What Is Jeff Bezos Adding To Amazon's Cart?

Jan. 19, 2016 9:44 AM ET

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 About: Amazon.com, Inc. (AMZN), Includes: BAC, BAM, BIN, BPY, BUD, COSWF, ETE, FDX, INAP, OCDDY, RSE, SBMRY, SNDK, SU, UPS, WCN, WDC, WMB, ZPIN

Disclosure: I am/we are long SNDK, WMB, INAP. (More...)

Amazon

Amazon (NASDAQ:AMZN) management is looking to buy Ocado (OTC:OCDDY). The British online grocer would expand upon Amazon's Pantry service for their Amazon Primesubscribers. This is a great opportunity for Amazon, in part because the threat of Amazon competition served to beat down Ocado shares over the past few years. Amazon wants to enter the UK online grocery market, but they have to make the decision of whether to make or buy their business. Buying Ocado speeds up their entry.

Meanwhile, Amazon has also registered with the Federal Maritime Commission to do business as an ocean freight forwarder in the US. This will make it easier for Fulfillment by Amazon customers to move products into Amazon's existing logistics system. The biggest impact will be on Chinese suppliers for the American consumer markets.

In cutting out the middle man, Amazon's Jeff Bezos wants to reduce costs and protect critical supply chain information. He is acting at an advantageous time - he can move in on the ocean freight business for a low price. Part of the plan to recoup his investment is to take out costs with Amazon's software and automation. Amazon can offer improved efficiencies related to pricing, booking, status tracking, and customs filings. This is bad news for other maritime freight competitors as Amazon will have massive scale and a willingness to price at its marginal cost. It is never easy to compete against someone who is willing and able to forgo a profit for decades.

Once Amazon's ships arrive in the US, they will have a number of new planes to speed up service within the US market. Amazon is buying twenty 767 freighters to begin supplanting United Parcel Service (NYSE:UPS) and FedEx (NYSE:FDX). As with their new oceanic efforts, they will squeeze margins in the air. Who can hold their breath the longest? Probably Jeff Bezos.

I approach consumption just as I approach investing - as a value investor. I shop as little as humanly possible. However, when it is absolutely necessary, I mostly shop on Amazon. Here is when and how to do so as cheaply as possible.