquisition was the $3 billion purchase of truckload and logistics giant Con-way Inc. in September 2015.

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