The most innovative Amazon business unit is currently Amazon logistics. The unit deals with much more than just the logistics by which it ships orders to its customers. Amazon is moving towards operating a full end-to-end retail model as it beefs up its logistics operations. The company is well on its way to becoming the pipe through which everything flows.
As Amazon forecasts a rise in globalisation (and cross border commerce), shipping costs will continue to increase in tandem with ecommerce growth. This means it’s a good idea to get into the shipping space now, to be able to manage and offset price increases – and not just by raising prime membership fees from shoppers, but by really affecting the back end. This need arises even though Amazon has a pretty good handle on shipping costs as it gets steep discounts from its logistics partners.
Explosive ecommerce growth going forward means there will be capacity constraints with the big logistics providers and that Amazon has to step in. Amazon has become so dominant that at peak times the partner companies cannot cope anymore.
There are 8 further strategic reasons why Amazon is getting into logistics.
1. More profit on current transactions. Amazon’s net income is lower than UPS and FedEx. Amazon aims to make additional revenue streams from delivering.
In every country Amazon has a number of strategic partners in logistics. Amazon believes it is able to improve the logistics processes and organisation of these local players.
2. New profit centers/customers. If Amazon does logistics the way it sell goods, the company will be a low cost operator. Many clients would look to Amazon as an alternative. This could turn shipping costs into a profit centre by Amazon becoming a logistics provider. Some of Amazon’s excess capacity sells back to FedEx and UPS, since both providers don’t really have much surge capacity or the ability to bring it online quickly.
3. Technology. Amazon is betting that technology will change logistics, as their experiments with drones show. Amazon also has detailed knowledge of what is being delivered in the package (versus just size and weight). This will give the company a competitive advantage to shave costs in ways that a general logistics company can’t.
Amazon thinks that there is soon to be a disruption in distribution processes and costs, both in terms of driverless cars and trucks and fuel (EV, etc). Amazon think that being in that space as those changes begin can be valuable as disruptions mean that market leaders are no longer automatically leaders. And when things change one can really grow.
Amazon will harness the promise of automation from drones to self driving trucks and cars. As much as the company has contributed to job losses in store based retailing, there will be job losses in warehousing and logistics in future as automation takes over. (Naturally Amazon also creates a multitude of jobs it should be said).
4. Become more independent of rate increases. The reality is that a logistics market dominated by two companies in the US is geared to price increases, this to an extent leaves Amazon at their mercy in the future.
5. Connected to the last point, Amazon wants to get around capacity constraints. With a fleet, especially aircraft, Amazon can control shipping times over their peak season better. Amazon think they can smooth out the long haul legs of peak shipping, move product from DC to truck delivery range cheaper and more consistently than their current shippers, and re-sell enough of their non-peak capacity to cover the fleet maintenance cost.
6. Make Amazon logistics mandatory for 3P sellers. Amazon Logistics was created for one way traffic from Amazon’s warehouses to distribute goods out to consumers. Now it would appear that Amazon are adding in collection from multiple retailer/3P locations. This will give Amazon much better control over flows, better efficiencies and better cost control and it could help with the problem of under utilisation of capacity on the return trip. In future Amazon could expand Amazon Logistics to become the de facto carrier for all Amazon sales. (This would point to classic ecosystem thinking).
7. Offer a radically innovative and much better logistics solution (from Prime Now to drones) than currently available on the market. Amazon will try to match and beat the efficiency of FedEx/UPS and leverage the USPS for certain services. This could then set a new standard for the competition (almost instant deliveries), similarly to the current Prime Now expansion and the new standards and consumer expectations this is setting.
Moreover delivery has become an important part of marketing, from ordering to payment to returns.
8. Due to its development history the US postal system is actually quite inefficient and a hotchpotch of different smaller companies, which were integrated into a wider logistics network over time. A rather inefficient logistics set up in the US is also due to the sheer size of the US it should be added. The situation is nothing like in the compact Netherlands (with one of the best postal systems in the world), where every location in the country is basically reachable within a number of hours from anywhere else. This suboptimal situation in the US also points to why Amazon is rolling out its logistics operation so aggressively in the US.
Find out more about Amazon Logistics including exclusive data points here…