Thursday, January 21, 2016

Amazon Stock’s Next Big Catalyst — Ocean Shipping?

AMZN's new delivery method will disrupt more than just BABA

Last week, it was reported that international e-commerce giant Amazon.com, Inc. (AMZN) had successfully registered as an ocean freight forwarder in the U.S.

Officially, it’s Amazon China that is listed as a licensed freight forwarding service provider by the Federal Maritime Commission, which will open the door to countless suppliers and vendors across Asia to begin shipping their wares via Amazon’s logistics network.

This move is another step forward for AMZN in its goal to control every step of the delivery process.

The notion of shipping via ocean freighters won’t be attractive for domestic retailers, but Amazon stock owners should be giddy about the prospects it represents.

There are hoards of Chinese retailers who will jump at the chance to ship their goods directly with Amazon and get them into its fulfillment centers. As David Morris of Fortune explained:
“As a freight forwarder, Amazon wouldn’t be putting its own ships in the water. Instead, it would be selling existing capacity, and managing the shipping process. An international Amazon freight service could oversee a products’ (sic) journey from ramp the (sic) at a Chinese factory all the way to an American warehouse.”
Amazon’s efforts to create its own delivery and distribution network will eventually pay off, and a worldwide logistics infrastructure will mean never again having to rely on a third-party to fulfill Amazon.com orders.

Further, such expanded capabilities will strengthen Amazon’s ability to compete with Chinese-based e-commerce retailer Alibaba (BABA), which has been taking steps to expand operations in the U.S.

Amazon Ocean Shipping Is Not About Revenue


Ocean shipping is a $350 billion market, although it’s not a very profitable industry at the moment. Amazon, however, isn’t looking to generate direct revenue here. Instead, as the international shipper, AMZN maintains control of the delivery process from end to end for products coming out of China. And for Chinese product manufacturers that can’t normally afford shipping via air cargo, an option to ship via Amazon ocean presents significant opportunity to access the Western market.

Additionally, with the expanded measure of control over its supply chain, both the cost and time of package delivery will be reduced.

Per Bidness Etc:
“Fulfillment of products to Chinese consumers directly from the US and vice versa using FBA warehouses and delivery network will eradicate some of the port-based storage, transport, and customs related costs.”
The move to become an ocean freight forwarder makes perfect sense for Amazon considering the company has been losing an average of $1 billion per quarter on shipping costs. Amazon has the potential to dramatically reduce its costs using “its robust software management systems to improve efficiencies and streamline costs that concern product bookings and government filings.”

Further, a sizable percentage of Amazon’s fulfillment costs come from labor, specifically the handoff of cargo from one third-party provider to the next. But now that AMZN has been granted permission to operate as its own shipper, those costs may be reduced or eliminated entirely.

Flexport has said, “It’s here that automation, something no traditional freight forwarding company can do even one percent as well as Amazon can, becomes the key competitive advantage over legacy freight forwarders.”

Ocean Shipping Is Only Part of Amazon’s Vision


In its quest for complete delivery dominance, becoming an ocean freight forwarder is merely one piece of the puzzle that will secure Amazon’s position at the top of the food chain and crush any budding competitive inroads from the likes of BABA.

Last week, AMZN revealed plans to acquire French delivery company Colis Prive, moving one step closer to total control of its European-based fulfilment. Last month, Amazon also announced the addition of thousands of branded trailers to be driven by third-party carriers, further expanding the company’s control and capability on the ground.

In the air, AMZN has arranged to lease at least one jet for dedicated delivery of packages between Poland and Germany, and has been in negotiations with Boeing to lease 20 more for shipment and transportation across the U.S.

AMZN a Threat to FedEx and UPS


So, between the increasing fleet of trucks, leased jets, and now its own ocean shipping capabilities, Amazon is poised to become a dominant global logistics powerhouse, threatening the U.S. expansion efforts of BABA, as well as the stranglehold traditional carriers FedEx (FDX) and United Parcel Service (UPS) have long since held.

Power Retail said it best
“If Amazon commits to developing a fully fledged delivery service, it has the potential to disrupt the fulfilment industry, especially considering Amazon’s vast resources, its history of innovation, and its ability to operate on extremely thin profit margins.”
Overall, the creation of a dedicated ocean shipping division out of Amazon China will be a boon for Amazon stock for more reasons than just the reduced shipment losses and improved margins that come from maintaining greater control over fulfillment services.

Amazon is building its own complete worldwide logistics network that encompasses land, air and sea, which together with its unparallelled software and automation capabilities will put AMZN in direct competition with FedEx, UPS and even the U.S. Postal Service.

Plus, since the inflow of low-priced Chinese-made goods to Amazon’s fulfillment centers in the U.S. will result in reduced delivery times for American consumers, there’s less chance that BABA will woo customers away from Amazon.

On the export side, AMZN ocean shipping will provide a steady stream of high-demand American-made products to China.

This move makes Amazon stock a solid buy for the long-term — both for the e-commerce boost that will stem from greater control and lower overseas shipping costs, as well as the potential for an entirely different stream of revenue that could arise when the Amazon logistics network is able to fully compete with FedEx and UPS.

Article originally appeared on InvestorPlace (01/21/2016)