According to a news report by CNBC, Amazon may be looking at entering the delivery services business. The news was first reported by The Wall Street Journal on Friday. According to the information, this new service is named “Shipping with Amazon”. The new service will have Amazon collecting packages from their third party businesses and delivering them to their customers.
This move would pit the tech giant against industry stalwarts UPS and FedEx. Amazon’s new delivery business is expected to launch in Los Angeles in the near future. The idea is that third party businesses that sell goods on the company’s website will now get in-house delivery services too.
The pilot project is going to be focused on delivery services for only one zip code in Los Angeles. More delivery operations are to be launched in other cities after its debut in Los Angeles and the success of the pilot program.
The program is still in its early stages, so plans haven’t been finalized. According to the WSJ, who quoted inside sources, Amazon is planning to extend its delivery services to the general business population once it stabilizes. However, right now, the target customers are businesses who already sell their goods on the company’s website.
UPS and FedEx shares dropped after the news broke on Friday morning. In response to this news, UPS released a statement that it was still Amazon’s delivery partner and that the package delivery multinational continued to support the tech giant as well as other customers.
Fortune explored the reasons why Amazon would want to start its own delivery services business. Here are some of them:
- Prime Membership Expansion
Amazon’s Prime membership is expanding rapidly. And while the company is able to keep to its 2-day delivery commitment for products in its own warehouses, deliveries for third party products are struggling. By taking over the entire delivery process, Amazon can ensure cheaper operations as well as higher customer satisfaction with on-time deliveries.
Currently, one of the most critical factors to the company’s continued success – logistics of deliveries – is out of the company’s control. By creating its own delivery services business, the company gains control over this key area.
- Cost Benefits & productivity
In 2017, Amazon spent as much as $20 billion on delivery costs. To ensure that it keeps to its promised deadlines, the company has to pay premiums on deliveries. With deliveries becoming in-house, the company will be able to markedly bring down costs. And the company is betting on drone deliveries to become the next big thing. If this happens, then the company will really be able to show massive cost savings on deliveries.
- Delivery Services are Big Business
The other consideration is that delivery services are actually big money. UPS’ fourth quarter earnings in 2017 were $18.83 billion dollars. If the online retail giant manages to get market share in this industry, it would boost revenues massively for Amazon.
The Washington Post doesn’t feel that Amazon is going to be that much of a threat to the existing delivery services business, despite the panic reaction in the market. Analysts say that this panic is premature. The delivery services and logistics business is a complex one, requiring huge investments. According to a senior research analyst at Loop Capital Markets, Anthony Chukumba, Amazon would need 30 years as well as at least $30 billion to recreate the scale of operations that FedEx and UPS currently have.
While entering the shipping and delivery space seems the most logical move for Amazon, it will not be a simple exercise.