Amazon (AMZN -0.10%) doubled the size of its already massive fulfillment network over the last two years, and now it's making it even more accessible to third parties. The e-commerce giant unveiled Buy with Prime last week, a service that allows merchants to provide Amazon Prime members fast and free shipping through their own websites.
Giving merchants more control over their checkout experience will help drive Amazon's third-party seller services and leverage its growing fulfillment network and Prime membership. But Amazon may be laying the groundwork to become an even bigger competitor to FedEx and UPS (UPS -0.56%) in the near future.
Two big assets to build from
Amazon is building Buy with Prime on the back of two significant assets, both of which are practically unmatched by any other company.
First, it has a Prime membership base consisting of over 200 million subscribers. Over half of U.S. households have access to Prime. It's those paying members who have allowed it to attract third-party sellers, which creates a flywheel to grow both Prime and third-party seller services.
Second, it has a massive fulfillment network, which includes warehouses, sortation and distribution centers, and an air hub. It contracts dozens of planes and hundreds of delivery vans, moving packages around the country. Those operations are supported by the strong demand from Amazon's customers.
Using those assets, Amazon can offer merchants a service no one else can: low-cost, one- or two-day shipping to anywhere in the U.S. In fact, Amazon already fulfills orders for merchants from third-party marketplaces. Keeping the service exclusive to Prime members will allow Amazon to offer better pricing to merchants while also making Prime even more attractive for customers.
Meanwhile, since customers are using Amazon's payment back end on Buy with Prime orders, Amazon will still be able to see customer-order data from third-party sellers even on their own websites. That data can help feed Amazon's own marketplace operations, improving the product selection and user experience. That "feature" may, however, keep some merchants from using the service so as to keep their customer data out of the hands of Amazon.
The next step
Amazon's invested heavily in its logistics network, and it's still growing quickly. Densifying the network will allow it to deliver packages for less than it would otherwise pay UPS or another delivery service.
Management says it currently costs about the same amount for packages it ships itself or for which it uses a partner. The advantage for Amazon right now is that it can schedule shipments out of warehouses or sortation centers multiple times per day, speeding up delivery for its customers.
Adding additional volume and scaling the operation should enable Amazon to cut the price per package delivery down, leading to significant cost savings. Meanwhile, revenue generated from Buy with Prime or future iterations of shipping services for third parties should help it generate a profitable business over time.
UPS generated nearly $100 billion in revenue last year, resulting in an operating profit of over $13 billion. Its domestic operations generate about half of its operating income. Considering Amazon's U.S. package volume is already about the same as UPS's, that indicates the potential profit for Amazon in delivering packages for third parties.
Buy with Prime is another step toward Amazon becoming a full-blown logistics provider. Even for a company already generating about $25 billion in operating income per year (with strong growth potential), building out the logistics business for third parties could have a meaningful impact on Amazon's bottom line.
In a world where consumers have come to expect fast and free shipping from every internet retailer, Amazon may become an indispensable backbone for many online retailers whether they sell on Amazon's marketplace or their own website.
Editor's note: An Amazon spokesperson reached out after this article was published to say: "Amazon prohibits the use of non-public information about products Buy with Prime shoppers purchased or viewed in merchants’ stores for merchandising or personalization in the Amazon store. Amazon also prohibits the use of non-public information collected when providing the Buy with Prime service to make sourcing, inventory level, and pricing decisions for the Amazon store, including for offerings of our private brands products."