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Amazon’s Move Into Transportation Spells Trouble For Shipping Companies

The retail giant is looking to control its entire supply chain

19Apr

Amazon’s success has, in large part, been driven by its excellent supply chain. Its same-day delivery offering has revolutionized the e-commerce industry and raised customer expectations dramatically, leaving other retailers scrambling to keep up. And it appears that they’re not the only ones who should be worried; it looks like packaging companies should also be looking in their rear view. Despite its protests to the contrary, Amazon’s recent moves into transportation services seem a sure sign that they’re looking to push companies like FedEx and UPS out of the equation.

The retail giant’s announcement last month of a lease agreement with Air Transport Services for 20 cargo planes is just the latest in a series of indicators they are trying to take total control of their supply chain. Amazon’s most publicized attempt to run its own transportation network is its experiments with drone technology, and in the longer term it has been looking at the potential of autonomous vehicles. In the nearer term, it has been quietly inviting drivers in the US to join its new on-demand delivery service for some time now, and has made a number of investments into delivery firms across the globe. According to the Seattle Times, Amazon will buy French parcel delivery company, Colis Privé, outright within the next three months, having originally acquired a 25% stake in 2014. In Germany, its second-largest market, it opened a new parcel sorting center outside of Munich late last year, and plans to open more similar centers outside the country’s major cities this year.

It used to be that Amazon packaged items for delivery and then left them to be picked up at the fulfillment center for delivery by the likes of UPS, FedEx, the US Postal Service. Now, in many parts of the US, Amazon packages customers’ orders, sorts them by ZIP code and trucks the sorted packages to a nearby US Postal Service facility, which takes care of the final leg of the delivery. It is this final leg that Amazon wants to take control of.

There are a number of advantages to this. Fundamentally, the longer they keep packages in their network, the cheaper it is for them. Building freight transportation capacity will also help ‘create deeper customer relationships,’ and keep carriers ‘honest’ around pricing and service. According to shipping industry analyst RBC's John Barnes, the move accomplishes two things: reducing costs in any way possible and ensuring that customers receive goods in a timely manner year-round. Perhaps most importantly, it provides Amazon's technology systems with information regarding efficiency for customer service and insights into cost savings that they can leverage without having to rely on third parties.

According to The Wall Street Journal, there is also a fear among Amazon executives that the hub-and-spoke distribution model used by UPS/FedEx is growing obsolete. And when the major tech companies say that an established industry’s working practices are growing outdated, this usually means they’re readying themselves to tear it apart. And the impact could be devastating for the packaging industry. In Germany, approximately one in seven of the 1.15 billion parcels delivered to households every year are dispatched from Amazon, and DHL delivers most of those. Amazon is also UPS' biggest customer, accounting for over 6% of its business in 2015. It’s unlikely that Amazon would just stop at delivering its own packages as well, and will probably eat far more into their market share than 6 or 7%.

This is not to say that DHL and UPS should just pack it in now though. There are many risks with Amazon’s move. Mark Heckman, principal at Mark Heckman Consulting, notes that ‘it should be added that owning stuff is great as long as it provides a return. The fact that even the great behemoth Walmart is closing stores this year should be fair warning to Amazon that what might appear to be wise today could be tomorrow’s regret.’ Other analysts also express doubts that it is the company’s intention to properly take over from the likes of FedEx and UPS, and Amazon itself has denied that they will stop using DHL completely in Germany. However, as automated cars and drone technology matures, it could be that Amazon is really just positioning itself to fully exploit these opportunities as they arise, and other packaging companies need to be on their toes if they are to prevent Amazon from outmaneuvering them as they have so many other industries.

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