Amazon delivery service: Why Bezos is launching Shipping with Amazon

Now UPS and FedEx have to answer the dreaded Amazon question, as the e-commerce giant aims to launch a shipping service for third-party sellers.
Written by Larry Dignan, Contributor

Video: Competitors need to answer the Amazon question

Amazon is reportedly planning to launch a delivery service that will compete with UPS and FedEx and ultimately give it control of the last mile of delivery.

The e-commerce giant historically has optimized its supply chain, distribution and logistics and then handed off to carriers such as UPS, FedEx, and the US Postal Service.

But now Amazon plans to launch Shipping with Amazon or SWA, according to The Wall Street Journal. The effort will roll out in Los Angeles. Yet another industry has to answer the dreaded Amazon question. Hell, even healthcare has to address Amazon these days.

Amazon's move to develop its own shipping service isn't surprising. Shipping could hamper Amazon's plans in the future. A shipping service could also be a profit engine.

UPS and FedEx have the ability to raise prices and upend Amazon's cost structure. Shipping is a massive expense. Stifel analyst David Ross noted:

UPS is growing nicely off a large base (more thanks to Amazon than in spite of Amazon) in all segments and now is increasing spending significantly on capacity growth.

Meanwhile, Amazon mentioned how shipping is critical to its business in its annual report. Reliance on UPS and FedEx is also a liability. Amazon said in its 10-K:

We rely on a limited number of shipping companies to deliver inventory to us and completed orders to our customers. If we are not able to negotiate acceptable terms with these companies or they experience performance problems or other difficulties, it could negatively impact our operating results and customer experience.

Shipping costs, which include sortation and delivery center and transportation costs, were $11.5 billion, $16.2 billion, and $21.7 billion in 2015, 2016, and 2017. We expect our cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, we reduce shipping rates, we use more expensive shipping methods, and we offer additional services. We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing our fulfillment network, negotiating better terms with our suppliers, and achieving better operating efficiencies.

This showdown with UPS and FedEx has been building for a while. Consider:

  • Amazon is piloting SWA with third party sellers, but it can open it up to other businesses. That move can keep costs down.
  • The company already has launched its own freight service. (See also: Amazon's Prime Day marks debut of Prime Air cargo planes, a FedEx, UPS threat)
  • Controlling the last miles of delivery is also critical to expand Whole Foods delivery operations.
  • And if you look hard enough in the suburbs you notice an army of small courier trucks with local contractors. These white vans are delivering Amazon packages in most cases and in my neighborhood are seen as often as UPS and FedEx already.
  • The Amazon move also comes at a time where UPS just outlined how it was building out its network.
  • And if you're going to provide a system (Amazon Key) where your door opens to an Amazon delivery when you're not home, it's best to own the driver and delivery experience completely.

Add it up and the surprise isn't that Amazon is launching SWA; the real surprise is that it took Amazon this long to do it.

Read also: Amazon Alexa adds ability to send SMS messages by voice | Amazon, Berkshire Hathaway and JPMorgan Chase & Co. health venture likely boon for AWS | Amazon removes lock screen offers and ads from Prime Exclusive phones

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