Morgan Stanley is sounding the alarm on Amazon's logistics network for UPS, USPS, and FedEx - with a chilling estimate of up to $100 billion in revenue slashed from the giants

Rachel Premack

Dec 13, 2019, 03:29 IST

Morgan Stanley is sounding the alarm on Amazon's logistics network for UPS, USPS, and FedEx - with a chilling estimate of up to $100 billion in revenue slashed from the giants

Amazon is rapidly in-housing its transportation network.
A recent report from Morgan Stanley highlights why UPS, USPS, and FedEx should be worried - to the tune of nearly $65 billion.
That's because the e-commerce company will carry 6.5 billion of its own packages and 3.5 billion non-Amazon packages by 2022, according to a Morgan Stanley estimate.
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UPS and FedEx have often shrugged off the threat of Amazon. FedEx founder and CEO Fred Smith has often referred to the concept that Amazon could compete with the $65 billion transportation giant as "fantastical."

A Goldman Sachs report from July bolsters that standpoint. According to that note to investors, Amazon Logistics would need $122 billion just to match the networks of UPS and FedEx; additional air hubs and international operating facilities would command the most cash.

But an extensive report from Morgan Stanley's freight transportation team, partnered with internal data researcher AlphaWise, provides another bullet point for Amazon Logistics bulls. The report outlines where Amazon Logistics is today, and how its growth could be a poignant threat to the bottom lines of FedEx, UPS, and the US Postal Service.

The numbers come from an analysis of some 70,000 orders from 300 US shoppers over the course of nine years.

"Simply put, the already large and quick ramp of Amazon Logistics represent a large opportunity-loss and its significant growth ambitions are a competitive risk for incumbent Parcel companies," Morgan Stanley analysts wrote.

Amazon to move more packages than FedEx and UPS in just a few years

Amazon will move 2.1 billion packages in 2019, according to a Morgan Stanley estimation. Meanwhile, FedEx's estimated 2019 volume totals 3 billion and UPS' is 4.7 billion.

That's set to boom by 2022, the report says. Amazon is slated to increase package volume from 2.1 billion in 2019 to 6.4 billion in 2022. The e-commerce giant will deliver more than FedEx by 2020 and more than UPS by 2022.

The US Postal Service had no comment on the research. FedEx did not provide a comment in time for publication. Representatives from Amazon did not respond to a request for inquiry.

A representative from UPS said, "Amazon and UPS are in a mutually beneficial relationship, but there is more to e-commerce, and UPS is leaning into it.

"UPS has a diverse customer base and supports 90% of the largest retailers and thousands of small and medium-sized businesses," he added. "The largest e-commerce shippers are beginning to move from two-day to one-day delivery."

(The report assumes Amazon's US package growth will explode at a 68% compound annual growth rate - perhaps an audacious estimate compared to UPS' and FedEx's estimated CAGR of 3.2% and 4.5%, respectively. UPS, for instance, had double-digit air volume increases in the last two quarters.)

But it doesn't just stop at moving Amazon's packages; Morgan Stanley says Amazon will start to integrate non-Amazon packages into its network. That complicates the UPS and FedEx messaging around their growth in e-commerce; even if the two companies begin to rely less (or, in the FedEx case, not at all) on Amazon, they won't be able to argue that they are growing their networks by incorporating other e-commerce customers.

As the analysts wrote (emphasis ours):

We believe Amazon Logistics may have enough "spare" capacity by 2022 to move as many as 3.5 billion non-Amazon packages or roughly 35% of the non-Amazon e-commerce market. This could cut UPS/FedEx/USPS share of e-commerce packages in the US from 95%+ in 2014 and 82% in 2019 to 50-55% by 2022-25.

Even if we assume that Amazon Logistics only moved ~1.5 billion third-party (3P) packages in 2022, we see this adding $7 billion to 2022 base case Amazon revenue (+1.5% to total revenues) and ~$1bn (3%) to EBIT due to efficiency/volume savings.

A $100 billion worry

All told, if Amazon were to move 6.5 billion more of its own packages by 2022, that would slash up to $65 billion in lost annual revenues for UPS and the USPS. That cut upticks to $100 billion if Amazon also moved 3.5 billion non-Amazon parcels that FedEx, UPS and the USPS would otherwise move.

Morgan Stanley estimates that Amazon pays $10 per parcel, an average of the UPS, FedEx, USPS revenue per unit. However, Amazon likely pays as much as a half of that, so the actual lost revenue for UPS and the USPS could total closer to $33 billion, the report says.

But even using conservative estimates, Morgan Stanley estimates that 15% of non-Amazon e-commerce packages is a $7 billion opportunity, and injecting them into the giant's network could add $1 billion in EBIT to Amazon.

The company is aware of the massive revenue potential and actively investing into it. Amazon is slated to spend more than $3 billion on developing its one-day delivery network, said Youssef Squali, the managing director and global head of internet and media-equity research at SunTrust.

Dave Clark, Amazon senior vice president of North America operations, said in an all-hands meeting said Amazon's transportation will be "pretty radically different" than typical parcel carriers.

"I really think the next three to five years is all about what's going to happen in our transportation businesses," Clark said, according to audio obtained by Business Insider's Eugene Kim. And we're starting to see our first implementations of robotic sort centers, package sortation centers, air hubs, delivery stations starting to deploy this year. And it will begin to scale in 2020 and 2021."