A Blog by Jonathan Low


Apr 28, 2015

Amazon Is Spending Money to Drive UPS and FedEx Out, Dominate Delivery As Well As Shopping, Make Profit Later

And you thought they were all friends! Amazon, FedEx, UPS, USPS, Royal Mail, Deutsche Post, all happily linked as part of a great global supply chain capable of delivering anything to anyone anywhere

Isn't cooperation and collaboration heartwarming - oh, and profitable?

But Amazon's ambitions are a tad grander than that. The company spends $3 billion or 9% of sales on delivery annually. Better to keep that money in-house where it will eventually drop to its bottom line rather than someone else's. And it's stock may now rise 20% on that prospect. JL

Roger Aitken reports in Forbes:

Amazon (plans) to become a logistics company in its own right, competing with companies such as UPS. The move will save Amazon $3bn a year globally. Amazon currently spends at least 9% of its sales income on transportation costs. Amazon needs its own logistics operation to offer both faster and more flexible delivery options to its customers.
Although Amazon reported a $57 million (m) net loss for its first quarter ended 31 March 2015, Amazon Web Services (AWS), one of three Amazon.com AMZN -1.47% Inc’s business segments that provides data storage and cloud services to big IT companies and start-ups, is still a $5 billion (bn) business and growing fast. But can the stock price see more positive action?
The love affair with the stock seems unabated and on Friday the price shot up 14% to $445.10 on Nasdaq in New York. In advance of the reported earnings more than a few analysts were thinking that the company’s substantial investment in AWS and price reductions would translate into only a marginally profitable business. At this time last year Amazon’s stock was trading at $303.83 a pop (25 April 2014) and is up from a 52-week low of $284, while five years ago this month it stood at around $137.10. Rewind to May 1997 and it was $1.73. So, it’s been a pretty stellar rise. Two of the attractions for investors, though, are AWS’s near 50% revenue growth and Amazon’s gross margins of 32% for this latest quarter – a record.
The latest quarterly net loss equates to $0.12 per diluted share and compares with net income of $108m ($0.23 per diluted share) in Q1 2014. That said, Amazon’s net sales increased 15% to $22.72bn for Q1 – versus $19.74bn in the corresponding quarter a year ago. Operating income jumped 74% to $255m for the latest quarter (Q1 2014: $146m). But we are talking about a company with a market capitalization of $206.7bn.In terms of analyst ratings, of 36 brokers monitored by Thomson/First Call the high target for the stock is $535 – $89.90 (20.19%) higher than Friday’s closing price. Investment house JP Morgan upgraded its recommendation on the stock as of 24 April 2015 from ‘neutral’ to ‘outperform’ with a price target of $535. Meanwhile, Nomura pencilled in a $490 price target and analysts at Raymond James upgraded it to ‘outperform’ from ‘market perform’ setting a $485 target.
Coinciding with Amazon’s results, the scale of its plans to become a “conduit” through which all aspects of e-commerce and logistics flow is examined in an industry report (‘Amazon Prime Prime Ambition’) from global courier firm ParcelHero.
Roger Sumner-Rivers, ParcelHero founder and an industry expert, says: “[The] $57m quarterly loss [in Q1] is the price Amazon and its shareholders are willing to pay to transform the market in the future.” The report reveals the extent of Amazon’s investment and planning for “a revolution in our supply chain, developing its own logistics operations and harnessing the potential of the Internet” according to Sumner-Rivers.
ParcelHero’s analysis of Amazon’s grand aims for its Prime services has led to some interesting conclusions. For example, Sumner-Rivers asserts that: “Amazon’s ultimate aim for its new distribution arm, Amazon Logistics, is, we believe, that it becomes a logistics company in its own right, competing with companies such as UPS and Royal Mail.”
He adds: “The move will save Amazon $3bn a year globally and £122m in the UK alone.” Amazon currently spends at least 9% of its sales income on transportation costs and this would more than offset the $57m quarterly net loss.
But Amazon’s ultimate delivery aims will boost its income far more significantly in the future. As Sumner-Rivers explains: “Amazon needs its own logistics operation to ensure reliability of service during peak periods, but also to offer both faster and more flexible delivery options to its customers, by further offering Same Day deliveries and also weekend and evening deliveries, supporting its ambitious Prime membership plans.”
The research from ParcelHero shows this is an expensive service for Amazon to provide, but that Prime customers spend a significant 50% more than non-Prime members.
Over the longer term Amazon will utilize its growing logistics expertise to transform the customer experience. As the ParcelHero founder points out: “Amazon has already patented using 3D printers to produce items en route to customers, introduced the ‘Internet of Things’ in the US, so that your fridge or coffee maker sends an automatic message to Amazon when you are running low, and is, right now, trialling deliveries direct to your car.”
He further adds: “We believe long-term Amazon’s logistics plans mean everything will one day be delivered through a portal called Amazon, from the web platform you order your items on, right through to the actual production of those items, while on the way to you.”
Amazon’s two other segments – North America and International – consist mainly of amounts earned from retail sales of consumer products (including from sellers) and subscriptions through North American-focused websites (www.amazon.com, www.amazon.ca, www.amazon.com.mx) and internationally focused websites, respectively.
In addition to AWS, Amazon’s large investment on trying to increase Prime subscription numbers appears to be working. An indication of this is that revenue for the company’s core North American electronics and general business activity rose 31% for the quarter versus the corresponding period a year ago. As regards second quarter 2015 guidance from Amazon itself, the company says net sales are “expected to be between $20.6bn and $22.8bn”. This equates to growth of 7%-18% compared to Q2 2014. And, the operating income (loss) is expected to be between $(500) million and $50m – against $(15)m in Q2 2014.


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