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This is the $21 billion reason Amazon wants to build its own UPS

MarketWatch logo MarketWatch 6 days ago Tonya Garcia

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A report that Amazon.com Inc. is planning to launch its own shipping service should be no surprise to anyone who took a close look at the e-commerce giant’s latest regulatory filing.

In its 10-K for 2017 filed with the Securities and Exchange Commission earlier this month, Amazon outlined the multibillion-dollar cost of making good on its free shipping offers.

“Shipping costs, which include sortation and delivery center and transportation costs, were $11.5 billion, $16.2 billion, and $21.7 billion in 2015, 2016, and 2017,” the filing said. “We expect our cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, we reduce shipping rates, we use more expensive shipping methods, and we offer additional services.”

Amazon said it is working to “mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing our fulfillment network, negotiating better terms with our suppliers, and achieving better operating efficiencies.”

The Wall Street Journal reported Friday that Amazon is getting ready to launch “Shipping with Amazon,” a service that will have Amazon picking up packages from businesses and getting them to consumers. The launch will roll out in Los Angeles in the coming weeks.

The news sent shares of FedEx Corp. and United Parcel Service Inc. lower Friday. FedEx was down about 4% in early afternoon trading, while UPS stock was down 3.9%.

CFRA maintained its strong buy rating on both FedEx and UPS stock.

“This is likely to lead to pricing pressure,” wrote Jim Corridore from CFRA Research. “We think the current economic expansion and surging e-commerce volumes are able to support a new competitor.”

See also: Does Amazon Prime’s 2-hour free food shipping make it a better deal than Costco?

The Journal said December 2013 was the point when Amazon’s shipping ambitions took root. Missed deliveries during that holiday season prompted the company to begin taking a closer look at it logistics network.

In this most recent filing, Amazon says a “disproportionate amount” of its net sales occur in the fourth quarter, and the company may see its shipping costs climb due to free upgrades, split shipments, and other steps taken to get packages to customers in a timely manner.

The company’s dependence on outside shipping service providers is one of its risk factors.

“We rely on a limited number of shipping companies to deliver inventory to us and complete orders to our customers,” the 10-K reads. “If we are unable to negotiate acceptable terms with these companies or they experience performance problems or other difficulties, it could negatively impact our operating results and customer experience.”

According to FedEx on its December earnings call, no customer represents more than 3% of its revenue or volume.

GlobalData Retail Managing Director Neil Saunders said Shipping with Amazon “makes sense” in urban locations like Los Angeles where order volume is great.

“In such areas, cutting out the middleman is likely to save money and give Amazon more flexibility over schedules and delivery options,” he wrote in a note. “However, we believe this benefit will only accrue over time and as part of a broader strategy to integrate the delivery of food and non-food.”

The Wall Street Journal reported Thursday that Amazon is extending its one- and two-hour delivery service Prime Now to Whole Foods customers in Austin, Tex., Dallas, Virginia Beach, Va. and Cincinnati.

And: Do Amazon warehouses hurt local jobs?

“As much as it makes sense to do this in urban areas, it is unlikely that Amazon will make a move on trying to service the American hinterland,” Saunders said. “Order densities and volumes, along with long travel times between deliveries, in many parts of the country do not justify such an investment.”

Self-driving vehicles could solve that problem, Saunders proposes, but that’s “some way off.”

Amazon shares were down 1% in Friday trading, but up nearly 62.6% for the past year. The S&P 500 index is up 12.6% for the last 12 months.

Tonya Garcia is a MarketWatch reporter covering retail and consumer-oriented companies. You can follow her on Twitter @tgarcianyc. She is based in New York.

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