Why Amazon Is Now a Trucking Company
Amazon.com Inc. (NASDAQ: AMZN) is becoming more and more like other large retailers such as Walmart Store Inc. (NYSE: WMT) and Kroger (NYSE: KR). Like those companies, the Everything Store is planning to put its own fleet of tractor trailers on the road.
As almost anybody that drives in America knows, the highways are filled with Walmart semi-tractor trailer rigs. When I go for a stroll along the highways here in Colorado, I generally see one Kroger tractor rig, usually with King Soopers/City Market livery, an hour.
The reason for all those rigs is to keep the flow of merchandise flowing to their stores. Amazon.com hopes to do the same thing by keeping goods flowing to its vast network of Fulfillment Centers. Wired reported that Amazon is planning to buy hundreds of big rigs to achieve that goal.
Why Amazon Wants to Be More Like Walmart
Like Kroger and Walmart, Amazon is hoping to get more control of its logistics network and reduce costs. Another goal is to get better control of supplies to ensure lower prices, ensure quality and, more importantly, make sure that goods are more likely to be available when a customer goes to Amazon.com.
There are several ways Amazon.com can use trucks to reduce costs. One way is to better utilize shelf space in fulfillment centers. If the Everything Store has a lot of empty space in its facility in Nevada, it can shift extra inventory from an overcrowded center in California. If Amazon sells out of a product, say windshield wipers, in the Northeast, it can simply ship more in from another part of the country.
The ultimate goal for Amazon.com is to create an integrated logistics network to provide a more seamless flow of merchandise to the customers. Such a network is vital if Amazon wants to challenge Walmart for the role of being America’s retailer.
Walmart’s key to success and low prices is its vast logistics network. Walmart is now making a major push into ecommerce that Amazon wants to head off.
Will Amazon’s Trucking Fleet Add Value to the Company?
Naturally, investors will be wondering if Amazon’s truck fleet will add value to the company. A related question is, will Amazon’s gamble on big rigs pay off?
Amazon certainly has the resources to buy large numbers of trucks. It reported a TTM revenue of $100.59 billion on September 30, 2015. That means Amazon crossed the $100.59 billion revenue mark for the first time. It also means that Amazon’s revenue is increasing by $4 to $5 billion a quarter. On June 30, 2015, Amazon reported a TTM revenue of $95.81 billion, on March 31, 2015, Amazon reported a TTM revenue of $91.97 billion, and so on.
If that goes on, Amazon could have revenues of around $120 billion by September 2016. That means Amazon’s TTM revenue could be bigger than those of Costco Wholesale (NASDAQ: COST) and Kroger by next year. Kroger reported a TTM revenue of $108.87 billion on October 31, 2015; Costco reported a TTM revenue of $116.20 billion on August 31, 2015.
Amazon’s growing revenue means that the truck fleet purchase will not be a big risk financially for Amazon. The problem is that there are some potential problems that could make all those trucks a drag on Amazon’s value. Those problems arise from outside forces over which Amazon has little control.
Who Will Drive the Amazon Trucks?
The most obvious roadblock Amazon faces in its foray into trucking could be America’s growing shortage of truck drivers. The American Trucking Associations reported that the U.S. is already short 50,000 truckers without all those Amazon rigs on the road, CNN Money noted. That shortage is growing too; just two years ago the nation was short 30,000 truckers.
If this trend continues, Amazon could find itself with a fleet of big rigs and nobody to drive them. It could also be facing higher costs; the average Walmart truck driver now makes $73,000 a year, and truckers’ salaries have been increasing by 8% to 12% a year.
This could create an opportunity for Daimler’s (OTC: DDAIY) self-driving semi-truck. Daimler owns one of America’s largest truck manufacturers: Freightliner. The two companies unveiled an autonomous semi this summer.
Will Crumbling Infrastructure Block Amazon Expansion?
Even if Amazon could find enough drivers, it faces the whole problem of America’s overcrowded and crumbling highways. As anybody who drives knows, many of America’s highways are falling apart, and gridlock is now a major problem even on many rural highways.
One has to wonder what good all those trucks will be if they end up stuck in traffic on the interstates. That could happen because Congress has failed to adequately fund America’s highway system. The Federal Highway Trust Fund has been short of money for decades, and Congress refuses to raise taxes to make up the difference. As Bloomberg columnist Barry Ritholtz pointed out, Congress has figured out the “Dumbest Way to Fund America’s Infrastructure.”
Jeff Bezos might soon find himself in an unfamiliar position: lobbying Congress for increased highway funding. By buying all those trucks, Bezos might put his company at the mercy of politicians.
Perhaps Bezos should put more of his money into next generation transportation solutions such as the Hyperloop. Such technologies might be the only way that Amazon’s business model could be viable in the future.
Disclosure the Blogger owns shares of Kroger. He also does retail sales through Amazon.com.