Industry Titans: How Did You Miss It?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Think of innovation. The United States Post Office (USPS) is not one of the companies that comes to mind. In fact, it probably isn’t even in the Top 100. Or Top 1,000. Or Top 1,000,000.
Moreover, the USPS announced that it incurred a terrifying $5.2 billion loss last quarter. To me that deserves a round of applause, because there can’t possibly be that many operations on planet earth that are capable of losing that kind of money in such a short period of time. USPS: my hats off to you.
(Now it is worth saying that the USPS did have trouble prefunding its retiree benefits and that USPS does have a plan in place – and I very much hope it works because I constantly use our postal service.) But – with all the negativity surrounding this company, it does deserve some strong recognition.
The company long ago made a wonderful innovation to the shipping space that has gone completely unnoticed – until now. They use mail lockers, giving condominium or apartment owners the ability to run down to a central location and retrieve their mail.
Amazon (NASDAQ: AMZN) was greatly applauded for introducing this same concept – storage lockers – where customers can come and pick up their orders. Amazon has introduced this service into major metropolitan areas like San Francisco, New York, Seattle, Washington, D.C., and the U.K. The idea is clever because city-dwellers don’t have to worry about missing packages or their packages being left at their apartment doorstep where they can be easily stolen.
Thus, Amazon’s decision to partner with convenience stores and other highly trafficked areas was met with a warm reception. The idea takes Wal-Mart’s (NYSE: WMT) site-to-store concept one step further. Wal-Mart is known for giving online customers free shipping so long as they retrieve the item in one of Wal-Mart’s stores. The idea produces sales for Wal-Mart and also provides cross-selling opportunities, as consumers are more likely to buy household items from Wal-Mart when they must go there anyway.
Big Companies Can Miss Big Things
This new innovation is as much about DHL, FedEx (NYSE: FDX), and UPS (NYSE: UPS) as it is about Amazon. Why? Because these shipping titans missed the boat. Amazon innovated on their turf.
Think for a moment of the tremendous cost savings that would accrue to shipping companies that created central distribution centers for packages. Of course there are nuances to work out, such as which customers do and do not want to travel to pick up their packages, but the idea could save firms a material amount of time, money, and resources.
Consider that UPS has an operating margin of 11.4% and a profit margin of 7.2%. No doubt these numbers could be increased by having a central distribution center. The same goes for FedEx, which has a 13.6% operating margin and a 7.1% profit margin. Slimming truck, driver, and gasoline costs could add tremendous value to these firms.
And cost savings are only one benefit. If these shipping companies created distribution centers, they could also add to their top line.
For example, shipping companies could charge retail companies to use this same distribution center. Maybe Target wants to launch a special – “free shipping this Christmas season” for customers who live more than 20 miles away from a Target. The innovative shipping company would charge Target a small fee to use its distribution center.
Further, the company could cross-sell simple items in this distribution center – even small items like pencils, pens, printer paper, and other goods.
So what can these shipping titans do now that they have missed the boat? Copy Amazon. Simply announce that they will do the same thing, and fight for space with Amazon. Otherwise, if they wait too long Amazon will have already gobbled up the best locations.
And what benefits will accrue to Amazon as a result of its aggressive move? Too many to count, but here are two.
First, Amazon will begin to trim down its shipping expense, a whopping $1.36 billion in the second quarter. This cost number sky-rocketed 44.5% over one year – rising from $941 million in 2011’s second quarter.
But even more than that, Amazon now has the opportunity to profit from its lockers. How much money could the company make if it leased or rented out certain lockers to other retail companies? And could Amazon get either free rent or affiliate sales if it were to offer coupons for the convenience store’s products from a simple touch screen?
Just as Amazon’s search for cost savings led it to “accidentally” stumble upon its growing Amazon Web Service business, its desire to trim shipping costs may produce a major new platform to distribute products.
In conclusion, Amazon has begun to implement a major innovation - albeit one that the arcane postal service has been implementing for decades. Should Amazon continue this practice in urban areas, the company will likely see a major reduction in its shipping expense, and might also see a boost to its topline revenue. Amazon has innovated on the shipping titans' turf - well done.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com and FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
