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Contract Logistics, Amazon's (AMZN) Next Massive Opportunity

October 19, 2015 7:44 AM EDT
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Colin Sebastian at RW Baird published a note this morning highlighting the opportunity for Amazon (NASDAQ: AMZN) to begin to offer third party logistics services in a similar way that it offers Web Services. Transportation and logistics is the next massive market opportunity for Amazon but rather than developing it as another internal business unit, this may be spun out. Amazon currently operates 167 distribution facilities around the world, totaling more than 100 million sq. ft., and continues to grow. In North America, Amazon operates 92 facilities (including local sortation centers). The analyst believes that this could be a $5 billion opportunity if it only captures 1% marketshare in the various segments of the industry.

Amazon has created ancillary services that help the company subsidize investments that were originally aimed at growing the core e-commerce business. Amazon's third-party Marketplace is a good example which leverages the scale of Amazon's e-commerce traffic and supporting fulfillment infrastructure. Amazon may be the only company with the fulfillment/distribution density and scale to compete effectively with global providers. Amazon was able to leverage not only its position as the leading destination for e-commerce with ~280 million active customers, but also as a top-ten web property overall, generating more than 175 million unique visitors monthly.

Early initiatives with Prime Now to offer third-party delivery suggests there is evidence Amazon may ultimately pursue more comprehensive third-party services. Certain segments of the logistics market, last-mile parcel delivery and contract logistics, are segments where Amazon could provide a compelling alternative to traditional shipping/logistics providers. There is currently ~$170 billion in market capitalization in legacy companies that may be ripe for disruption.

Ideal customers for ATL (Amazon Transportation & Logistics) would range from SMBs to enterprise businesses that lack financial resources, expertise, or technology horsepower to manage fulfillment/logistics internally. The global contracted logistics market is very fragmented, with the top 10 companies comprising only 20% of total revenue, but DHL accounts for 8% of that 20%.

Domestic Parcel Delivery is an $80 billion US market dominated by UPS (NYSE: UPS), FedEx (NYSE: FDX), and DHL. Amazon has been partnering in this space to fulfill the last mile delivery for its Prime service but recently, its endeavors to build out last mile service for Prime Now, Prime Fresh and Flex are through new relationships and internally developed services that could be extended in a similar way that Prime was extended to third party sellers and AWS is offered as a separate service.



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Robert W Baird