With e-commerce is growing at a rate of 15 percent year-over-year, opportunities for logistics companies and carrier services stand to increase exponentially, too.
In the U.S., FedEx, UPS and the United States Postal Service (USPS) represent the sector’s stalwarts, though the drum beats of Amazon’s growing logistics business have reverberated throughout the industry for months.
Some analysts have deemed Amazon Logistics the next threat to the establishment, but what would it actually take for the company to catch up?
In a Goldman Sachs report released Wednesday, the firm’s analysts largely dispute the idea that Amazon Logistics, with its 70 planes and 10,000 vehicles, actually stands to undermine the competition. At least, not anytime soon.
“Our long-term view on the sector is favorable, and we believe that recent concerns about ‘digital disruptors’ and Amazon are overdone in the near term,” the analysts said. “We do not discount the risk that these companies represent to the ‘incumbents,’ however even though the competitive pressures are real, sector valuations more than reflect the concern.”
The firm’s analysis stems from the fact that Amazon has not yet established the same IT capabilities as the large scale domestic brokers to manage a massive network of carrier and shipper networks—which, at this point, it doesn’t have either. The same goes for other small to mid-sized companies attempting to break into the space.
In order to even factor into the race with UPS and FedEx, Amazon would have to invest $122 billion into expanding its network, according to the report. Replicating the competition would certainly “take years.”
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With delivery times getting tighter (largely influenced by Amazon Prime’s one-two day promise) and e-commerce growing at a significant and steady rate, the demand for express companies and logistics providers is at a high. That leaves ample opportunity for existing express carriers and other well-positioned providers to secure volume.
This is where Goldman Sachs believes FedEx and UPS should be focusing their efforts in the near-term.
“Amazon is definitely a concern for the incumbent express companies as Amazon has brought more of its transportation service requirements in-house,” the firm said, referring to the company’s distribution facilities and its growing fleet of aircrafts. “However, we feel that that other factors should be more heavily considered when it comes to UPS and FedEx—at least over the next two to three years.”
The analysts went on to say UPS could stand to invest significant capital into improving profits through an enhanced and automated smart network, and that FedEx should focus on successfully integrating TNT, the carrier it recently acquired, to ensure synergy and leverage its spending on ground automation into real margin expansion.
Amazon is even less of an issue for FedEx since it decided not to renew its Air Express contract with the company in June of this year. In 2018, Amazon made up just 1.3 percent of FedEx’s revenue.
And, while Amazon’s share of online commerce continues to grow, “there is still about 50 percent of e-commerce that is not made up by Amazon on the consumer side in the U.S.,” the Goldman Sachs analysts said, citing Walmart, Target and Best Buy as large scale examples.
With USPS’ financial difficulties, UPS and FedEx could actually see disproportionate growth when it comes to non-Amazon business, according to the report.
“Finally, and this may be the most important point—Amazon likely needs its own capacity,” opined Goldman Sachs analyst Heath Terry.
As the company’s sales volume continues to grow, it will likely experience “periodic, but well-documented transport provider peak season shipping issues,” as it has over holidays past.
“Amazon appears to be managing capacity investment to ensure peak season fluidity and to accommodate long term growth,” Terry said, noting that on a Q1 2019 earnings conference call, the company said it would “definitely need the continued support of its external transportation providers” to fulfill orders.
If Amazon is unable to support its own business without the help of established carrier networks, it’s unlikely the company’s logistics operations stand a chance at overtaking them in the near future.