You have to marvel at the many ways Amazon (NASDAQ: AMZN ) generates revenue. From web hosting to devices and even advertising, Jeff Bezos leads a complex machine with many paths to generating income. What's sometimes missed by AMZN stock watchers, though, are the new and innovative pieces of the Amazon pie.
There was a time when investors didn't pay too much attention cloud services. Something similar is going on with Amazon's recent moves in self-driving cars and logistics.
While everyone has been focusing on Bezos' personal life and Amazon's recent decision to abandon a New York City headquarters, the online retailer quietly made some critical moves into beefing up its last-mile logistics infrastructure. This is huge news and could eliminate some of the biggest costs it has with shipping.
It's time for investors to pay attention to Amazon's latest moves to dominate the online/retail landscape.
Amazon's Logistics Problem
AMZN's two-day delivery option changed the game for the entire online retail sector. Its biggest competitors - Walmart (NYSE: WMT ), Target (NYSE: TGT ), et.al. - were forced to step up their game and all offer some version of it. Yet, in its game changing logistics move, Amazon created a dilemma for itself.
Amazon two-day delivery raised expectations for every online shopping experience. We want our order, and we want it now. Consequently, retailers that get the omnichannel shopping experience are doing well. It's reducing the wait time until the product gets into your hands.
The problem for many retailers comes in the last mile of the delivery. Getting the package from a fulfillment center through the air is relatively easy. The actually getting off the truck and to your front door is often where precious time is lost. Moreover, it's the more expensive piece of the pie. Looking at the total cost of shipping a package, the last mile comprises around 53% of the cost. Looking at its annual report, Amazon's shipping costs have nearly doubled to $21.7 billion from 2015 to 2017. Most of that cost comes at the end.
This is kind of a big deal for AMZN. As fellow InvestorPlace contributor , Will Ashworth put it , "Amazon's goal is to sell you everything in your home." This isn't just home furnishings or a new coffee pot. But the entertainment played in it - think Prime Video & Music. How you run it - Alexa's smart home accessories and even what you eat via Prime Pantry and Whole Foods.
To do that, it's costing Amazon more and more. And its own two-day and same-day grocery deliveries are becoming harder to execute.
Amazon Busts Out Automation and Improved Logistics
While the news media focused on Bezos and his leaked photos, Amazon made a big step in solving its last mile problem, joining in a $530 million investment in self-driving startup Aurora Innovation Inc. It's Aurora's pedigree that's got people talking: three founders who were formerly key players in the self-driving units of Alphabet 's (NASDAQ: GOOGL ) Waymo, Tesla (NASDAQ: TSLA ) and Uber. Less than a week later, Amazon announced that it was part of a $700 million investment in electric truck producer Rivian.
The dots are easy to connect.
Amazon already uses a variety of robots and automation tools in its warehouses to pick and gather items for shipment. The next logical step is having them deliver your goods. While the retailer's drone ambitions were a tad bit laughable, having a fleet of autonomous vehicles deliver packages is not. Add in the introduction of Amazon's Scout to deliver packages directly to your door (see photo above), and you've got a significant investment in delivery cost and time reduction.
Consider what happens to costs when the e-tailer no longer needs to spend the money on sending trucks operated by humans on various shipping routes. A robot can load up the truck. The truck can drive itself and be at your door. Even better is that this can happen at any time of day because it's a robot and doesn't need to sleep. Two-day delivery can become next-day and even same-day delivery for a ton of items.
Amazon's incentive is great in wanting to do this as well. McKinsey & Company predicts that autonomous deliveries will allow retailers to slash shipping costs by 40% . In AMZN's case, that's about $9 billion and another huge advantage over its rivals.
Amazon is Still Forward Thinking
While autonomous car deliveries and widespread package drop-off via a cooler-sized Scout aren't going to happen tomorrow, they're just more examples of how AMZN continues to evolve and solve its own margin problems. I have no doubt that the retailer will be able to cut shipping costs and eventually have an army of self-driving vehicles dash here and there, dropping off packages. That's what Amazon stock investors need to focus on.
In the end, the recent moves build upon its goal of being the total retailer and building on the concept of the Amazon Home. For the AMZN stock audience, it's another sign that the firm is working hard to keep more of its revenues in its own coffers.
Disclosure: At the time of writing, Aaron Levitt was long AMZN.
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