Amazon’s Foray into Shipping

Jeff Bezos has become the richest man in the world. Amazon is one of the biggest companies.

Amazon has always grown at a very aggressive rate. It is known for not giving out any dividends to shareholders. Instead, Amazon has always plowed in all its earnings and invested the same for growth. However, as the company matures, there are fewer options available to help Amazon continue its astounding feat of growing at double-digit rates.

As a result, it has started looking out for greener pastures. For instance, it was recently rumored that Amazon is teaming up with Berkshire Hathaway and JP Morgan to offer health insurance services. However, now Amazon has decided to venture into shipping its own products. Amazon has stated that it will run a pilot of its logistics services in Los Angeles. These services will later be ramped out to include other cities and states.

This aggressive declaration has led many analysts to believe that the competition in the shipping space is going to heat up soon. Amazon is known to be a disruptor. They have a history of moving into billion-dollar businesses with strong incumbents and becoming a significant player. The case of Amazon Web Services is a testimony to this fact.

In this article, we will have a closer look into Amazon’s foray into the shipping industry. We will try and analyze whether or not Amazon is likely to succeed in this business.

How is the Industry Structured?

If Amazon does enter the shipping industry, it will indeed be a newcomer in this very old business. United Parcel Service has been in the business for over a century. FedEx has also been around for over forty years. Other players like DHL have also had their infrastructure in place for decades. Amazon will most likely be playing catch-up. They are unlikely to make a significant dent in the business of these logistic giants. Amazon has a lot of hurdles lined up before it can make any significant impact.

Firstly, shipping is a capital-intensive business. Amazon would need a huge fleet of planes and trucks to get any kind of operation underway. Also, the investments in warehouses and sorting centers will be significant to build any kind of momentum.

Shipping has become a specialized business which requires heavy investments in software as well. Just to give an idea of the scale of investments, both UPS and FedEx have more than 500 airplanes. These companies also own more than 150,000 cars and trucks. They also employ more than 100,000 people each and deliver about 20 million packages every day!

It is likely that Amazon will try to lease most of this infrastructure instead of buying it. This will make Amazon’s operations more expensive and time-consuming. Also, quality hassles are common when outsourcing is used in the shipping industry.

How Will Amazon Benefit?

Shipping is a major component of Amazon’s costs. Amazon has sent more than 1.2 billion packages in 2017 in the United States alone. Most of this business is routed via UPS, FedEx and even United States post. The problem for Amazon if that they have to pay these companies twice. Once they pay them to deliver the packages to the customer. Then they pay them again to pick up the packages from suppliers and deliver them to Amazon’s distribution centers.

If Amazon is able to establish its own shipping company, it will benefit from economies of scale. It will be able to drastically cut down costs because the vehicles that will be returning empty after delivering customer shipments can be loaded by the suppliers. This will result in substantial cost savings for Amazon.

Can FedEx and UPS Compete?

FedEx and UPS have cause to be worried about the future. However, they shouldn’t be alarmed as of now. This is because:

  • Amazon will require huge capital investment and years to scale up operations. It will be a miracle if they are able to manage their entire shipping by themselves in the next decade. The question of having excess capacity to compete with FedEx and UPS is still far away

  • In the short run, Amazon will be dependent on FedEx and UPS. These companies could team up together and stop providing concessional rates to Amazon. An increase in shipping rates will affect the bottom line immediately. This will impact the additional cash flow that Amazon can deploy to compete in the shipping industry.

    From a strategic stand point, FedEx and UPS certainly have the higher ground. They can use their financial and operational muscle to decimate Amazon’s operations whereas there is very little Amazon can do to disrupt their day to day business

  • Their monetary losses will not amount to much even if they lose the last mile connectivity business. This business is not very lucrative from a financial stand-point.

  • Also, the market for shipping in the United States is huge. Apart from giants like UPS, DHL, and FedEx, the market is currently being served by many small and medium enterprises. Amazon’s entry into the business may not have much of an impact on the business of others since the shipping market is already huge. It is also growing at an alarming pace given that online shopping is slowly becoming the norm.

❮❮   Previous Next   ❯❯

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.