Amazon Shakes Up the Delivery Business

It’s classic Amazon. Build an internal business to service the massive online store. Give it dominant scale. Sell the excess supply as a stand-alone enterprise.

Two weeks ago, The Wall Street Journal reported Amazon (AMZN) may be developing an application to independently schedule and track shipments online. That should sound vaguely familiar. It’s the exact service provided by United Parcel Service (UPS), FedEx (FDX), DHL Group and others. Amazon wants to build a new entrant with the global scale. That’s going to materially change the $150 billion global freight industry.

Cathy Roberson, founder of Logistics Trends & Insights LLC, told the WSJ: “This is the next piece in the jigsaw puzzle. It’s all falling into place for Amazon as a logistics provider.”

After launching a new fleet of freight planes, Amazon may soon leave UPS, DHL and FedEx behind in its exhaust.

For global freight’s Big Three, the implications are clear. Soon they will be competing head-to-head with one of their best customers.

When Amazon began building a network of massive warehouses almost two decades ago, many in the retail industry scoffed. It seemed like overkill for a tiny online-bookseller in out-of-the-way Seattle. Those warehouses were later automated with innovative robots. They were connected to global data centers providing instant access to storage and compute at unprecedented scale.

The data centers became Amazon Web Services. Years later, its excess supply became the information technology infrastructure for many of Silicon Valley’s hottest startups. Recently, that migration has extended to the Fortune 500 and it’s growing rapidly. Wired reported AWS grew 49% in 2014 to $4.6 billion in sales. Just last quarter, the internal unit had sales of $3.2 billion, a 54% surge year-over-year.

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Legacy technology companies have been left in the wake. Hewlett Packard, Dell, EMC and Cisco have struggled to retain clients. After all, why build out and maintain your own data centers when you can simply rent state-of-the-art gear – and now software analytics – from AWS for a fraction of the cost?

Now, Amazon could do the same with logistics infrastructure. A while ago, I reported on the beginning of this commercial revolution. Last year, it announced it would brand thousands of the trucks that shuttle packages between its distribution centers. This year, it leased 40 cargo jets and registered a shipping company in China. Massive spending projects to provide last-mile services in the U.K. and India are ongoing. It’s a trend.

It is what Amazon does. Massive warehouses outfitted with productivity enhancing robots reduced the cost structure for the online store. AWS had the same effect. Building out an Amazon-branded global logistics business will put pressure on the rest of the industry to reduce fees. That’s a win for Amazon.

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It’s a loss for UPS, FedEx and DHL. Worse, history suggests Amazon is likely to extend its AWS business model to logistics. That means it will eventually offer excess capacity as a stand-alone business. That would mean even lower prices.

Amazon is a dominant business with the type of scale few can match. That is a huge advantage. The shares remain a long term buy into material pullbacks.

Best wishes,

Jon Markman