Amazon: The Influence of Increasing Competition with FedEx – Amazon.com, Inc. (NASDAQ: AMZN)

Amazon (AMZN) has agreed that it will have a large part of the shipping industry. FedEx (FDX) recently announced it would not renew its express delivery with Amazon. This should lead to greater investment from Amazon in its logistics network.

In the latest earnings report, the company announced a day ship for Prime members. This will require Amazon to make higher logistics investments and control a larger share of the delivery network. The company has plenty of resources to build a strong logistics network in the United States and other key international regions.

Over the past few weeks, Amazon has made a big investment in Deliveroo, a British food delivery start. There has also been a $ 1.5 billion investment in airport development outside Cincinnati. Shipping costs in the last quarter were $ 7.32 billion, which was 12.3% of net sales. While this price will increase in the short term, Amazon can also use this logistic network to make money from other profitable services.

Importance of Shipping

The importance of a strong logistics network for Amazon's business cannot be overstated. The company changes all of its Prime members for a day's shipping. This would require greater reliability from the delivery network and more internal logistics. The company has already started automating important features. A recent Reuters report mentioned that the company is investing heavily to automate boxing of customer orders. This report mentions that the machine can order orders five times faster than a human being.

Amazon must automate other features within its fulfillment centers to deliver its one-day shipping promise. While Walmart (WMT) has also announced a similar feature, it should be noted that Walmart offers faster delivery of just 200,000 items. On the other hand, Amazon will offer this service on millions of merchandise. Many of these items may not be available in the nearest filling network. This would require building better shipping capacity.

Amazon recently broke the ground for a $ 1.5 billion airport development outside of Cincinnati. It will also make more than $ 100 million investment for air freight complex in Lakeland, Florida. These are large numbers, and we should see a similar amount of investments over the next few months as the company improves the delivery network.

Fig 1: Shipping costs for Amazon. Source: Amazon Filings

Shipping is one of the biggest costs for the company. In the last quarter, Amazon used $ 7.32 billion in freight, which was a growth of 21% over the previous year. In the picture above, we can see that the growth in shipping costs has exceeded paid units sent for all the last six quarters. The main reason for higher growth in shipping costs is the faster delivery options offered by Amazon. Amazon has expanded its free delivery options on the same day in several subway areas.

Shipping-as-a-service

The rapid growth of freight and cost has put additional burdens on Amazon. Massive investment in this segment has significantly improved Amazon's delivery network. In the next few years, we should see an increase in the company's ability to provide a freight-as-a-service platform.

Source: Statista, Company Filings

The entire logistics sector plays a central role in many industries. Freight operators are already cautious about Amazon's entry into this segment. The company offers an online freight brokering platform to connect to available trucks and carriers in five eastern states of the United States. We should see this service rolled out in other areas by the end of this year. Amazon has also got more work done internally.

Source: WSJ

Investment in Deliveroo and airports

Amazon has invested $ 575 million in Deliveroo. It's a UK food delivery start that competes with Uber Eats. Deliveroo has over 60,000 delivery personnel within its platform. A major investment in this start-up shows that Amazon is looking at other options to address the issue of last-mile delivery. It may be possible to integrate this business with Amazon's Prime membership. There are many other synergies that Amazon can get from Deliveroo. Interestingly, the company was forced to shut down Amazon restaurants in 2018, which offered takeaway delivery in the UK due to competition from Uber Eats and Deliveroo.

Amazon has also promised $ 1.5 billion investment in airport development outside Cincinnati. Another $ 100 million has been promised for air freight complex in Lakeland, Florida. The scale and speed of these investments shows that management will have better control over the delivery network.

The latest report on the non-renewal of the Express Shipping contract by FedEx is not a surprise when we look at initiatives taken by Amazon. In the next few quarters, Amazon would try to bring more freight services internally. This will help the company to offer better service to customers and also reduce long-term shipping costs.

Affecting Margins and Bottom Line

Most analysts and investors are focused on AWS and the advertising segment to forecast Amazon's future profits. However, Amazon can also improve margins and profits by reducing its shipping and settlement costs. The company has a number of levers to reduce these costs. One of the most important is to reduce the growth of shipments from their own online store. As long as higher prices on Amazon do not harm Prime membership, we should see lower discounts from the company over the next few quarters.

This will reduce shipments and reduce shipping costs. This trend can already be seen in recent quarters. According to Chart 1, shipping growth in the last quarter was 21%, while growth in paid units was 10%. In the quarter for the previous year, shipping growth was 38%, while paid unit growth was 22%. Both the shipping costs and the growth of paid units have declined in the last quarter.

Overall, delivery and settlement costs accounted for almost 26% of Amazon's net sales. Therefore, even a few percentage points reduction in these costs will have a major impact on the company's bottom line.

Amazon's EPS forecast.

for 2 years in advance has moved higher. Over the past year, this number has increased from less than $ 20 to over $ 50. According to these metric shares, the stock is traded at 36 times the EPS projection for 2 fiscal years ahead.

Amazon has the ability to use heavily to build a strong logistics network. Few companies can match Amazon's investment capabilities. At the same time, the company has the opportunity to make money from its logistics network by adding new services to its Prime membership. These two factors will allow the company to deliver margin improvements within shipping costs. This will have a major positive impact on EPS in the next quarters.

Investor Takeaway

Amazon has reduced the growth in shipping costs in recent quarters. It also invests heavily in improving its own logistics capabilities. This should allow the company to offer better shipping than other e-commerce competitors. We should also see a roll-out of the freight-as-a-service platform where Amazon offers its delivery network to other businesses. This will convert the freight segment into a source of income from a cost source.

There are few players (if any) who can match Amazon's ability to invest in the logistics network. This will allow the company to increase its market share and price strength in this huge industry. There is a lot of income and marginal growth over the next few years, as the Amazon freight network is improving on a scale. This is one of the main reasons that makes the Amazon share a good buy-and-hold bet on today's level.

Notice: I am / we are long AMZN, SAVE. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.