Amazon Will Deliver More Packages Than UPS or FedEx by 2022
22 Dec 2019
Amazon (NASDAQ:AMZN) is already delivering more of its own packages than its delivery partners like UPS (NYSE:UPS) or USPS. At the pace it’s growing, it’ll be delivering more packages total than either UPS or FedEx (NYSE:FDX) in just a few years.
The online retail giant is delivering around half of its own packages through Amazon Logistics, according to an estimate from Morgan Stanley’s analysts. That’s in line with an estimate from Rakuten Intelligence earlier this year that it delivered 45% of its packages.
Amazon will make about 6.5 billion deliveries in 2022, up from 2.5 billion this year, according to Morgan Stanley’s projections. That compares to 5 billion deliveries and 3.4 billion deliveries that year for UPS and FedEx, respectively.
The growth of Amazon Logistics has not gone unnoticed in Amazon’s financial reports, but the long-term benefits ought to prove well worth the investment.
Spending a fortune on shipping
Amazon’s shipping expense increased 46% in the third quarter, reaching $9.6 billion. That growth has accelerated this year as Amazon evolves its Prime shipping benefit from two-day delivery to one day. For reference, both UPS and FedEx had operating expenses around $16 billion last quarter. So there could be a lot more investing planned for Amazon Logistics.
To be sure, a lot of the increase in expenses is tied to launching one-day delivery for Prime members. That means Amazon has to pay the premium pricing for UPS or USPS one-day shipping on items it doesn’t ship itself. As it moves to control more of its own deliveries, it will likely mitigate the premium pricing it incurs from its shipping partners. CFO Brian Olsavsky noted earlier this year it’s usually less expensive for Amazon to deliver its own packages.
Meanwhile, building out a network of airhubs, planes, trucks, and last-mile delivery drivers isn’t exactly cheap. Amazon is certainly taking on more leases to fill out its logistics network, but the exact numbers are obfuscated by its larger lease agreements for Amazon Web Services servers and rackspace. Nonetheless, Amazon’s healthy cash flow is more than capable of supporting the increased investment.
Owning the last mile
There’s a big benefit to Amazon to owning the entire delivery chain from its warehouses to its customers’ doors. As previously mentioned, it’s generally less expensive for Amazon to ship items itself. But that benefit improves as the company scales the number of deliveries it makes. That’s why it’s able to deliver many more items with Prime one-day shipping that it couldn’t afford to previously with UPS or FedEx.
Owning the delivery chain also means faster delivery. Amazon can offer later order cut-off times to shoppers for one-day delivery, something FedEx is charging Amazon’s competitors a premium for with its Extra Hours service.
In the long run, Amazon should save a lot of money on shipping while positioning itself to compete better with brick-and-mortar retailers. It doesn’t have its top items forward deployed in stores like many of its major competitors, which allows them to offer same-day and next-day fulfillment for less. But owning the last mile and shifting to one-day delivery has enabled Amazon to win more sales for items shoppers may have gone to a brick-and-mortar store for before.
The potential for a new Amazon business
Amazon Logistics could become a service for third-party merchants at some point in the future. With scale larger than UPS or FedEx, it could very well undercut their pricing while lowering its own shipping expenses due to increased scale.
Amazon currently skews its own deliveries more toward urban and suburban markets than rural. That’s because those markets are generally more efficient for deliveries, with homes closer to one another. But using the scale provided by third-party demand could enable it to make deliveries in more rural areas more cost-efficient.
Of course, Amazon Logistics for third parties would also be another source of relatively high-margin revenue. UPS’ and FedEx’s operating margins were 9.8% and 6.4%, respectively, last year. That compares to operating margin of 4.4% for Amazon’s North American operations.
As Amazon continues to ship more and more packages itself, the potential for it to branch off a new business increases, which is where the real payoff for its investments could lie.
By Adam Levy
Source: The Motley Fool