Is Amazon going to cut UPS, FedEx out?

Published Tue, Nov 24 201511:54 AM EST

After disrupting the retail sector with e-commerce and the legacy technology industry with cloud computing, what is Amazon's next big disruptive act? Responding to an unsubstantiated media report the company secretly launched an air cargo operation in Ohio, Baird's Colin Sebastian believes Amazon is building out a transportation and logistics offering. Here's what he said in a note to clients Tuesday: "Whether the report is accurate or not, our assessment of Amazon's broadening fulfillment ecosystem, internal domain expertise, and early initiatives with Prime Now to offer delivery services suggests Amazon may ultimately pursue more comprehensive third-party services. Similar to the gradual rollout of AWS, we would expect Amazon to introduce competitive transportation and logistics services on an incremental basis, with a long-term focus." Amazon already offers one- to two-hour delivery with the Prime Now service in over dozen U.S. cities and same-day grocery delivery with Amazon Prime Fresh. Sebastian thinks Amazon has the differentiated skill-set and critical mass to compete broadly with UPS and FedEx . "Global logistics is a highly competitive market that we believe has yet to fully capitalize on the emergence of web-based technologies such as cloud computing, data-centric analytics and optimization that can reduce inefficiencies throughout the supply chain," he wrote in a note last month. "Amazon's cloud technology expertise and increasingly complex fulfillment, logistics and delivery network seem to be obvious foundation to offer third-party services." He said Amazon is the only company that has the scale and investor base that will be willing to tolerate the size of investment needed to build out a new delivery network. The company can leverage the relationships it already has with over 3 million businesses from cloud computing clients to third-party marketplace sellers, not to mention the 280 million active website customers. Sebastian said the potential addressable market for Amazon's delivery and logistics services is about $400 billion to $450 billion. It may make financial sense to bring shipping in-house just for internal purposes as well. Due to Amazon's free shipping benefit for Prime and orders over $35, shipping is one of Amazon's largest loss leaders. In 2014, the company reported shipping revenue of $4.5 billion and shipping costs of $8.7 billion, resulting in a net shipping loss of $4.2 billion, up from a $3.5 billion loss in 2013, according to company filings. Read More Hedge funds' favorite stocks are getting smoked Amazon is also under pressure from rising shipping rates. UPS and FedEx continue to raise shipping rates around 5 percent a year. Both companies this year added surcharges for the size of packages called "dimensional weight" rules, which further adds cost to e-commerce sellers. Amazon did not immediately respond to CNBC's request for comment. Read More Could Chipotle's 9-year sales growth streak end?

An Amazon.com worker sorts packages onto a conveyor belt at an Amazon fulfillment center in Tracy, California.

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After disrupting the retail sector with e-commerce and the legacy technology industry with cloud computing, what is Amazon's next big disruptive act?

Responding to an unsubstantiated media report the company secretly launched an air cargo operation in Ohio, Baird's Colin Sebastian believes Amazon is building out a transportation and logistics offering. Here's what he said in a note to clients Tuesday:

"Whether the report is accurate or not, our assessment of Amazon's broadening fulfillment ecosystem, internal domain expertise, and early initiatives with Prime Now to offer delivery services suggests Amazon may ultimately pursue more comprehensive third-party services. Similar to the gradual rollout of AWS, we would expect Amazon to introduce competitive transportation and logistics services on an incremental basis, with a long-term focus."

Amazon already offers one- to two-hour delivery with the Prime Now service in over dozen U.S. cities and same-day grocery delivery with Amazon Prime Fresh.

Sebastian thinks Amazon has the differentiated skill-set and critical mass to compete broadly with UPS and FedEx.