Amazon Tries to Take on the Entire Trucking Industry
At roughly the same time Amazon (NASDAQ: AMZN) quietly let it be known that it plans to move from free two-day shipping to one-day shipping for Prime members, the company dropped another bombshell. The e-commerce giant took its freight brokerage platform live at freight.amazon.com.
That's not a move the company did much to promote. In fact, there's no press release on the company's website nor did it have a media event to trumpet its efforts.
Not playing up major news seems to be part of CEO Jeff Bezos's playbook. That does not make the beta launch of Amazon's freight service in Connecticut, Maryland, New Jersey, New York, and Pennsylvania any less epic, however.
What is Amazon doing?
The company is leveraging its own shipping brokerage capabilities to sell those services to other companies. It's going to do that through its online brokerage platform at prices that will undercut current market pricing by 26-33%, according to Freightwaves.com, which broke the news of the launch.
This isn't Amazon selling capacity on its own vehicles. Instead, it's brokering access to its trucking network. In its launch version, the online retailer is offering access to 53' dry van full truckload freight service without marking it up.
Basically, Amazon is locking up trucking capacity by brokering those services without making any money. It's not asking trucking companies to operate at a discount (at least beyond whatever discount they already give the online retailer) and that leaves Amazon lots of room to raise prices down the line (while still being much cheaper than what's currently being charged).
"Amazon already moves an enormous amount of freight through its distribution and sortation centers and has an extensive network of trucking carriers," wrote FreightWaves' John Paul Hampstead. "For many industry observers, it was only a matter of time before Amazon leveraged the implicit network effect -- the total number of shippers and carriers who do business with Amazon -- and connected both sides of its business."
Why is this important?
Amazon can enter a business and take market share without any regard for making a profit. In this case, the company already moves so much of its own freight via third-party carriers that it largely already had the infrastructure necessary to become a broker for other companies that need to move freight.
That allows the online giant to offer much cheaper prices to attract companies to its brokerage platform. Rival brokerage firms, on the other hand, can't eliminate their markups -- that's how they make money.
To compete, both trucking companies and brokerages will likely have to cut their rates. That could allow Amazon to eventually realize a profit in this business without charging more. More importantly, lowering overall prices for freight will help the online leader reduce its own expenses in that important area.
No matter how this plays out, Amazon wins. The company can raise its brokerage prices during the peak holiday season and still be cheaper than its rivals. It should also be able to lower its own costs and have even more leverage by increasing its volume with its vendors.
This is Amazon flexing its muscles in a way no other company could. It can enter a new business with no pressure to make money because Bezos has taught its investors that short-term or even longer investments make sense if they pay off eventually, and this almost certainly will.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.
