Amazon’s Delivery Challenge to UPS & FedEx Launching in LA

As reported by The Verge, Amazon will finally launch its shipping service for businesses in Los Angeles in the “coming weeks,” according to a new report from The Wall Street Journal.

The service, dubbed Shipping with Amazon or SWA, will directly compete with companies like United Parcel Service Inc. and Fed Ex Corp.

However, it will be initially restricted to companies selling goods on Amazon’s own marketplace.

No doubt executives at companies FedEx (NYSE: FDX) and UPS (NYSE: UPS) are no doubt waking up to frantic phone calls about what their industry might look like in five years.

Read: Amazon's Delivery Dream Is a Nightmare for FedEx and UPS

Shipping with Amazon is not a new project for the company.

For years, the e-commerce giant has been building out its delivery infrastructure, expanding into ocean freight, leasing its own cargo planes, finding ways to deliver packages inside your house with Amazon Key, and even planning for the future with its drone delivery initiatives.

Despite all this, though, the company isn’t ready to go toe-to-toe with established firms, which spend billions each year just upgrading their existing networks.

For that reason, Shipping with Amazon is starting small. So far, it’s been tested in various pilot programs, including in London, and this initial launch is said to be limited to Los Angeles.

The WSJ reports that Amazon plans to then “expand the service to more cities as soon as this year,” but doesn’t report a time-frame for doing so. Amazon already delivers at least some of its own orders in 37 American cities, but still relies on the likes of the U.S. Postal Service to fill in the gaps in its coverage.

GlobalData Retail Managing Director Neil Saunders said Shipping with Amazon “makes sense” in urban locations like Los Angeles where order volume is great.

“In such areas, cutting out the middleman is likely to save money and give Amazon more flexibility over schedules and delivery options,” he wrote in a note.

“However, we believe this benefit will only accrue over time and as part of a broader strategy to integrate the delivery of food and non-food.”

Logistics Management news editor Jeff Berman reports that this development is in sync with recent comments made by Amazon CFO Brian Olsavsky at the company’s recent fourth-quarter earnings call in regards to its logistics operations and plans.  

“We will continue to build our logistics capability...and that will be all the way to end delivery,” Olsavsky said. “We've been able to increase service levels in many of the cases by delivering ourselves,” adding "... shipping cost is always going to be a strong part of our offering, and it’s going to be increasing due to our business model, and we, at the same time, look to minimize the cost by getting more and more efficient in that area."

As reported today, Amazon is also extending it's one and two-hour delivery service Prime Now to Whole Foods customers in Austin, Tex., Dallas, Virginia Beach, Va. and Cincinnati.

For those who study Amazon’s business model, SWA looks awfully familiar to the tech giant’s hugely successful cloud computing business, AWS. With AWS, Amazon first built out infrastructure that could serve its own needs, and, once that was established, began selling the same tools to third parties. SWA could be on a similar track.

As independent analyst Ben Thompson put it, Amazon’s ultimate goal “is to take a cut of all economic activity.” AWS lets Amazon siphon some of the profits of digital businesses by selling them the infrastructure they need to reach their customers, and SWA could do something for companies with physical products to deliver

There’s no guarantee, of course, that SWA will succeed like AWS given the hugely different demands of running cloud and shipping businesses. But Amazon is at least going with a tried-and-tested method to out-compete its rivals and wants to steal business from UPS and FedEx by undercutting them on price.

Related: Amazon Reportedly Focusing on Expanding its Delivery Trial Offering Threatening FedEx & UPS

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