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Amazon.com Vs. FedEx And UPS Not Any Budding Rivalry — Yet

A new report from RBC Capital Markets asks the ever more pressing question about Amazon.com ( AMZN ) and its deliveries ambitions: Does the transportation sector have a problem? The short answer is no — at least not yet, according to RBC analyst John Barnes. The crux of the issue for the e-commerce leader is that its shipping costs soared 32% to $11.5 billion in 2015, while sales rose about 20%. That, says Barnes, suggests that Amazon might have trouble ahead if it continues on course. As a result, Amazon has been taking more of the shipping task into its own hands. RBC emphasizes, though, that Amazon isn’t anywhere near able to separate itself from shipping partners such as UPS ( UPS ) and FedEx ( FDX ). But the company will incrementally begin to do so, the report says, at least in certain areas. In prior years — though not in 2015 — both UPS and FedEx have stumbled during the critical holiday season. Packages not being delivered on time, Barnes says, is like Amazon being closed on random days without warning. Amazon’s massive distribution network is as complex as it is large. It includes a growing trucking operation and the recently disclosed air transport and ocean shipping components. Ocean shipping is where Barnes suspects the company will attack first. “We believe Amazon will take over large swaths of its ocean freight supply chain, as the move can lower its own shipping costs, drive third-party sellers to the platform and eventually turn into a profit center,” Barnes wrote in the report, released late Monday. As IBD has reported, industry experts estimate that the ocean shipping business has the potential to be worth millions in free cash flow for Amazon, mostly from selling capacity to third parties. Analysts says that Amazon CEO Jeff Bezos might not go after the free cash flow but instead drive the value back to consumers in some fashion, such as still-lower prices. But the ocean shipping industry is vast, and Barnes estimates that the Seattle-based company would grab only between $200 million and $400 million in business. It could, though, affect shippers such as Expeditors International of Washington ( EXPD ) as well as UPS and FedEx. The ocean shipping grab isn’t without precedent, either. Wal-Mart ( WMT ) has been taking possession of suppliers’ goods in China and doing its own shipping for years. Amazon’s growing air network is one area where the company will be content to work with third parties, Barnes said. Amazon’s recently announced deal with Air Transport Services Group ( ATSG ) to lease 220 767 jets highlights this point. As part of the deal, Amazon will be able to purchase about 20% of ATSG’s common shares over a five-year period. Meanwhile, Barnes says that UPS and FedEx are both fighting Amazon’s long-term onslaught. UPS now provides 30% of Amazon’s parcel needs, netting $2.2 billion in revenue, and FedEx hauls in $1.5 billion, or about 20%. Those figures translate to about 8% and 10% of ground revenue, respectively, for the shipping companies.

Amazon Primes Pump, Hikes Minimum Free Shipping For Non-Subscribers

Amazon.com ( AMZN ) shipping got more expensive Monday, as the company announced it was raising its free shipping minimum 40% to $49. The move, of course, only pertains to non-subscribers of its Amazon Prime loyalty program, since those subscribers get free shipping on any order. Amazon’s latest move is likely intended to drive more Prime subscription growth and also cut down on shipping costs. Amazon stock rose 4.6% to 559.50 on the stock market today , moving back above its 200-day moving average for the first time since plunging below that mark on Feb. 3. Rival Wal-Mart ( WMT ) has a $50 threshold for free shipping. E-tail startup Jet.com uses $35 as its minimum, while Target ( TGT ) has a $25 minimum. Wal-Mart stock rose 1.5% on Monday while Target edged up 0.2%. Amazon’s shipping costs have been ballooning as the company offers increasing rapid delivery times — including one-hour delivery in certain markets via Amazon Prime Now. Those costs rose 37% year-over-year in Q4, to $4.7 billion. Rumors continue to swirl about the firm’s long-term plans for its shipping program, as investors and analysts speculate that Amazon is interested in competing with established delivery companies such as UPS ( UPS ) and FedEx ( FDX ). Internal documents seen by Bloomberg seemingly support that theory. And, there have been reports of Amazon getting into the ocean freight business — which one observers said could generate upward of $100 million in free cash flow — as well as leasing cargo jets and making a large purchase of trucks to haul packages between its fulfillment centers. The documents seen by Bloomberg suggest Amazon is gearing up to compete more with China e-com leader Alibaba ( BABA ). Besides delivery costs, Amazon has spent billions of dollars on its fulfillment and sortation centers, the last step in the delivery process. Wells Fargo analyst Matt Nemer says Amazon.com captured 51% of all retail growth in Q4 2015 . Amazon’s Prime loyalty program offers free two-day shipping, as well as free streaming audio and video, among other perks. Analysts in general peg Amazon’s Prime customer count near 40 million, with some estimates coming in as high as 50 million. Prime members, on average, spend about twice as much on Amazon.com than regular shoppers. Prime members accounted for 57% of Amazon’s North American sales in Q4, and Prime members spend about 12% more every year, according to ITG Investment Research analyst Steve Weinstein. Nemer has told IBD that Prime is the biggest reason for Amazon’s growth, which during the past two quarters has exceeded 20%.

