There has been plenty of speculation about Amazon increasingly becoming a transport and logistics company and competing directly with UPS and Fedex, the kings of parcel movement. Idle talk was further fuel when Amazon launched its own fleet of cargo planes, leasing 20 Boeing 767 wide body freighter aircraft to handle more of its own deliveries in the U.S.
Amazon has not denied rumors about its plans to later acquire its own planes. Says VP Global Operations at Amazon, Dave Clark:
“At this moment, that’s not something we’re pursuing.” He added: “I’d never say never, … Who knows what the future holds?”
The Case for Amazon to Enter the Logistics Business
Shipping costs are sky-high for Amazon. When you count nearly 80 million Amazon Prime customers across the world paying $99 each towards membership fees, the resulting $8 billion worth of annual cash flow seems like a lot of money. But consider the fact that Amazon spends nearly $12 billion out of pocket for shipping its products worldwide, and suddenly Amazon doesn’t seem to be making any sort of profit from Prime memberships.
Amazon’s shipping cost has been steadily increasing as the company kept expanding its user base. With Amazon’s entire business model relying on deliveries to the home, Amazon’s delivery and shipping-related expenses have kept on rising as well.
As you can see from the graph, above shipping costs are outpacing shipping revenues, and the most expensive leg of delivery is the last mile to your home. Unlike a traditional big box retailer where every extra customer that walks into the store will reduce the overall investment cost of the retail location, every order from every customer means an additional expense for Amazon.
And that’s why the speculation around Amazon getting into the logistics business. If they own the shipping network, their costs will be much lower and they will be far more profitable as a company.
But now let’s look at the opposite side of the argument.
The Case for Amazon to NOT Enter the Logistics Business
Though we don’t know what might happen twenty years down the road, Amazon has no choice but to keep its relationship with UPS and Fedex on the best terms possible. With the company growing at a fast pace even within the United States, their requirements for shipping are huge. And huge enough that they will simply not be able to do it on their own for at least the next 10 years or more. They still need Fedex, UPS and a host of smaller partners to ship the estimated billion packages per year to their rightful owners.
So there’s no way Amazon is going to go head-on with giants of the logistics industry whose deep penetration of the U.S. geography would put any company to shame. It’s a symbiotic relationship for now, albeit a tension-filled one.
On their part, the moment UPS and Fedex see a credible threat coming from Amazon they will inevitably start backpedaling on the discounts they dole out to Amazon as one of their largest customers.
The second biggest problem Amazon will face is capital. Logistics is an extremely capital-intensive industry. UPS and Fedex spent nearly $7,000,000,000 ($7 billion) last year towards capital expenses. Amazon needs every penny it makes to fund its own expansion plans, and building a logistics network is not the kind of distraction they want at this time.
So what then, if Amazon isn’t competing with UPS and FedEx?
As an analyst I believe that the company merely wants to gain more control over its shipments, nothing more. Seasonal peaks are the worst time of the year for Amazon in terms of shipping headaches, and UPS and Fedex themselves are stretched just to keep up with Amazon’s customers come shopping season every year.
That’s the real reason Amazon is looking to operate a fleet of Boeing 767s – so it can ease the load off UPS and Fedex and take more control over its own shipping needs.
The better option for Amazon – the one they’re pursuing at the moment – is to handle certain parts of the shipping chain like plying goods between its own fulfillment centers. If they can connect two shipping hubs with transportation of their own, it makes it that much cheaper for them. Whether it’s city to city aircraft deliveries in the United States or huge container ships connecting Shanghai to San Francisco, the more they own of their shipping infrastructure, the more they stand to gain – but only up to a certain point, beyond which the size and scale of UPS and Fedex will be more efficient every time.
The biggest takeaway is that Amazon is trying to save more money on shipping so it can spend more on attracting even more Prime customers with freebie after freebie, which I’ve written about in detail in a piece called How Big is Amazon Prime?
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