Amazon’s “New” Distribution Efforts Aren’t New

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Amazon’s “New” Distribution Efforts Aren’t New

By Alasdair McLean-Foreman is the founder and CEO of Teikametrics - 10/26/2016
The headlines on Amazon’s latest move suggest the company’s “newest ambition” is to directly compete with UPS and FedEx and become the king of shipping. Only part of that conclusion is true.

When the Wall Street Journal recently reported Amazon is building out its delivery network to control shipping costs, the newspaper was correct. The online retail giant is accelerating its already huge investments in technology, urban warehouse real-estate, vehicle infrastructure, and even aircraft to push the boundary of retail distribution. These are billion dollar bets. Amazon spent an estimated $11.5 billion, more than 10 percent of its sales, last year on shipping. As shipping costs and delivery expectations continue to rise, especially for the ever important “last-mile” portion of delivery, Amazon is doubling down. The Journal article covers Amazon’s investment in Prime Air, the return of its senior logistics executive from his stint at Uber Technologies, experiments with “citizen couriers” and other methods for augmenting the capacity of delivery partners UPS, FedEx, and the U.S. Postal Service.

Analysts have commented that this would potentially give Amazon a slice of the $400 billion delivery network market by o?ering logistics services to third-party businesses, eating into UPS and FedEx’s share of the market. However, this business model isn’t a “new” thought for Amazon. Amazon already has a huge opportunity for customers of shipping services through its army of millions of retailers via its Ful?llment by Amazon (FBA).

This world class logistics network has already allowed the company to o?er millions of third-party small businesses turn-key logistics by doing the heavy lifting of picking, packing, and shipping products to the homes of over 300 million Amazon customers. Ful?llment by Amazon (FBA) gives retailers the bene?t of an operations and logistics machine they could not otherwise hope to have, and also the ability to target the growing number of Amazon Prime subscribers, which is re?ected in sales numbers. Fifty percent of retailers report their total sales rise upon Amazon adoption. Amazon has built a rapidly growing multi-billion dollar business from its seller marketplace which in addition to commissions, charges FBA fees for pick and pack, weight handling, warehouse storage, and many other additional fees. As Amazon increases its stranglehold on U.S. retail, it has the leverage to increase these fees to its third-party retailers. For example, third-party retailers using FBA will experience an Uber-like “surge price” increase of over 400 percent for monthly storage fees during the holiday period (Oct 1 - Jan 1).

Additionally, there are now 180 Amazon ful?llment centers in the U.S. today, up from only 60 in 2015. Even more impressive, same-day Amazon delivery is now available in 27 cities across the U.S. By streamlining the logistics journey through its FBA network, Amazon has built a very robust business model and the natural evolution of this is end-to-end delivery that could include innovations such as drone delivery which would of course, completely disintermediate carriers like UPS or FedEx.

In their coverage of Amazon’s latest move into logistics, Wall Street Journal reporters Greg Bensinger and Laura Stevens write, “Executives at the freight giants are skeptical, and so are analysts and logistics experts. They say it would be di?cult and costly to build a domestic delivery network to rival the big U.S. players...” True enough. However, if we see Amazon increase its overall market penetration of retail and within that an increase of the percentage of its transactions through third-parties using the FBA model - it will have an incredible market opportunity as it will have both demand (300M+ consumers) and the lion’s share of the supply (its army of millions of retailers).
In addition to UPS and Fedex, the other losers in this game would be the players that are attempting to play catch up with Amazon. These would include of course, Walmart, eBay, and virtually any other retailer looking to move online. Just ask Sports Authority or Radio Shack.

Even with the recent acquisition of Jet.com, Walmart will struggle to provide a service that could potentially rival Amazon in terms of customer convenience, shipping speed, and most importantly delivery costs.

As Amazon, gallops into the distance, Walmart will need to evolve its once revolutionary supply-chain and logistics ethos. Maybe we will see Walmart using a ship-from-store model using its tremendous retail footprint? Or will there be a scenario where we consolidation where Walmart or the carriers combine forces, merge, or acquire one another? One thing is for sure is that Amazon will not able to win
uncontested - the real winners here are consumers who will bene?t from this ?erce competition as billion dollar businesses try harder and harder to raise the bar for delivery experiences.

Alasdair McLean-Foreman is the founder and CEO of Teikametrics.

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