Amazon.com Inc. (AMZN - Get Report) has an intricate relationship with the U.S. Postal Service. But what exactly goes on between the two, and just how big of an impact does USPS have on Amazon's costs?
More than 60% of Amazon's U.S. shipments are carried out through USPS, one expert polled by Jefferies analysts suggested, meaning Amazon may be more exposed than its competition should the Postal Service have to raise rates given "aging infrastructure." But these cost and capacity headwinds aren't unique to Amazon; rather, they afflict the entire industry, Jefferies analysts wrote.
"Given the Post Office's aging fleet and infrastructure, our expert believes rates will eventually have to go up. Capacity constraints in the system (from shrinking labor pools of both [fulfillment center] workers and truck drivers, to physical warehouse infrastructure, to rising wages) are pushing logistics costs up, not just for AMZN, but for retailers in general, a dynamic which is expected to continue over the next several years," Jefferies wrote.
Managing those headwinds represents a short-term "pain" for Amazon, Jefferies said, but they are also a means of raising the barrier to entry on Amazon's playing field, making them a long-term competitive moat.
Plus, if USPS were to raise rates, FedEx Corp. (FDX - Get Report) and United Parcel Service Inc. (UPS - Get Report) would likely follow suit in a move that would impact all firms like Amazon that rely heavily on shippers, Jefferies wrote. For Amazon, about 62% of packages flow through USPS, 21% through UPS, 8% through FedEx and 9% through regional carriers.
For now, it seems Amazon's relationship with the Postal Service "likely comes at favorable terms," analysts said, and is probably done at an incremental cost break-even. But Jefferies noted that "the truth is no one outside of the USPS knows if, and what [percentage] of, fixed costs are also covered."
Amazon's strategy in dealing with impending capacity constraints will likely include building out more infrastructure in bigger metro areas in a move that could double the company's total number of sortation and delivery stations, but that still might not "completely absorb" USPS' total share.
"Tighter partnerships with big AMZN sellers and [third party] logistics partners could also help in the near term but won't solve for the longer-term problem - rising demand," Jefferies wrote. "To address that, AMZN needs to also influence consumer behavior and expectations, adding constraints around what qualifies for free/expedited shipping."
"In our view, building out fulfillment capabilities in the near term will help AMZN create substantial barriers to entry for the longer term. As a result, we expect AMZN will emerge as the best in class retailer of the future offering consumers price, selection and convenience no one else can match," analysts concluded.
Jefferies analysts maintain a buy rating on Amazon stock with a $1,850 price target, implying upside of about 29%. Amazon stock dipped about 1% in premarket trading Tuesday, April 11, but remains higher 22.8% year to date.