News reports were buzzing Thursday when it was revealed by several media outlets that Amazon (AMZN) was testing its own “Last Mile” delivery service in San Francisco, Los Angeles and New York. After Christmas shipping delays by both UPS (UPS) and FedEx (FDX) forced the world’s largest online retailer to give customers $20 credits, AMZN is taking matters into its own hands.
Will it work? Does it make sense? Will UPS and FDX be affected by the move?
These are just some of the questions that come to mind as AMZN pursues the ultimate customer experience through logistical solutions such as going the last mile. As Jeff Bezos continues to push the envelope, AMZN shareholders can only hope he hasn’t gone too far.
The Last Mile and Logistics
In December, I referred to Jeff Bezos as the “Steve Jobs” of logistics — the ultimate middle man. Indeed, AMZN is really just a big logistics company that also happens to sell products of almost every description to customers in the U.S. and elsewhere.
This latest batch of news stories suggests AMZN’s initiatives regarding the last mile are a shot across the bow of both UPS and FDX who seriously dropped the ball this past holiday season. That’s a logical explanation, but I don’t think it’s the correct one.
As an online retailer masquerading as a logistics company, AMZN obviously was thinking about the last mile long before the latest snafu with its third-party carriers. Over the past three fiscal years, it has spent $15.7 billion on shipping, with costs increasing at an average annual rate of 38%.
In the three months ended March 31 shipping costs jumped another 31% year-over-year and now represent 9.3% of overall revenues. Three years ago, those costs were 100 basis points less. That might not seem like a lot, but on $74.5 billion in revenue it adds up to a $744 million in additional expense. If AMZN pocketed the difference, its income from operations in 2013 would have doubled. That’s a big deal.
The Last Mile and UPS
According to the Wall Street Journal, UPS handled about 30% of the 608 million packages shipped by AMZN in 2013, second only to the US Postal Service. UPS generates approximately $554 million in revenue (1% of its overall sales according to Stephens Inc. analyst Jack Atkins) from the 182 million packages handled for AMZN, which works out to 58 cents per share, or 13% of its EPS this past year.
That’s a lot, no doubt. But it will never happen like that. Here’s why…