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Amazon’s Newest Ambition: Competing Directly With UPS and FedEx

Just before the morning rush hour on a recent Thursday, a brigade of vans rolled up to a low-slung warehouse near Los Angeles International Airport.

Workers in bright green vests crammed some 150 Amazon.com packages into each truck before the fleet headed through the urban sprawl to customers’ doorsteps.

This logistical dance wasn’t performed by United Parcel Service Inc., FedEx Corp. or the U.S. Postal Service, all longtime carriers for the online-retail giant. It was part of an operation by Amazon.com Inc. itself, which is laying the groundwork for its own shipping business in a brazen challenge to America’s freight titans.

Tackling the delivery business, Amazon executives publicly say, is a logical way to add delivery capacity—particularly during the peak Christmas season. But interviews with nearly two dozen current and former Amazon managers and business partners indicate the retailer has grander ambitions than it has publicly acknowledged.

Amazon’s goal, these people say, is to one day haul and deliver packages for itself as well as other retailers and consumers—potentially upending the traditional relationship between seller and sender.

Some executives refer to the initiative as “Consume the City,” a nod to the company’s plans to build a massive delivery network that could eventually compete with such partners as UPS, according to people familiar the matter.

Executives at the freight giants are skeptical, and so are analysts and logistics experts. They say it would be difficult and costly to build a domestic delivery network to rival the big U.S. players, especially after the failed multibillion-dollar attempt by Deutsche Post AG ’s DHL Express in the 2000s.

Memphis-based FedEx says it is spending more than $5 billion annually on expansion and upgrades; UPS says it shells out in excess of $2.5 billion. The two companies have managed to blanket the world with a total of roughly 4,000 hubs and other facilities to sort tens of millions of packages a day. Combined, they operate more than 1,000 planes and 200,000 vehicles to deliver packages to doors.

“The level of global investment in facilities, sorting, aircraft, vehicles, people to replicate the service we provide, or our primary competitor provides, is just daunting, and frankly, in our view, unrealistic,” says FedEx CFO Alan Graf. “We’ve been at this for 40 years.”

Atlanta-based UPS has played down any competitive threat. On a conference call with analysts, Chief Commercial Officer Alan Gershenhorn said UPS’s network would be “very difficult to match.”

In an emailed statement, an Amazon spokesman said “we are very happy to have the delivery capacity our carrier partners can provide. They provide a high quality service, and our own delivery efforts are needed to supplement that capacity rather than replace it.”

Inside the company, executives describe, in the words of one senior official, how Amazon “is building a full-service logistics and transportation network effectively from the ground up.”

Amazon’s push into the shipping sector reflects a willingness among today’s powerful tech companies to defy the traditional constraints of business and leap into new ones.

The company, which started out as an online bookseller, has gained credibility as a producer of TV programs and big-screen movies. Amazon Web Services, which provides data servers to big companies, is now its fastest-growing division with at least $10 billion in sales expected this year.

Now the stage is set for Amazon to move against the partners that have helped power much of its success so far. Shipping costs as a percentage of sales have risen every year since 2009. Last year, Amazon spent $11.5 billion on shipping, or 10.8% of sales, compared with 7.5% in 2010. Total revenue for the year was $107 billion.

The company could save $1.1 billion annually if it stopped using UPS and FedEx, according to Citigroup Inc. analysts. Keeping packages under its own control just over longer distances could save Amazon around $3 or more on a typical delivery, the analysts say. The average cost to ship a package via UPS or FedEx is $7.81, they estimate.

Amazon currently delivers its own packages from roughly 70 facilities in 21 states, having built most of them in the past two years, according to data from supply-chain consultancy MWPVL International Inc. Today, 44% of the U.S. populace is within 20 miles of an Amazon facility, compared with 5% in 2010, according to investment bank Piper Jaffray.

All of this helps to explain why Amazon wants more control over its delivery chain—from factories in China through U.S. ports to sprawling suburban warehouses and neighborhood package-sorting centers. It hopes to offer more delivery times, including hours not available from traditional carriers, say people familiar with the plan. The cost of such a system isn’t known.

For subscribers: Amazon?s Newest Ambition: Competing Directly With UPS and FedEx - WSJ

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MEMFO4Ever

Cue up the music...

"Let the wages hit the floor, let the wages hit the floor, let the wages hit the floor...aaaaaahhhhhhhhhhhhhhhhh"

Spike from flyi

"Executives at the freight giants are skeptical, and so are analysts and logistics experts. They say it would be difficult and costly to build a domestic delivery network to rival the big U.S. players, especially after the failed multibillion-dollar attempt by Deutsche Post AG ’s DHL Express in the 2000s."

This is whistling past the graveyard, and belies a misunderstanding of the Cabotage issue.

BoilerUP

Look beyond "airline" to "domestic delivery network"...

atpcliff

This same rumour was floating around as early as late 2015. It's the third/fourth source I have read expressing this idea...