Amazon To Compete With UPS And FedEx, Seriously?

This May Become The Face Of Amazon's New Venture!

The Wall Street Journal has reported Amazon is ready to launch a delivery service for businesses that would compete toe to toe with United Parcel Service Inc. and FedEx Corp. According to people "familiar with the matter" Amazon is planning to undercut UPS and FedEx on pricing. Many companies have tried over the years to break into this difficult market and failed because they underestimated the difficulties of building out and operating such a complex network. The United States Postal Service is an example as it continues to struggle with losses year after year. Simply put, something as basic as delivering a package at times proves to be no easy task.

The idea Amazon is entering to this part of the business world should force any logical investor to question why their stock is trading at a PE 300 time future earnings. It is insane to think any "delivery company" can ever be worth such a high multiple. I almost have to laugh when people say the stock market has not disconnected from the economy and reflects the health of the American economy. Some peole remain oblivious to the fact much of the market gain has been in just a few stocks known as the FAANG stocks. These few stocks have far outpaced the rest of the market when it comes to gains in value.

UPS Has Made Delivery A Science!

The delivery arm of Amazon will be named “Shipping with Amazon,” or SWA. The service that will have Amazon picking up packages from businesses and getting them to consumers is expected to kick off in Los Angeles during the coming weeks. While some people say this should not be a surprise to anyone because Amazon spends billions of dollars each year shipping goods it still does not mean Amazon will be able to deliver products at a huge saving, and that is exactly what they will have to do if they want to keep the PE ratio of Amazon stock at the sky-high level it currently trades. It is understandable that Amazon wants to mitigate shipping cost but to think they are going to do it on the cheap is a reach.

It appears the new delivery service will try to maximize ties Amazon has with its "third-party merchants" that currently sell goods via its website. This will allow SWA to get it off to a fast start. While the program is being piloted with the company’s third-party sellers, it is envisioned it will eventually be open to shipping for other businesses after it is up and running. As it has in the past once the system is functional Amazon plans to expand the service to more cities possibly this could occur as soon as this year. Clearly, Amazon would not be planning to enter this business if they did not think they could undercut current delivery pricing, however, the exact rate structure is still unclear.

UPS And FedEx Have Honed Their Delivery Systems

We should remember that both UPS and FedEx have over the years honed their delivery systems for maximum efficiency and cut cost to the bone. The packages these companies deliver are often far too valuable to trust to low paid employees that come and go through a revolving door. Customers depending on receiving an important order have little tolerance on damaged or misdelivered packages and the cost of cleaning up these problems far outweigh the benefit of a less expensive delivery. While it could be argued the current economic expansion and surging e-commerce volumes are able to support a new competitor in the delivery business my personal experience causes me to question whether this is true.

This may be another case of Amazon's "engulf and devour strategy" that will eventually come back to haunt it. Almost every day we see articles about how Amazon is buying this or that company or expanding into another business sector. Amazon's announcement they were purchasing Whole Foods got me thinking Amazon's engulf and devour strategy will eventually max out then come back to haunt them by generating a backlash and scorn. With their constant efforts to extend their reach and to become everything to everybody as a one-stop total fulfillment center, they are stepping on a lot of toes. Any company stupid enough to hire Amazon to act as their agent and paying this competitor to ship their products to customers have adopted a destructive strategy akin to cutting their own throat so they can breathe more efficiently. Amazon is not their friend and of that, they should take note.

While many people have heralded Amazon's disruptive nature and technology as game-changing much of the companies success is based on making little or no profit and lucking into an era where easy money and low-interest rates have allowed its rapid expansion. These factors have also masked many of its core weaknesses as it devastates many small businesses across America. Again this brings front and center the fact we should consider and think about what kind of society and world future generations might want to live in. To some investors, this is why the current valuation of Amazon's stock seems outrageous and brings forth the image of a scheme held up and driven by hype and self-promotion.


Footnote;  While I'm fully aware of the argument that only through creative destruction can we progress and move forward, the issue is that Amazon is predatory. Amazon often fails to have the best price or service and buying from Amazon carries the hidden cost of destroying businesses rooted in our communities. The article below explores Amazon's destructive strategy of "Engulf and Devour"

http://brucewilds.blogspot.com/2017/07/amazons-engulf-and-devour-strategy.html