Amazon buys a shipping company. Can it compete with FedEx, UPS?
In an effort to control operating costs, Amazon has bought its own shipping company in France, and a US shipping acquisition may follow.
Amazon is finalizing its acquisition of a French shipping company in a move to take more control over shipping costs, according to the Seattle Times. Amazon first acquired 25 percent of the company, Colis Privé, in 2014, and is poised to finish acquiring the remaining 75 percent over the next three months.
Shipping costs are an enormous expense for Amazon. In 2013, the e-commerce giant charged customers a global total of $2.8 billion for delivery, but it still lost $3.3 billion on shipping. That same year, thousands of customers did not receive their Christmas gifts on time for the holiday, which forced both Amazon and UPS to issue refunds on shipping fees.
Although Amazon’s shipping and delivery processes have increased in efficiency since then, the company’s shipping costs have increase by approximately 30 percent each of the past two years. Amazon’s move to acquire a foreign shipping company may be a an attempt to both lower its shipping costs and take firmer control of product delivery.
"[G]iven the scale of Amazon’s own first and third-party retail operations, we believe there are potential efficiency gains from internally operating fulfillment, logistics and delivery, as well as service benefits of controlling the full customer experience," Colin Sebastian, an analyst with Baird Equity Research, told Fortune.
One way Amazon attempts to control its shipping costs is by enticing more customers to become subscribers to Amazon Prime, a service that charges a yearly premium in exchange for free shipping and other benefits.
The annual cost of being an Amazon Prime subscriber steadily has gone up over the years, from $79 in 2014 to $99 today. But the service has been a boon for Amazon: A 2014 study from Chicago-based Consumer Intelligence Research Partners shows that Amazon Prime customers typically spend more than those who don’t use the service -- to the tune of $1,500 a year. Amazon customers who don’t have prime typically spend $625 a year on the site.
“When customers spent more, Amazon’s volumes increased, so it could lower shipping costs and negotiate new deals with vendors.” author Brad Stone wrote in "The Everything Store," his book about the company. “That saved the company money, which would help pay for Prime and lead back to lower prices.”
But as Wired detailed in 2014, Prime didn't solve all of Amazon's shipping cost woes, prompting the company to look for more solutions.
Colis Privé is not the first international carrier Amazon has acquired. In 2014,the e-retailer purchased a small stake in the UK shipping service Yodel. Amazon entered into talks with Boeing to lease some of its 767s for domestic cargo transport that same year, which led to speculation that the company is building its own air freight business. Analysts also speculate that an acquisition of a US shipping firm may be on the horizon.
“We anticipate they will either make a similar acquisition on the U.S. domestic side (perhaps buying a regional carrier) or continue building out a delivery network internally,” John Haber, CEO of Spend Management Experts, told USA Today.
UPS said in a statement to USA Today that it wasn’t worried about the move. The shipping company is one of Amazon’s largest domestic partners, and also provides a savings program on shipping for Amazon small business users.