Now that Amazon (NASDAQ: AMZN) has acquired Whole Foods (NASDAQ: WFM), some anticipate the online e-tail giant will acquire a shipping company – specifically UPS (NYSE: UPS).
Those who are looking to make a quick buck are considering whether they should scoop up UPS stock ahead of a possible acquisition. It seems to make sense that Amazon would consider purchasing a shipping powerhouse, as the e-tailer spends about $11 billion per year on shipping. This equates to over 10 percent of the company’s aggregate sales. Let’s take a look at whether buying UPS stock in hopes of a buyout is prudent investment decision.
Amazon is Building Its Own Shipping Network
Though the acquisition of UPS would certainly ameliorate Amazon’s logistics challenges, the truth is the company has already invested a substantial amount of money in its own shipping network. This network is not highly visible to Amazon customers. Amazon owns its own trucks and even hires private deliverers to drop off packages in certain markets. These services are supplemental those provided by UPS, FedEx and USPS.
Current and former Amazon employees have noted the company’s push to deliver its own products has earned the internal nickname of “Consume the City”.
Though Amazon might not ever reach the point where it builds its own massive shipping network that allows for total self-reliance, the online retailer certainly is not dependent on a single third party shipping company. As the Amazon shipping network continues to expand, the company will be less inclined to purchase a shipping giant like UPS.
After all, industry analysts estimate Amazon can save upwards of $3 per package if it creates its own shipping network. This adds up to an annual savings of about $1.1 billion.
The Problem with Acquiring UPS
Imagine an instance in which Amazon purchases UPS. Amazon would have to restrict UPS deliveries to products purchased on Amazon’s website, and grocery deliveries to Whole Foods stores.
There is no way Amazon would use its newly acquired shipping network to deliver the competitions’ packages. Even if Amazon was willing to deliver such shipments, most of those companies would discontinue business relationships with Amazon’s shipping wing. It doesn’t make sense to hand over valuable data such as package quantities and types, business seasonality statistics and information about major routes to Amazon. The company could use this data as a critically important competitive advantage to steal market share.
In the end, Amazon would have to restrict UPS’ logistics services to its own shipments. The result would be a contraction of services. Sure, Amazon has the lion’s share of online sales, and shipments across the country will certainly increase with the acquisition of Whole Foods. Yet Amazon’s logistics needs do not compare to the level of business UPS currently does with its myriad of partners. It does not make business sense for Amazon to acquire a vast shipping network only to shrink that network right off the bat.
Antitrust Issues
If Amazon were to gain total control of a gigantic shipping company like UPS, there would undoubtedly be accusations of monopolistic business practices.
Antitrust laws exist to encourage competition. The nation’s top e-tailer’s acquisition of one of the leading shipping companies would spell doom for much of the competition. A newly acquired UPS could refuse to ship packages for any business besides Amazon. The bottom line is that Amazon is acquiring an ever-growing portion of market share. The purchase of UPS would only accelerate Amazon’s growth, allowing the company to acquire that much more of the limited economic pie.
One has to wonder if Amazon will eventually sell everything from food to prescription medications, electronics and maybe even automobiles. Add in ownership of a mammoth shipping company like UPS, and it would be awfully difficult for competitors to put up any sort of fight. It is certainly possible the federal government will eventually step in to put the brakes on Amazon’s rapidly growing business – and Wall Street would not react favorably.
The Verdict
Don’t buy UPS assuming it will be a takeover target for Amazon. There is a good chance Amazon will be content to continue building its own shipping network while tapping into the logistics power of the newly-acquired Whole Foods.
Regards,
Ethan Warrick
Editor
Wealth Authority
