Amazon Formalizes Competition with Shippers

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1Q 2019 | IN-5428

Amazon is driving at least 49% of the United States’ e-commerce sales. Notably, the company recently updated wording in its annual 10-K to add companies that provide “transportation and logistics services" and detail “intense competition” from a number of companies.

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Amazon versus Everyone Else


Amazon is driving at least 49% of the United States’ e-commerce sales. Notably, the company recently updated wording in its annual 10-Kto add companies that provide “transportation and logistics services" and detail “intense competition” from a number of companies.

Shippers like UPS, FedEx, USPS, and DHL make a combined US$5 trillion from U.S. commercial shipments using massive fleets of last-mile delivery vehicles; UPS has approximately 119,000 vehicles and FedEx has more than 160,000 vehicles. Since 2018, Amazon has quadrupled its own delivery vans to almost 20,000 vehicles, with reports of up to 7,500 trailers for moving products across its fulfillment centers and warehouses in use. Amazon expanded its Amazon Air fleet of 40 Boeing 767 cargo planes, with leases for at least 10 more (FedEx claims that it owns 678 planes and UPS owns 248), operating about 350 flights per week in 2Q 2018, and plans to open its own air hub in Kentucky in the next 2 years.

The firm also has ocean freight, smart lockers in numerous sites, and some options for in-home deliveries. These investments have been assessed as saving Amazon an estimated US$2 to US$4 per order; with CFO Brian Olsavsky indicating that Amazon can ship a number of packages at or below the cost of its partners. Already, Amazon is projected to deliver 26% of orders independently. This could lead to a potential US$4 billion loss for delivery partners.

Risk and Reward


The company’s developing vertical integration offers cost advantages, further customer linkage, and a playbook reminiscent to Amazon Web Services (AWS), which was initially developed to serve internal stakeholders. Additionally, Amazon is exploring emerging technologies and form factors to efficiently reach the last mile. This includes the Amazon Scout, which is an autonomous delivery robot in Washington State, as well as funding for Aurora Innovation, a startup focused on a full range of autonomous driving capabilities.

Early last year, the e-commerce giant launched its Shipping with Amazon (SWA) logistics services initially in Los Angeles, ramping up competition with its partners. Amazon also provided significant discounts in its first volley, enabled for third-party Amazon sellers. FedEx appeared to respond with its late-night shipping.

Rumored provider XPO Logistics missed its forecast after contractions from a significant customer, which is assumed to be Amazon and likely its largest client. This impacted XPO’s stock price and has been linked to XPO facilities closures, with sales droppingby up to two-thirds, or US$600 million annually. Despite strong debates on the amount of business that Amazon constitutes, both FedEx and UPS have been down slightly over the last month. Only recently, UPS’s Chief Executive Officer (CEO) finally acknowledged that Amazon is considered a threat.

Unlikely to Go It Alone


The expanding co-opetition with its shippers is expected to continue evolving. Some Amazon considerations regarding its shippers that were mentioned in the 10-K include seeking “better terms from vendors…more aggressive pricing, and…more resources to technology, infrastructure, fulfillment and marketing.” The question is how far and how fast will Amazon go to take on its current partners? A sustained march may bring additive multi-modal transport under its SWA umbrella or perhaps acquisitions, both large and small. There could be potential anti-trust implications if Amazon targets a large shipper. Along the way, pricing may continue to be a point of contention on both sides.

“Buy versus make” can open up Amazon to new issues, with rumors that it already considered a bid last year for XPO, with a US$9 billion value at the time, in competition with Home Depot. A variety of considerations in evolving SWA into a shipper include unions, overhead, economic conditions, and regulatory matters, including taxes.

It is unlikely in the near-term that Amazon will transform SWA into a broader provider. It is most prudent to make incremental changes, invest in disruptive technologies, modes, and form factors, and strike a balance in extending reach in specific markets for logistics services. Potentially, SWA will follow a modified version of the AWS playbook, initially for its own usage to offset cost, increasing control and flexibility for demand variation. Given the nearly unmatched scale, however, there is little reason to believe that Amazon could not transition to a full-fledged provider with a reduced and/or redefined role for its partners.


Companies Mentioned