It's hardly news at this point. E-commerce giant Amazon.com (NASDAQ:AMZN) has been handling at least part of its own delivery work since 2014 and began building a fleet of delivery aircraft in 2016. There was never any doubt the end-goal was self-sufficiency... and savings. The initiative posed a threat to logistics names like FedEx (NYSE:FDX) and UPS (NYSE:UPS) simply because both had been delivering Amazon-purchased parcels. Each has survived Amazon's strategic shift, however.
The disruption is nowhere near being over, though, if a recent report from Morgan Stanley is on target. Not only will Amazon continue to do more and more of its own delivery work, it could steal market share from UPS and FedEx by making deliveries of goods not purchased at Amazon.com.
What Morgan Stanley said
The advent of one-day delivery service could act "as a potential Trojan horse to drive long-term adoption of an eventual (Amazon) third-party shipping offering," explained the 38-page report that examined nine years' worth of data. As it continues to expand its logistics arm, the company could ramp up its current capacity to handle 2.5 billion parcels per year in the United States to 6.5 billion by 2022. At that point, it would be handling more packages than UPS or FedEx would.
Where those deliveries may originate is still in question. Amazon is certainly apt to continue expanding its e-commerce business. But it may not quite need the capability of delivering 6.5 billion packages. The "spare" space on its trucks and planes likely to be in place within three years could give the company the option to handle 3.5 billion non-Amazon deliveries, according to Morgan Stanley. For perspective, that's roughly one-third of the e-commerce market outside of Amazon's sphere.
It's an idea that's been broached, but never taken too seriously by investors. CEO Jeff Bezos has never been afraid to try new things, but most of it to date appears to have somehow funneled consumers into Amazon's digital ecosystem, where they're monetized in multiple ways. Morgan Stanley's thesis acknowledges this reality, noting: "This is contrary to the general investor perception that (Amazon) is still in the very early stages of building out its logistics network and is too small to make a difference in the marketplace."
However, investors were forced to entertain the prospect more seriously following October's release of the company's third quarter numbers. It was the first quarter where the true, full cost of offering one-day shipping on most Prime purchases could be measured, and not surprisingly, the initiative wasn't cheap. Global shipping costs jumped by 46%, though U.S. e-commerce sales only improved to the tune of 24%. International e-commerce revenue was up an even more tepid 18%. The end result? Double-digit declines in operating income as well as in total net income. Lackluster guidance suggested Amazon didn't see an immediate end to the expensive one-day delivery program either.
Indeed, with annual shipping costs now seemingly set around $40 billion -- roughly half of the company's gross profits on merchandise sales -- Morgan Stanley says softening the impact of soaring delivery costs is "crucial" to Amazon's profits in the future. The most effective means of abating that expense is by selling the unused space on the company's delivery trucks and cargo airplanes.
Purely defensive, but potent all the same
While Amazon certainly has the technical wherewithal to handle third-party packages, it's worth bearing in mind that the company has said nothing definitive on the matter... not that it would. Morgan Stanley seems more excited about the prospect than Amazon's key figureheads do. That may be because initiating non-Amazon deliveries is being viewed not so much as a profit center, but as a means of containing costs.
Nevertheless, it's a possibility that poses a threat to FedEx and UPS, even if their relationship with Amazon isn't as profitable on a per-package basis as it is with other customers. Amazon reportedly accounts for about 10% of UPS's revenue. Amazon is far less important to FedEx, making up less than 2% of its top line after scaling back the partnership. That decision took a measurable toll on FedEx's results, though.
It's anecdotal evidence that the sheer volume growth of Amazon's logistics offer could stand in the way of other delivery companies' fiscal growth going forward. As Morgan Stanley's report phrased it, "The already large and quick ramp of (Amazon Logistics) represent a large opportunity loss, and its significant growth ambitions are a competitive risk for incumbent parcel companies."