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Amazon Is Getting Closer to Its Own Delivery Service

By Adam Levy - Feb 5, 2018 at 5:42PM

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The e-commerce giant is helping third-party merchants take care of logistics themselves.

If you really think about it, Amazon (AMZN 2.92%) is already a shipping business. Amazon Prime has attracted millions of members on the promise of two-day shipping for over 100 million items.

Amazon ships most of those 100 million Prime-eligible items from its growing network of warehouses spread across the globe. But Amazon's latest service, called FBA Onsite, could have more third-party sellers sending items directly from their own storage spaces. Amazon will oversee the logistics of getting items from point A to point B, replacing some of the work often handled by UPS (UPS 1.69%) and FedEx (FDX 3.47%), according to a report from Bloomberg.

The move has the potential to relieve some of Amazon's capital expenses while opening a path to more service revenue.

An airplane with Prime Air printed on it.

Image source: Amazon

Solving its own problem

Amazon can't seem to build warehouses fast enough.

Not only is it seeing greater demand from customers shopping on its website, but more and more third-party merchants are using its Fulfillment By Amazon service. Fulfillment By Amazon, or FBA, allows third-party merchants to ship their inventory to an Amazon warehouse, enabling Amazon to take care of the logistics of shipping out orders as they come in.

Amazon takes a cut of every FBA sale and there are other fees associated with inventory storage. The success of the program shows up in the company's third-party seller services, which increased 40% year over year in the third quarter.

But Amazon has had trouble keeping up with demand for FBA in the past. In the fourth quarter of 2015, Amazon experienced such high demand for FBA that it put a strain on its fulfillment costs. Fulfillment as a percentage of revenue climbed to 12.7%, up from 11.7% in the year-ago quarter.

Amazon introduced Seller Fulfilled Prime at the beginning of 2016 to try of offset some of the congestion in its warehouses. But that resulted in significantly higher costs for third-party merchants who don't have the logistics wherewithal of Amazon.

Thus, the introduction of FBA Onsite. The new service gives third-party merchants all the logistics power of Amazon.

Amazon will oversee the pickup of packages from merchants' warehouses and determine the best way of shipping them. Merchants will also get to take advantage of Amazon's discounted rates with the United States Postal Service, UPS, and FedEx, saving merchants up to 85% on their shipping costs.

Sellers win because their fulfillment costs go down; Amazon wins because it doesn't have to use up its precious warehouse space.

Amazon, the services company

While Amazon will still lean heavily on traditional shipping companies like UPS, FedEx, and USPS and the near term, there's potential for Amazon to start injecting its own carrier systems at some point.

It already runs a fleet of planes and trucks to deliver packages to distribution areas and hand them off to a shipping partner for last-mile delivery. It also has a group of vetted freelance drivers in its Flex program that deliver some items, particularly Prime Now orders, the last mile to customers' doorsteps. And don't forget its experiments with drones.

FBA Onsite provides the potential for Amazon to extend its logistics and carrier services outside of its own domain. Amazon is starting with its big third-party sellers. It could eventually develop a system to cut out UPS or FedEx, enabling it to take a larger profit from the service or -- in typical Jeff Bezos fashion -- offer the service for less. It could even extend the service to merchants that aren't selling on Amazon.

This is the playbook for Amazon's services businesses. Scratch its own itch then scale.

It's resulted in several interesting businesses, the most profitable and prominent being Amazon Web Services, its cloud computing arm. Most recently, it's also experimenting with providing its own employee healthcare services.

Amazon has a lot of potential to disrupt the delivery services market with its considerable size and the demand for its FBA program. Amazon itself still accounts for just a fraction of total deliveries by UPS (7%) and FedEx (3%), but as it starts expanding outside its immediate domain, the threat looks more and more real.

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