Amazon Tests Prime Delivery Service To Squeeze Out FedEx And UPS

Amazon may have had an 'Aha!' moment, and that could be bad news for FedEx and UPS, the two delivery services the online retailer leans on to ship packages to customers in a timely manner—within two days on many items, for Prime members. In what could be a damaging blow (another one) to both shipping companies, Amazon has begun testing its own delivery service for items that qualify for free two-day shipping, on so-called last-mile routes.

This does not mean that Amazon would cut FedEx and UPS loose entirely, though it would push the world's largest online retailer deeper into the same category—shipping services. This is something Amazon kicked off two years ago in India and has been slowly trying to expand in the United States. The project, which Amazon refers to internally as Seller Flex, began as a trial in the US earlier this year in certain West Coast states. A broader rollout is planned for next year.

Amazon Prime Delivery Truck

How this works is Amazon oversees pickups of packages from warehouses of third-party merchants selling items on Amazon's website, and their delivery to customers. At present, UPS and FedEx typically handle that type of work for Amazon. And while Amazon will still use those companies for delivery, as part of Seller Flex it could decide how to send a package instead of leaving it up to the seller.

Benjamin Hartford, an analyst at Robert W. Baird, said in a note that "Amazon's final mile efforts reflect a logical extension of its model as it builds network density." At the same time, he believes this could negatively impact share prices of both FedEx and UPS as Amazon encroaches on a broader logistics space. Indeed, in the early going UPS saw its share price dip by as much as 2.1 percent to $116.52 in after market trading, though it has rebounded. FedEx saw a similar decline, dropping 1.6 percent before also recovering.

"Amazon is a valued UPS customer," said Steve Gaut, a UPS spokesman. "We support all our customers with industry-leading e-commerce solutions and expect to expand these relationships further in the future."

FedEx has not commented on Amazon specifically, though did point out that the "scale infrastructure and complexity" of running a global transportation network.