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Amazon Logistics is the company’s next big disruptor

Contrary to the mainstream market view that AMZNL is still in the early stages of rollout, the service’s ramp up has been exponential and it may continue to take share from the incumbent parcel companies at a faster than expected pace.

The company accused of destroying the U.S. retail industry by the Treasury Secretary has been quietly disrupting the U.S. parcel industry. Morgan Stanley estimates that Amazon Logistics (AMZNL) will ship over 40% of Amazon’s U.S. volume, or over 2 billion packages, in 2019. Contrary to the mainstream market view that AMZNL is still in the early stages of rollout, the service’s ramp up has been exponential and it may continue to take share from the incumbent parcel companies at a faster than expected pace.

Overnight, Morgan Stanley published a detailed report that attempts to size and scope the AMZNL business based on an analysis of 70,000 Amazon transactions from 300 U.S. shoppers over the last 9 years. Given the small sample size, the bank’s estimates and conclusions should be taken with a grain of salt, but nonetheless offer a fascinating insight into a vital but opaque segment of Amazon’s retail operations. In a nutshell, the report concludes that AMZNL is operating at an annual run-rate of over 2.5 billion packages and could reach 6.5 billion (or 65% of Amazon’s U.S. volume) by 2022. This compares to estimated 2019 volumes of 3.0 billion for FedEx and 4.7 billion for UPS.

Chart 1: AMZNL share of Amazon’s U.S. packages

Source: AlphaWise, Morgan Stanley Research estimates

As the chart above shows, AMZNL’s volume has ramped exponentially over the last twelve months, shipping c.46% of Amazon’s U.S. packages as of August 2019 compared to c.20% a year ago. This pace of expansion comes as a surprise and certainly helps explain the sudden and significant loss of business at several parcel companies, most prominently FedEx, which terminated its contract with Amazon back in August. Perhaps more surprisingly, AMZNL is delivering the current volume with only one fifth the fleet size of its largest competitors, suggesting a far more efficient operation with greater density – which makes sense considering Amazon’s initial focus on more densely populated urban and suburban areas. 

In terms of share loss, all parcel carriers have donated share to AMZNL since the service was launched in earnest in 2014, with UPS, FedEx and USPS losing 1,300 bps, 1,100 bps and 700 bps of share to AMZNL respectively. If AMZNL does grow to 6.5 billion Amazon packages by 2022 from the 2.5 billion run-rate today, that could be more than $20 billion of lost revenue for the parcel operators assuming the standard blended price of c.$10 per package and up to a 50% discount for Amazon.

Chart 2: Share of Amazon U.S. packages by carrier

Source: AlphaWise, Morgan Stanley Research estimates

However, the biggest concern for the parcel companies is not the loss of heavily discounted Amazon volume, but the loss of higher-priced volume from smaller e-commerce shippers. AMZNL has committed to expanding its delivery fleet from 25,000 vans today to 125,000 by 2025 (UPS and FedEx combined have 139,000 today), which can only suggest one thing – an Amazon third-party shipping service is coming. Considering AMZNL’s efficiency advantage over incumbent parcel companies, it could offer cheaper rates to external shipping customers and still drive attractive incremental operating margins relative to Amazon’s retail business. Indeed, Morgan Stanley estimates that AMZNL could optimistically carry as many as 3.5 billion third party packages by 2022, which would translate to more than $35 billion lost revenue for the incumbent parcel companies and a material revenue and earnings opportunity for Amazon.

A third-party logistics service is the logical next step for AMZNL and follows the Amazon playbook to a tee – create and scale a business where Amazon is the first best customer, and then offer it to third-party customers at a win-win price. This same strategy was used for Fulfilment By Amazon and even Amazon Web Services, where the retail business was the first best customer for both services. Given the prospect of losing further Amazon volume and likely also valuable non-Amazon volume over the next several years, the competitive threat to parcel companies is potentially underestimated. The Montaka team continues to monitor this space for opportunities.

 

 

 

 

 

Daniel Wu is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.