Amazon is offering 50 percent cheaper shipping than UPS for some sellers

Key Points
  • Amazon is offering steep discounts for its pilot shipping program that is being tested in the Los Angeles area.
  • One seller says Amazon's shipping service was 50 percent cheaper than what was offered by UPS.
  • The discounts show how far Amazon is willing to go as it expands its logistics network.
An Amazon-branded Boeing 767 freighter, nicknamed Amazon One, flies over Lake Washington during the Seattle Seafair Air Show on Aug. 5, 2016 in Seattle.
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Amazon is going after FedEx and UPS with steep discounts as it looks to court more sellers to try its pilot shipping service that launched this year.

Ray Berman, an Amazon seller who was recently invited to the program, said the rates were as much as 50 percent cheaper than those offered by UPS. He said for a shipment of 600 pounds of boxes from his warehouse to Amazon's fulfillment center, Amazon charged only $80 — much lower than UPS' $160 and FedEx's $104.

"I was amazed by it," Berman told CNBC. "It could be a real savings in overall cash flow."

The discount shows how far Amazon is willing to go to build out the initial customer base of its own shipping service that competes directly with FedEx and UPS.

Although Amazon has long played down its shipping ambitions — saying its own delivery service is only meant to "supplement" existing partners — the aggressive pricing could be an indication of its plan going far beyond that.

"This is the typical Amazon playbook," said Jerry Kavesh, CEO of 3P Marketplace Solutions, a consulting firm for Amazon marketplace sellers. "They decided there's an opportunity — and they're willing to buy their way in."

Low rates and quick pickup

The program is called "Amazon Shipping," according to a screenshot of the service description seen by CNBC. It currently handles only small package shipments between third-party merchants and Amazon warehouses in the Los Angeles area and does not include final delivery to customers' homes. A similar test project was reported by The Wall Street Journal earlier this year.

The invitation to the program says the current rates are "promotional pricing," hinting they could rise. It's also possible the level of discounts could be different depending on the size of shipments.

Still, Amazon seems to be highlighting the low rates and quick 24-hour pickup time as the main selling points for its service.

"When you ship with Amazon, you get low rates and quick pickup and delivery to our facilities," Amazon wrote in the invitation.

In an emailed statement, Amazon's spokesperson confirmed the test program is focused on the Los Angeles area and that it's designed to help sellers speed up their inventory shipments to Amazon warehouses and product availability to customers.

"We're always innovating and experimenting on behalf of millions of small businesses that sell on Amazon," the spokesperson said.

One-stop shop

Saurabh Ambulkar, a management professor at Northeastern University, said this points to Amazon's broader goal of becoming a "one-stop shop" in the supply chain that covers everything from storage and shipping to last-mile delivery to the customers.

Doing so provides more control and visibility for Amazon, while giving better prices and convenience to the merchants that sell on its site, he said.

"Amazon wants to be this one central shop where you can do everything," Ambulkar said.

Amazon has doubled down on expanding its logistics network in recent years. It has entered the ocean freight business, added its own fleet of trucks and leased dozens of aircraft to handle parts of its massive amount of shipments. It is also delivering more packages to the customers through independent contractors and new initiatives like Amazon Flex, which depends on hourly drivers.

Amazon's shipping costs have continued to rise, jumping from $11.5 billion in 2015 to $21.7 billion in 2017.

RBC Capital's Mark Mahaney said Thursday on CNBC's "Power Lunch" that it's just a "matter of time" before Amazon makes a big investment in the shipping space.

"There's another investment cycle coming, and I bet you it's around shipping and [Amazon] actually coming out and directly competing with FedEx and UPS," Mahaney said.

UPS didn't respond to a request for comment. FedEx played down Amazon's threat as a competitor, saying its infrastructure and 40-plus years of experience are not easily replicated.

"While there has been significant media interest in what Amazon is doing to expand their in-source delivery capability, this should not be confused as competition with FedEx," FedEx said in a statement.

Berman, the Amazon seller, said he doesn't expect the rates to stay this low forever and says the service may not be fully reliable right away. But even a smaller discount and the promise of a 24-hour delivery window would be enough for him to become a dedicated future user if Amazon further expands the service.

"I do have a lot of trust in Amazon's shipping system," he said. "It wouldn't take much for me to switch over and go all-in."

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