Is Amazon Ocean Shipping Worth Millions In Free Cash Flow?

With annual ocean shipping hauling in $350 billion a year in revenue, there is good reason why Amazon.com ( AMZN ) is interested in the business. E-commerce leader Amazon is planning to launch a global shipping and logistics operation that will compete directly with UPS ( UPS ) and FedEx ( FDX ), Bloomberg reported Tuesday, saying it had reviewed documents for the plan, called “Dragon Boat.” Bloomberg wrote that the new operations would expand Fulfillment By Amazon (FBA), which provides storage, packing and shipment of goods from third-party sellers. Such sellers make up a significant portion of its e-tail growth. An ocean shipping business alone could generate substantial returns — more than $100 million in free cash flow, Flexport CEO Ryan Petersen told IBD. That’s assuming the goods would be ingested into FBA’s supply chain — which aims to eventually squeeze out the middlemen, paperwork and headaches from logistics and delivery. The cost savings Amazon expects to see by owning the supply chain end to end, and the charges it could levy third-party sellers (or other merchants) would generate that free cash flow, generally defined as cash generated by operations minus capital expenditures. “It’s attractive for Chinese merchants to get into Fulfillment By Amazon centers right now,” Petersen told IBD. “Even with my conservative model, which would not make Amazon a large freight forwarder (though) less than a fraction of 1% of the overall ocean shipping business, it could easily earn more than $100 million in free cash flow.” Peterson says Amazon’s 90 or so fulfillment centers in the U.S. would easily be able to handle 450 containers every week. (The number of fulfillment centers is from Flexport’s data, Amazon does not disclose that). Based on current shipping costs, that would easily net Amazon $100 million in free cash flow, Petersen says. His estimate also assumes ocean shipping prices dig themselves out of the current slump. Rates are about half of what Petersen expects in the long run. San Francisco-based Flexport provides software and expertise that simplifies the international shipping process. Alibaba, Amazon Competition Grows The Bloomberg story said Amazon’s Dragon Boat program also will pit against its Chinese counterpart Alibaba ( BABA ) to gain share of cross-border e-commerce, which is expected to grow to $2 trillion by 2020. The world’s largest retailer , Wal-Mart ( WMT ), already does something similar when it takes possession of freight in China. But Wal-Mart doesn’t re-sell the freight shipping service, and Amazon might, according to analysts. Wal-Mart did not return requests for comment. Southington, Conn.-based Ocean Audit founder Steve Ferreira agrees with Petersen that ocean shipping could be lucrative for Amazon, and he says the company could well disrupt the shipping market. Ocean Audit specializes in detecting errors in ocean freight billing errors. The fact that Amazon last August filed initial paperwork for what might be the Chinese-side of Amazon’s ocean shipping division, Ferreira told IBD, suggests to him that the company is far along in developing its shipping operations. Amazon Would Be ‘Game Changer’ Ferreira calls Amazon’s potential entry into the ocean freight business a “stunning game changer.” He says the Seattle-based e-commerce firm could “theoretically enter the market and start moving goods at below the current market cost.” Amazon might well be gearing up to do just that. Ferreira says he believes Cong Pan , a Beijing-based Amazon attorney, is getting all the “paperwork” for Amazon Ocean set up. He says Beijing-based Amazon Vice President Brian Xue would run the ocean freight operation. Amazon did not return requests for comment. Amazon CEO Jeff Bezos has often repeated his mantra of putting customers before profits. Additional free cash flow could be used to lower the cost of Amazon’s goods or begin to offer essentially free parcel shipping for shoppers willing to wait, says Peterson. “If I had to read the mind of Jeff Bezos, he might not go after the free cash flow,” Petersen said. Baird analyst Colin Sebastian agrees with Petersen’s assessment. “I would caution that Amazon likes to use projects and other things to subsidize its core business,” Sebastian told IBD. “Amazon might not see any free cash flow because it would be absorbed into other businesses.” Sebastian says he expects Amazon will move in stages into the transportation and logistics sector. “Amazon takes an incremental approach to new businesses, and they’re not going to create a competitor to DHL right away,” he said. But Sebastian says he sess enormous potential. “There’s a lot of potential disruption,” he said, “if Amazon plays its cards right.”