AMZN Prepares to Go the Last Mile

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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.

the-last-mile-amznWill 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…

In order for this scenario to play out, AMZN would first have to find a replacement shipper to get the 182 million packages from point A to point B. The test it’s undertaking in the U.S. as well as that in the U.K. are only responsible for the final leg of the package’s journey. Unless said package was going from downtown San Francisco to somewhere in the Bay Area such as Palo Alto, AMZN would still need a shipper with a plane or tractor trailer to get it where it’s going.

While Bezos and company could seek out cheaper regional alternatives, it seems unlikely that packages going from LA to New York would be farmed out to anyone but the big boys.

Now lets assume that UPS loses 50% of AMZN’s business. That’s 91 million packages, or 29 cents per share. In order for this loss to be real, it would have to sit on its hands and not seek out replacement business. That just won’t happen. As a global logistics champion, it’s always bringing on new customers. At the end of the day this is making a mountain out of a molehill. It helps AMZN more than it hurts UPS or FDX.

The Last Mile Reality

Although AMZN doesn’t publish the locations of its fulfillment and distribution centers, logistics consultant MWPVL has put together a rather thorough examination of its warehouse facilities in Canada and the U.S. As of April, it estimates  that AMZN operates 55 fulfillment centers in the U.S. and Canada, totaling 43 million square feet. Worldwide, it’s more like 108 fulfillment centers and 75 million square feet.

Furthermore, MWPVL estimates another 12 fulfillment centers are expected to be opened in North America in 2014 for an additional 10.3 million square feet. Give or take a few million square feet — AMZN’s 2013 10-K says 84.6 million square feet — they are in the ballpark.

Why mention this?

Because it’s clear that the Last Mile program will be designed around big cities, where most of its customers’ orders come from. Fulfillment centers will continue to be built on the outskirts of major metropolitan areas, making the last leg feasible under its own Amazon delivery banner. If the news reports are correct Amazon is already testing its own tracking system that doesn’t link to third-party shippers. Bringing as much of the fulfillment and shipping process in-house as it possibly can only enhances the high-touch customer experience Jeff Bezos seeks to provide AMZN customers.

The Last Mile – Bottom Line

When I first read the Last Mile news, I immediately thought third-party shippers like UPS and the Post Office were in a heap of trouble. However, after reflecting on what actually will take place, I’ve come to the conclusion that it will be somewhat revenue neutral for UPS et al., while revenue positive for AMZN.

Amazon’s costs might not change too much as a result of the move but it will certainly reinforce the AMZN brand as its trucks move about San Francisco and elsewhere delivering packages.

Does it make sense? You bet. Will it work? That has yet to be determined. Will it hurt third-party shippers like UPS? It could — but not nearly as much as you might think.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2014/04/amzn-the-last-mile/.

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