Amazon.com's (NASDAQ:AMZN) shipping costs increased 23% year over year in the fourth quarter. While that's an improvement from the 31% increase during the same period last year, it's still more than the 14% increase in paid units the online retailer managed.
Amazon is working to reduce shipping expenses by moving more of its logistics and deliveries in-house with Amazon Air and a homegrown network of delivery service providers. On the company's fourth-quarter earnings call, CFO Brian Olsavsky provided some additional details about how Amazon manages its shipments between its own network and partners including FedEx (NYSE:FDX) and UPS (NYSE:UPS).
Picking the low-hanging fruit
Amazon is often able to transport inventory from its warehouses to its customers' doors more quickly and less expensively than FedEx or UPS can.
"What we like about our ability to participate in transportation is that a lot of times we can do it at the same costs or better, and we like the cost profile of it," Olsavsky said on Amazon's fourth-quarter earnings call. "We can also invest selectively, because we have more perfect information. We know where our demand is, we know where we're moving things between warehouses and sort centers."
In other words, there are some cases where there's strong enough demand for Amazon's inventory that Amazon can move packages more quickly and at a lower cost. That's because it can pick and choose which markets it delivers to while relying on FedEx and UPS for markets with less demand.
As Amazon continues to take a growing share of the relatively fast growing online retail market, the number of hubs and cities Amazon can economically serve will steadily increase. That presents a major threat to both UPS and FedEx. Not only is Amazon a big customer for the couriers, but it also has a history of leveraging its own in-house infrastructure to offer services to other businesses. That is to say that Amazon could offer delivery service to other businesses in the future.
A competitive advantage against other retailers
At the beginning of 2017, Walmart's (NYSE:WMT) head of e-commerce in the U.S., Marc Lore, called out Amazon, announcing "two-day free shipping is table stakes." That quote is from the press release announcing free two-day shipping on Walmart.com orders over $35 on select items.
Amazon responded, and now 3 million items are available for next-day shipping to Prime members living in 10,000 cities across the United States. That represents the majority of Prime members, Amazon says. Those customers can get nearly as many items from Amazon within one day as Walmart shoppers can get in two days.
What's more, Olsavsky points out that "by not involving third parties all the time, we found that we can extend our order cut-offs." So customers can order items later and receive them sooner.
FedEx is working with big-box retailers like Walmart to offer similar benefits. And while that's great for FedEx, it comes at the cost of its partners' profit margins, thanks to the higher cost of the service. Amazon is able to offer the better service at a lower expense.
On top of that, operating its own logistics network allows Amazon to speed up delivery or ensure demand, especially during peak seasons such as the holidays. Amazon shoppers are more likely to receive their orders on time as a result. That keeps customers happy and keeps them coming back to shop on Amazon.com in the future.
So not only can Amazon often ship packages to customers more quickly and cheaply by relying on its homegrown delivery network, it provides a meaningful competitive advantage in the online retail market.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and FedEx. The Motley Fool has a disclosure policy.