Will Amazon convert shipping costs into profit?

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

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

This report indicates 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 packages in 2021 than FedEx in the US – a milestone. Several transportation analysts doubted that Amazon could do it.

A 2018 article in a Memphis business journal, for example, stated that the “odds of [Amazon] ever to make the network profitable or in any way shape or form a serious competitor to FedEx is dubious at best, a pipe dream. (FedEx, it should be noted, is based in Memphis.)

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

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

Cost center

Some have pointed out that Amazon’s market share is only 12% when revenue — not package volume — is in view. But this fact is irrelevant.

Fulfillment and shipping are cost centers for e-commerce operations. Amazon’s first-quarter 2022 results, released April 28, showed the company spent more than $19.5 billion on shipping.

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

Pitney Bowes reports that Amazon held 12% of the $188 billion package delivery market in 2021. This translates to approximately $22.5 billion in delivery revenue.

Profit center

You could say that Amazon is on the verge of turning one of its biggest expenses into a profit center.

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

This figure could increase if the company’s “Buy with Prime” initiative is successful.

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

Indeed, Amazon has opened up its delivery services to e-commerce sales coming not just from its marketplace, but from any store. Buying with Prime is a backdoor to scale its delivery operations and become a profitable parcel carrier.

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

Amazon Web Services

Amazon has already done this.

Data centers are usually a cost center for large e-commerce companies. But Amazon has long since turned that expense into profit.

Amazon Web Services started out as low-cost digital storage, but has grown into a huge cloud computing company. 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 revenue of $18.4 billion. Additionally, AWS is growing at over 30% per year.

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

Its advertising services business generated $7.8 billion in revenue in the first quarter of 2022.

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

Take away

Amazon’s fulfillment and delivery operations and its success with AWS and retail advertising could be an exciting lesson for e-commerce businesses.

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