Is Amazon a disruptor or a distraction for the logistics industry?
That was the main question I addressed during my keynote presentation at the SMC3 Connections Conference last month, one of the leading events for transportation and logistics professionals.
The question was triggered by all of the logistics-related moves Amazon continues to make, as evidenced by these headlines since last September alone:
- Amazon Buys Thousands of Its Own Truck Trailers as Its Transportation Ambitions Grow (Recode – Dec 2015)
- Amazon expands logistics reach with move into ocean shipping (Reuters – Jan 2016)
- Confirmed: Amazon Flex officially launches, and it’s like Uber for package delivery (GeekWire – Sep 2015)
- Amazon to compete with Fedex, UPS and Alibaba with secret ‘Dragon Boat’ plan, report says (GeekWire – Feb 2016)
- Amazon Partners with Atlas Air Worldwide for Cargo Services (WSJ – May 2016)
- Amazon ‘in talks over Hahn Airport base’ (Lloyd’s Loading List – Apr 2016)
And just last Friday, Amazon revealed Amazon One, it’s first branded cargo plane.
Plenty has been written about the “Amazon Effect” in retail and how the company has rewritten many of the rules for success in the industry. Is Amazon planning to do the same in logistics?
First, let’s be clear about a couple things. Amazon is already a third-party logistics provider (3PL) and has been for many years. It is perhaps the leading 3PL serving small and midsized businesses (SMBs), a segment of the market that other logistics service providers have ignored or failed to penetrate. According to a January 2016 press release:
In 2015, Fulfillment by Amazon (FBA) shipped over one billion units on behalf of sellers. The number of active sellers using FBA grew more than 50% [to approx. 3 million sellers]. In Q4 2015, FBA units represented nearly 50% of total third-party units.
Amazon also has logistics partnerships with large brand companies, including P&G where Amazon is embedded inside P&G warehouses to fulfill direct-to-consumer orders on behalf of P&G (see Amazon Inside P&G Warehouses: A Case of “What’s In It for We”). “The Amazon-P&G alliance is still running strong,” states a May 2015 article on Fool.com. “According to data from L2, P&G ranks on the first page of results in Amazon for over 40% of its individual products, and close to a third of its products are among the top 50 in their category in the number of reviews per listing on Amazon.”
Second, while many people view Amazon’s free and fast shipping (trending toward same-day) as its main competitive weapon, the company’s real killer weapon and true differentiator is its Amazon Prime service. According to an analysis by Consumer Intelligence Research Partners published in January 2016, “Amazon Prime now has 54 million US members, spending on average about $1,100 per year, compared to about $600 per year for non-members.” And here’s how Amazon CEO Jeff Bezos referred to Amazon Prime in its 2015 Annual Report (emphasis mine):
We’ve grown Prime two-day delivery selection from 1 million items to over 30 million, added Sunday Delivery, and introduced Free Same-Day Delivery on hundreds of thousands of products for customers in more than 35 cities around the world…
Prime Now offers members one-hour delivery on an important subset of selection [and serves] members in more than 30 cities around the world.
Prime has become an all-you-can-eat, physical-digital hybrid that members love. Membership grew 51% [in 2015] – including 47% growth in the U.S. and even faster internationally – and there are now tens of millions of members worldwide.
Simply put, retailers that simply try to copy (or even outdo) Amazon by offering free and fast shipping are defending against the wrong thing. Delivery is a loss leader for Amazon (the company’s shipping costs exceeded shipping revenue by $5B in 2015), but Prime is another example of the whole being greater than the sum of its parts — with the whole including free movies, music, games, books, and much more, with the costs offset in part by higher overall spend from Prime members and the company’s profitable and fast-growing cloud computing service.
Is Amazon a disruptor or a distraction? It’s an interesting question to think about, but as I discussed in my presentation, the more important questions to ask are:
- Why is Amazon investing so heavily in expanding its logistics footprint and capabilities?
- Why should you care? What are the takeaways?
- What, if anything, should you do about it?
I presented three possible responses to the first question:
Jeff Bezos’ response (as reported in a June 2016 Wall Street Journal article): “Amazon isn’t aiming to take over the last mile of delivery from the likes of FedEx, United Parcel Service or the U.S. Postal Service, but rather to ‘supplement it heavily’ chief Jeff Bezos said [May 30th] at a conference hosted by technology website Recode.”
Wall Street’s response (as expressed in a Baird Equity Research report from October 2015): “We believe that global logistics is a highly competitive and fragmented market that has yet to capitalize fully on the emergence of web-based technologies such as cloud computing and data- centric analytics and optimizations that can reduce inefficiencies within the supply chain. As such, we believe certain segments of the logistics market, namely last-mile parcel delivery as well as the much larger contract logistics space, are areas in which Amazon could provide a compelling alternative to traditional shipping/logistics providers.”
Adrian’s response: Amazon wants to own and control the innovation cycle — from the front end of its operations (website) to its back end (order fulfillment, DC automation systems, and final delivery) — in a holistic and integrated manner. In essence, Amazon is taking the same “owning the ecosystem” strategy that Apple took in the computer industry. In short, I believe Amazon logistics strategy is a customer focused one: it’s not aiming to compete with entrenched players like UPS and FedEx (the capital costs required to match their networks would be too great); the company is investing in logistics not to deliver packages, but to keep raising the bar on delivering the best overall customer experience possible (which didn’t happen in December 2013 when UPS and others failed to deliver Christmas packages on time). For related commentary, see Keeping Control: What 3PLs Must Convince Their Customers.
Instead of blindly copying Amazon or operating solely in reactive mode, my recommendation to the SMC3 conference attendees was to step back and consider these higher-level takeaways from Amazon’s success and strategy:
- End-Customers Must Become the Center of Your Supply Chain Universe: How must you transform your supply chain processes, technology, resources, and relationships in response?
- Logistics Must Become a Competitive Weapon: Cost management is still important, but how can you leverage logistics to drive top-line growth and profits, increase market share, and improve customer service, experience, and loyalty?
- Last-Mile Delivery is Becoming New Logistics Battleground: See Walmart’s pilot tests with Uber, Lyft, and Deliv, and Schneider National’s recent acquisitions of last-mile service providers Watkins & Shepard and Lodeso. For related commentary, see How Big is the Same-Day Delivery Market?
- Logistics, Commerce, and Technology are Converging. In short, logistics services and technology are moving further upstream toward enabling and facilitating e-commerce.
Crafting your own unique response to these trends, levering your strengths, assets, and resources, is the best path forward.
Is Amazon a disruptor or a distraction? Probably a little of both, but if you asked Travis Kalanick, CEO and founder of Uber, here’s what I imagine he would say:
Now, that’s a topic for a different day!
What are your thoughts on this question? Why do you think Amazon investing so heavily in expanding its logistics footprint and capabilities? Do you agree with my response and takeaways? Who do you believe will have a bigger impact on logistics in the years ahead: Amazon, FedEx, UPS, or Uber? Post a comment and share your perspective!