Amazon will soon organize an independent delivery service, Inc. recently reported that it will be launching its own delivery service, which will compete directly with United Parcel Service Inc. and FedEx Corp. as well as indirectly with the United States Postal Service and other delivery companies. The shipping service is to be called “Shipping with Amazon,” or SWA, according to The Wall Street Journal. It is described to be an “end-to-end shipping solution.” Through the new system, Amazon will send its drivers to pick up products from businesses that sell goods through the retailer and from Amazon warehouses, which they will then deliver to customers. The new delivery service is intended to make products available for cheaper and quicker delivery, and to stop overcrowding in Amazon’s warehouses.

Amazon intends to launch the new shipping service in Los Angeles in coming weeks for a trial run with third-party merchants that sell goods through the website. If successful, the plan is to expand the system to other cities as soon as later this year.

The service will then expand to involve more sellers, including those who do not store their inventory in Amazon’s warehouses, allowing them to ship orders through this delivery network. In the future, Amazon also plans to extend the service to third-party merchants working on its e-commerce platform, practically undercutting both UPS and FedEx rates.

Since the news broke, shares of both UPS and FedEx dropped by 0.3 percent and 4 percent, respectively. However, according to JPMorgan Chase analyst Brian Ossenbeck, UPS and FedEx will not be hit as hard as the USPS. The USPS is one of Amazon’s largest carriers, and this new service will directly replace it. Eventually, Amazon plans to expand the service to serve other businesses as well, undercutting UPS and FedEx on pricing. Shipments outside the reach of the service will continue to be shipped via other shipping platforms.

Operating their own shipping services could allow Amazon to negotiate better prices with other delivery companies, considering that shipping costs are such a major part of Amazon’s costs. Last year alone, Amazon spent around $20 billion on shipping. With this new system, the company hopes to control shipping costs more effectively.

Additionally, the new service is expected to speed up delivery times and drive more people to become Prime members as a result. Besides all this, Amazon will most probably make a profit from the service alone.

The company has also launched a logistics service called “FBA Onsite,” through which third-party sellers on the Amazon website must ship their goods to an Amazon warehouse for “fulfillment by Amazon” to qualify them for Prime shipping. Amazon will decide the method of those shipments, but pickups and deliveries will continue to be handled by the same delivery services for the time being.

During the December 2013 holiday season, shipping companies faced problems trying to keep up with the amount of orders coming in.

As a result, shipments from many retailers, including Amazon, were delayed and in some cases, did not make it to customers in time for the holidays. Amazon’s new service aims at solving problems like these, easing the pressure off of other shipment services to avoid a scenario like this from happening again.

“Shipping with Amazon” was tested and rolled out in London last year. Amazon also already delivers some of its own orders in a number of cities in the United States.

Analysts are skeptical as to whether Amazon can get this transportation network to succeed. The company does not yet have the capacity or equipment to handle shipments at this scale, and it will be expensive for them to do so.

Amazon will first need to develop infrastructure and personnel for their network, and it could take years for them to become an established force, while Amazon’s competitors have both infrastructure and experience.

This is not the only other area that the giant e-commerce company has expanded into this year. Amazon also recently announced that it is teaming up with JPMorgan Chase & Co. and Berkshire Hathaway Inc. to form a new health care company to help reduce the health care costs of their employees.

Amazon’s new delivery service certainly stands to assist the company in terms of  savings on shipping and more efficient delivery to customers. However, the logistics of this venture could prove troublesome. Whether Amazon’s entrance into this area will be successful or not remains to be seen.

BusinessEstelle SaadComment