Despite performing extremely well in the last few years, Amazon.com, Inc. (NASDAQ:AMZN) stock could really use some good news in 2016. Year-to-date, AMZN stock is down about 12%, largely due to missing analyst estimates in its latest earnings report. Investors weren’t happy to hear that cloud computing growth slowed and that operating expenses increased more than expected.
But Amazon is making big bets in areas that it hopes will payoff later and reverse the downward trend AMZN stock has been following so far in 2016. One of those areas is logistics.
According to the German newspaper Die Welt, Amazon is planning to takeover a commercial office building on a central Berlin street and turn it into a fulfillment warehouse so that it can offer the city’s “Prime” subscribers two-hour delivery. (Source: “Amazon plans two-hour delivery in Berlin –Welt,” Reuters, March 26, 2016.)
Up until now, Amazon has mostly used Deutshe Post’s DHL parcel service for its deliveries in Germany. However, this move to create a warehouse signals that Amazon wants to take control of its own delivery services.
And this isn’t just happening in Germany.
In February, Bloomberg uncovered a 2013 report from Amazon that described the expansion of a logistics plan called “Fullfillment By Amazon,” which provides storage, packing, and shipping for merchants selling on Amazon. (Source: “Amazon Building Global Delivery Business to Take on Alibaba,” Bloomberg, February 9, 2016.) The report envisioned a global delivery network that would control the flow of goods from factories around the world.
The company has downplayed its ambitions in logistics, but Amazon announced in mid-March that it is leasing 20 Boeing Co (NYSE:BA) “767” cargo jets from Air Transport Services Group Inc. (NASDAQ:ATSG). Amazon has also leased thousands of truck trailers and has received a license to expand into ocean freight. (Source: “Confirmed: Amazon leases 20 Boeing 767 freighter aircraft, continues to expand delivery network,” GeekWire, March 9, 2016.)
These moves are obviously designed to cut out FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS), which are bound to eventually become Amazon’s rivals.
But back to Amazon’s leasing of planes, which is significant. Amazon’s fleet of planes will enable the company to get purchases to the company’s customers as fast as possible, with fewer hiccups caused by third-party delivery companies.
“Having their own fleet of planes will be a huge move,” said Jarrett Streetbin, founder of EasyPost, a logistics company in San Francisco. “They would no longer need to spread out their more expensive inventory around the country or pay FedEx to get it somewhere by the next day. They could send it themselves from one hub.” (Source: “Amazon Subsidiary Gains Approval to Ship Ocean Freight,” The New York Times, March 29, 2016.)
Amazon’s own shipping service will also help the company to cut down on shipping costs, which the company takes a loss on. In 2015, shipping cost Amazon about $11.5 billion, while revenue was about $6.5 billion. (Source: “Amazon’s shipping revenue and outbound shipping costs from 2006 to 2015 (in million U.S. dollars),” Statista, last accessed March 29, 2016.)
But Amazon’s ambitions can also mean big bucks for the company. According to Robert W. Baird & Co. analyst Colin Sebastian, Amazon’s global logistic operation could become a $400-billion business. (Source: Bloomberg, op cit.)
Getting back to Germany, the country is the largest source of revenue for Amazon outside of the U.S. Sales from Germany for full-year 2014 came in at approximately $11.9 billion, or 13% of overall sales. Also, e-commerce sales are expected to hit almost $83.0 billion in Germany, so it’s no surprise that Amazon is trying to grab a larger piece of that. (Source: “Retail e-commerce sales in Germany from 2012 to 2018,” Statista, last accessed March 29, 2016.)
The Bottom Line on AMZN Stock
Amazon’s plan to offer two-hour Prime service in Germany using its own delivery service is a tactic to get more Germans to sign up for Amazon Prime. After all, Prime members spend about $1,500 per year buying items on Amazon compared to non-Prime members who spend about $625.00 a year. (Source: “Amazon Prime Hits New Highs, Consumer Intelligence Research Partners,” LLC, January 27, 2015.)
With delivery set to begin in May, AMZN stock may get that boost it’s been looking for since the start of the year.