The shipping industry has relished Amazon’s ecommerce success. It’s made billions of dollars as a result of Amazon’s 100 million-plus paid Prime members and the ability to deliver what other online retailers couldn’t: kept promises, significant savings and lightning-fast, free delivery of over 350 million products.  

The  Amazon cash cow that once delighted logistics companies isn’t gone, but it’s at risk. Amazon’s segue into shipping has birthed a disruption in the shipping industry that has challenged every major contender.  

Considering the velocity of logistics giants’ recent losses and Amazon’s perspicacious entrance into logistics, the customer-turned-competitor is posturing to make a dent in the logistics industry that will rattle the stock exchanges and annual earnings. Make no mistake, Amazon is in the logistics business and it’s disrupting the giants faster than they can create viable solutions to dodge the Amazon bullets.

CNBC reported that Amazon now ships about 26% of its own orders, which is significant,  considering they own half of U.S. ecommerce sales. Amazon is U.S.P.S’s  biggest customer, and among the largest for FedEx, UPS and XPO.  This means its logistics initiative threatens shipping giants with loss of valuable customers and thinning profit margins.

Amazon’s delivery and shipping model progressed from the same mold as its  Amazon Web Services: developed for its own ecommerce use and is now the largest enterprise cloud business in the U.S.  Amazon Logistics is positioned for the same type of success.

Revenue loss, plummeting stock prices
The Amazon threat has weighed on FedEx and UPS stocks in the first quarter,  which were down 2.9% and 1.3%, respectively. According to Zacks, FedEx missed its earnings for fiscal 2019. XPO’s net income for 2018 dropped 56% year over year, which caused a double-digit drop in stock shares, according to a recent earnings report. On an earnings call, XPO CEO Brad Jacobs suggested the culprit for the loss was the impact of its largest customer reducing its business portfolio by two-thirds, which meant an annual revenue loss of  more than $600 million. While Jacobs denied the customer’s identity, analysts have confirmed the mystery customer is indeed Amazon. With the U.S.Postal Service’s largest customer now making 26% of its own deliveries, it’s no surprise U.S.P.S,’s net income loss jumped 44% in 2018.


Logistics giants fight back
For starters, UPS made an undisclosed equity purchase in Inxeption in January, a blockchain-based marketing services provider to create an ecommerce platform for its B2B marketers to connect with end users. UPS is banking on increased revenues from the investment.

One of UPS’s strengths is its diversification. In its annual report, it indicates no one customer holds more than 9% of its revenue to manage the impact in the event a high-volume customer shifts its shipping business elsewhere.

Chairman and CEO, David Abney, outlineded UPS’s four strategic imperatives for growth at a recent conference:

• Continued expansion of high-growth international markets where the company efficiently connects domestic and export customers to its global network

• Profitable expansion from both B2B and B2C e-commerce, as U.S. industry package revenue is expected to grow by 40% from 2017 to 2022, and cross-border e-commerce volume is expected to grow by 28% over the next three years

• Enhancing services for SMBs, as the company repositions its commercial and service strategies to help this growing economic segment reduce logistics complexity and costs, and take advantage of UPS-offered technology platforms for growth

While the U.S.P.S doesn’t have to scramble to satisfy shareholders, it took measures in January 2019 to cover lost revenues. These measures are rate hikes.

According to the Motley Fool, “former Postmaster General Patrick Donahoe warned that raising rates on Amazon could push the online retailer to find other solutions, taking away valuable marginal revenue from the postal service.”  Donahoe could not have been any closer to the truth; Amazon is finding other solutions that could further erode the Postal Service’s revenues.

As the postal service’s largest customer, delivering some of its own last-mile packages was a catalyst for the recent postal increases. Approved by the Governors of the Postal Service that believes the new rates will keep the Postal Service competitive while providing the agency with needed revenue.

FedEx continues to downplay Amazon’s entrance as a logistics competitor. In fact, on an earnings call last September, the company’s executive VP, Rajesh Subramaniam, said, “While there has been significant media interest in what Amazon is doing to expand their in-source delivery capability, this should not be confused as competition with FedEx. The global infrastructure, the technology, the capabilities, knowledge that’s needed to compete in our business is quite extraordinary, and we have built that up over 40-plus years.”

Statistics references: Amazon Air Fleet Delivery Vans Tractor Trailers Daily Delivery UPS Air Fleet Delivery Vehicles Daily Delivery FedEx FedEx USPS Delivery Vehicles Daily Delivery

Amazon’s natural evolution into logistics
Managing its own logistics guarantees that Prime members get their “free two-day shipping” and ensures Amazon can better handle meteoric sales occurring around the holidays or during bad weather.  The secondary benefit for Amazon is its disruption of the shipping industry as it morphs into a logistics company that rivals today’s giants. .

Morgan Stanley estimates that Amazon saves $2 to $4 per package when it uses its own logistics. That translates into $2 billion annually. And with Amazon’s competitive pricing and thinner-than-typical margins, saving $2 billion in expenses is the same as adding tens of billions of dollars in profit without ever having to sell something.

On Amazon’s January 31, 2019 earnings call, Amazon CFO Brian Olsavsky explained why logistics are key to the company’s customer-centric growth:

“What we like about our ability to participate in transportation is that a lot of times we can do it at the same costs or better and we like the cost profile of it, too. We can also invest selectively because we have more perfect information. We know where our demand is, we know where we’re moving things between warehouses and sort centers. And by not involving third parties all the time, we found that we can extend our order cutoffs and we’ve done that over the last few years.”

What’s next for Amazon beyond nailing logistics?
You can bet it will be disrupting the online advertising world. Take a sneak peek.