Amazon.com-warehouse-002
Inside an Amazon warehouse | Photo courtesy of Amazon

Amazon has acknowledged that it’s quietly building a fleet of planes, trucks and ships, all aimed at getting into the logistics business. Does that mean it’s dropping its relationship with United Parcel Service and its other commercial carriers? Or maybe even going into direct competition with them?

“Within a few weeks, Amazon.com will begin competing directly with longtime partners United Parcel Service, FedEx and DHL,” wrote The Seattle Times in January about one of its most prominent local businesses.

After Bloomberg got its hands on some internal Amazon documents regarding an initiative called the “Global Supply Chain by Amazon,” the e-commerce giant came clean, though insisting it has no plans to go head-to-head with UPS or FeEx, its partners in a worldwide fulfillment business of e-commerce orders.

In the last couple of years, Amazon has added Amazon-branded trucks and negotiated to lease 20 Boeing 767 jets. Its China subsidiary has received a U.S. ocean shipping license to operate freight ships. In 2014, Amazon bought a 25 percent stake in a French shipping company, Colis Privé, with plans to acquire the rest of the company some time this year. That same year, Amazon acquired the right to purchase a small stake in Yodel, a parcel-delivery company in the U.K.

According to the documents seen by Bloomberg, “Amazon intends to create a revolutionary system that will automate the entire international supply chain.”

Said the financial website TheStreet.com: “This should be enough to send fear into the board room at UPS, which sees a lot of business come its way because of Amazon’s online sales. But with the tech titan looking to take matters into its own hands even more, perhaps UPS (and FedEx, too) may want to consider what else they can do to fight back while time is still on their side.”

Overreaction, says Amazon.

“We are doing this in order to better serve our customers at peak times,” Amazon.com CFO Brian Olsavsky told analysts. “We are adding more logistics to supplement existing shipping options, and it’s not meant to replace them. We’ve had to add some resources of our own to handle our capacity at peak.”

It’s well known that Amazon’s fulfillment costs have increased every year, to as much as $13.5 billion in 2015 (up 25 percent from 2014).

It’s also well known that the company has been troubled by delivery issues in some of the last few peak holiday seasons, attributable to both UPS and FedEx having had trouble handling last-minute shopping surges.

Photo courtesy of UPS.
Photo courtesy of UPS.

Also, according to The Wall Street Journal, “Amazon fears that UPS’ hub-and-spoke system – moving a package from shipper to sorting hub to brown van to your home – is growing obsolete.”

So, as The Journal wrote, “Rising package volumes and costs have Amazon seeking alternative delivery routes – shifting the online retailer’s role from key ally [with UPS] to a potentially disruptive competitor.”

There have been other issues between the two over the years. In 2013, when FeEx refused to lower its prices for Amazon, UPS took on the additional load even though some UPS executives questioned whether the added low-margin business was worth it. Still, when Amazon launched Prime in 2005, UPS offered discounts of as much as 70 percent for the new, even lower-margin, business.

UPS handles about 30 percent of Amazon’s 600 million packages within the United States. That’s an estimated $1 billion a year, which, it has been reported, has grown 500 percent in 10 years. How big a hit would that be for UPS, one of Louisville’s largest local businesses, and a conduit for myriad other businesses that come to the area to be in close proximity to UPS?

“UPS has annual revenue of about $60 billion, so we’re not talking about a kiss of death here,” said a report last month on the website InvestorPlace.com. In fact, losing Amazon’s business would reduce UPS’ expected 2016 revenues by only 1.67 percent. And the margins on some of that Amazon business, given the deep discounts, are razor-thin.

As TheStreet.com wrote, “UPS makes its big bucks on bulk shipping, not residential-based e-commerce. Remote neighborhood deliveries are a mere pittance. Heavy freights delivered to one location produce large profits. Business-to-business deliveries are the key to UPS’ business.”

UPS is notoriously closed-mouthed. Public relations executive Mike Mangeot would say only, “We respectfully decline to discuss our relationship with Amazon, other than to reiterate that they are a valued customer.”

But two years ago, in its annual 10-K filing with the SEC, UPS noted the peril of having one of its largest customers “develop their own shipping and distribution capabilities,” saying such a development “could materially impact the growth in our business and the ability to meet our current and long-term financial forecasts.”

Kent Oyler
Kent Oyler | CEO of GLI

As for the implications on the local economy if UPS’ growth were impacted, Kent Oyler, CEO of Greater Louisville Inc., remains confident of the company’s robust success.

“UPS has spent many years building the most robust package delivery system on the planet.  It’s always faced competition and that just makes them stronger and more innovative,” Oyler told Insider Louisville. “Given the expected exponential growth in e-commerce shipping, we have every reason to be optimistic that the Greater Louisville economy will continue to grow in step with UPS, as well as the hundreds of logistics companies with operations here, including Amazon.”

However, losing some of Amazon’s business as the e-tail giant brings its logistics and shipping in-house might be only the first shoe to drop for UPS. The next shoe, wrote Bloomberg, might be Amazon’s “intention of turning shipping into a core business, with its launch potentially arriving this year. The service would essentially turn Amazon into a FedEx and UPS rival.”

The Seattle Times interviewed Colin Sebastian, an analyst with the financial services firm Robert W. Baird & Co., on the matter, writing that he “believes Amazon may be developing a delivery service that meets more than its own shipping needs. He expects Amazon to ultimately offer any excess cargo capacity it has to other companies looking to transport goods.”

“They have the opportunity to disrupt this market and generate a lot of revenue,” Sebastian told the newspaper. “That’s because the global fulfillment market, which includes shipping and warehousing goods, represents a $400-$450 billion business.”

A couple of years ago, Amazon launched a service called Fulfillment by Amazon (FBA), going after outside customers (“Let Amazon pick, pack and ship your orders”).

“Sellers will flock to [Fulfillment By Amazon], given the competitive pricing,” said the internal Amazon documents Bloomberg obtained.

Amazon founder and CEO Jeff Bezos | Photo via Creative Commons
Amazon founder and CEO Jeff Bezos | Photo via Creative Commons

In fact, Amazon CFO Olsavsky said the huge demand on Amazon’s logistics during this past holiday season was partly because of third-party merchants using the FBA service. Fortune reported that “the number of active sellers in [FBA] grew more than 50 percent [in 2015].”

Amazon also has 123 warehouses around the world, a valuable asset for luring new business.

Could Amazon handle its own shipping, and even set itself up as a viable independent carrier? Any doubters haven’t watched Jeff Bezos operate since he launched Amazon in the mid-1990s. It certainly has the infrastructure, the systems in place, and the well-known brand.

Amazon is probably more notoriously closed-mouth even than UPS, but a former Amazon employee, who once helped develop the analytics and optimization algorithms to get the e-tailer’s chaotic worldwide shipping system under control, told InsiderLouisville “Amazon has been developing these capabilities in China, Japan and Europe for many years.

“So it’s very doable,” he said. “It will take time. But I mean years, not decades.”

“Now that Amazon has referred to itself as a ‘transportation service provider,’” posted TheStreet.com, “nothing can be ruled out of the equation… especially because it’s Amazon.”

Steve Kaufman
Steve Kaufman has been writing professionally since the Johnson administration (Lyndon, not Andrew) on all manner of subjects, from sports to city hall to sales and marketing to running a medical practice to designing stores. His journey has taken him from Chicago to Buffalo to New York to Atlanta to Cincinnati, before landing, finally, in Louisville.