If it’s just a mere rumor Amazon.com, Inc. (AMZN) is developing its own distribution network that will negate much of its need for service providers like United Parcel Service (UPS) and FedEx (FDX), then it’s a potent, plausible one.
The Wall Street Journal has affirmed the whispers floating around since last week that the e-commerce giant is looking to establish a fleet of air cargo planes so it can handle more of its own delivery logistics, and do so at a lower cost than what it’s spending now to ship packages.
In other words, there’s probably a great deal of truth to the premise, even if mum’s still the word from Amazon.
AMZN shareholders are understandably enthused about the idea, as delivery costs are growing faster than the company’s sales of physical goods; those relative costs should be going down as scale increases.
At the other end of the spectrum, UPS shareholders are sweating the rumor, as Amazon’s absence could take a billion-dollar bite out of the delivery service’s top line.
At the risk of sounding glib to UPS investors, for Amazon.com, it’s nothing personal — it’s just good business.
Finally an Idea to Be Proud Of
In the interest of perspective, yours truly hasn’t been shy about bashing Amazon in the past when it made some odd, ridiculous business decisions.
It wasn’t an effort to beat the value of Amazon stock lower. They were simply calls for investors to recognize the company wasn’t applying common sense. For example, the use of freelance package delivery drivers is ill-advised at best, and I still contend the notion of delivery drones is downright idiotic if it’s anything more than just a publicity stunt.
On the flipside, a good idea is a good idea regardless of who comes up with it, and Amazon has had its fair share of good ideas, too. Namely, I lauded the company’s efforts to “win” Cyber Monday, and I thoroughly credited July’s Amazon Prime Day as a business-building tool.
Point being, I call ’em like I see ’em, good or bad.
With that as the backdrop (and as I suggested would be a wise idea back on Sept. 30) Amazon is at a point where the next best step is expanding its own internal delivery capabilities rather than ultimately lining the pockets of UPS shareholders.
And that’s exactly what it’s doing. With The Wall Street Journal’s report on the matter, it’s difficult not to think Amazon isn’t actually in talks with air-cargo companies to lease a fleet of delivery airplanes.
For the record, it’s not a completely alien idea to Amazon. It’s already got a few of its own trucks on the road — mostly as an experiments and for R&D purposes — suggesting this has been on Jeff Bezos’ mind for a while. Adding an estimated 20 or so jets to the mix, however, clearly ups the ante.
Although many have accurately pointed out that this isn’t just about money, money does have a great deal to do with it. In the third quarter of this year, shipping costs amounted to 11.7% of the company’s total revenue, vs. only 10.4% of revenue in the same quarter last year, despite the fact that crude oil prices have essentially been halved since then.
Faithful owners of UPS will be quick to point out that this was low-margin business anyway, and might say good riddance if Amazon backs off on its use of the service.
It will be a no-margin account should Amazon decide to do much of its delivery work in-house, though, and unlike UPS, Amazon doesn’t have to make deliveries a profit center to boost the value of AMZN stock. Amazon.com can simply break even on its freight charges. The profit will come on the sale of the item.
That said, there’s no denying there’s a benefit to the entire e-commerce process (from sales to delivery) being handled from start to finish by Amazon; the package “hand off” to UPS can create big headaches for Amazon.com.
Bottom Line for AMZN stock
A reason to buy Amazon stock? No, not quite, but it’s a reason to appreciate the potential of AMZN a little more.
Amazon is still a company with significant flaws, not the least of which is the fact that the business model itself inherently leads to paper-thin profit margins.
That would be fine if the company could prove to AMZN shareholders it could consistently turn a thin profit. There’s the rub, however … a lack of consistent profit.
The addition of an in-house delivery service won’t directly lead to reliable earnings, though it may just indirectly help a little.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.