Will Amazon Convert Shipping Expense into Profit?

Amazon is poised to become the second-largest package delivery carrier in the United States, perhaps transforming a cost into a profit center.

In 2021, Amazon’s burgeoning logistics service had a 22% share of the U.S. small parcel delivery market by volume, making it the third-largest carrier in the American market, according to a May 23, 2022, Pitney Bowes report.

This report states that Amazon’s network — made up of company-owned facilities and vehicles, an army of delivery service partners, and Uber-like Flex drivers — moved about 4.8 billion boxes and envelopes in 2021.

Surpasses FedEx

Amazon delivered more parcels in 2021 than FedEx in the U.S. — a significant milestone. Several transportation analysts doubted Amazon could do it.

A 2018 article in a Memphis business journal, for example, said that the “chances of [Amazon] ever making the network profitable or in any way, shape or form a serious competitor to FedEx is dubious at best, a pipe dream.” (FedEx, it’s worth noting, is based in Memphis.)

The quote addressed Amazon’s Delivery Service Partners, a network of independent contractors who own or lease Amazon-branded vans and make deliveries exclusively for Amazon. But there might be a lesson here about doubting the company’s abilities and tenacity.

In 2022, analysts expect Amazon to pass UPS in parcel volume, making it second only to the United States Postal Service in the number of small packages delivered in America.

Cost Center

Some have pointed out that Amazon’s market share is just 12% when revenue — not parcel volume — is in view. But that fact is beside the point.

Fulfillment and shipping are cost centers for ecommerce operations. Amazon’s Q1 2022 results, released on April 28, showed that the company spent more than $19.5 billion on shipping.

The parcel delivery network Amazon is building is likely to reduce the company’s fulfillment and shipping expenses relative to using other carriers. UPS and FedEx’s profit margins are Amazon’s cost savings opportunity.

Pitney Bowes reports that Amazon had 12% of the $188 billion parcel delivery market in 2021. That translates into roughly $22.5 billion in delivery revenue.

Profit Center

One could argue that Amazon is on the verge of transforming one of its most significant expenses into a profit center.

The company is already deriving revenue from third-party sellers on its Marketplace. In the first quarter of this year, Amazon’s third-party seller service fees, fulfillment, and shipping revenue were more than $25. billion.

That figure could grow if the company’s “Buy with Prime” initiative succeeds.

Announced on April 20, 2022, Buy with Prime puts Amazon’s “fast, free delivery, hassle-free returns, and a seamless checkout experience” on any ecommerce site. Participating merchants must use Fulfillment by Amazon and the company’s parcel delivery network.

Effectively, Amazon opened up its delivery services to ecommerce sales originating not just from its Marketplace but from any store. Buy with Prime is a back door to scale its delivery operations and become a profitable parcel carrier.

UPS and FedEx generated $2.6 billion and $1.1 billion in profit in their most recent fiscal quarters. Amazon presumably sees that profit as an opportunity.

Amazon Web Services

Amazon has done this before.

Data centers are typically a cost center for large ecommerce enterprises. But Amazon long ago transformed this expense into profit.

Amazon Web Services started as low-cost digital storage but has grown into a massive cloud computing business. AWS now includes database offerings, animation solutions, natural language processing, machine learning, and more.

AWS generated more than $6.5 billion in profit in the first quarter of 2022 on $18.4 billion in revenue. What’s more, AWS is growing more than 30% per year.

Advertising

In a way, Amazon used this same tactic on its website, too. The company has become a leader in retail media.

Its advertising services business produced $7.8 billion in revenue in Q1 2022.

Instead of seeing its website and marketplace as somehow proprietary, Amazon has long since seen it as an opportunity to generate more profit.

Takeaway

Amazon’s fulfillment and delivery operations and its success with AWS and retail advertising could hold an exciting lesson for ecommerce companies.

What is a cost today could become a source of revenue.