Amazon takes the ocean plunge to build a better supply chain

Peter Tirschwell, senior director, content, IHS Maritime and Trade | Feb 25, 2016 10:43AM EST

A recent headline in the Financial Times was eye-opening, though really not surprising. The article, “Wal-Mart suffers worst sales performance in 35 years,” reported how the mass retailer, the company that all but invented the modern supply chain, saw its revenue decline in 2015, its first annual decline since 1980.

It wasn’t much, a drop of 0.7 percent to a still enormous $482 billion, but more revealing was that its e-commerce revenue slowed for the fifth straight quarter, to 8 percent in the October-December 2015 period. That compares to Amazon’s quarterly revenue growth of 26 percent off a much-larger base of e-commerce revenue.

The “everyday low prices” that built Wal-Mart through the relentless elimination of cost is proving no match against Amazon, with its nimble combination of low overhead, convenience and incentive that defines the former Seattle upstart. Just as Wal-Mart invented the modern supply chain, Amazon is reimagining it, and we have to use our own imaginations just to keep up.

The company that simultaneously built the world’s largest cloud computing business and became a digital entertainment giant has grown uncomfortable with traditional freight transportation offerings, so it’s dabbling in trucking, air freight and now ocean.

Now a licensed non-vessel-operating common carrier in the U.S. market, Amazon is keeping established forwarders awake at night contemplating the ambitions of a juggernaut, with great momentum that not only controls large volumes of its own freight and that of partner vendors — especially those based in China — but also has consistently been uninhibited in leveraging its strengths to enter and dominate new fields.

Could ocean freight transportation be the next industry Amazon disrupts? A call recently from a nervous private equity investor with a large stake in an established forwarder told me all I needed to know about the state of alarm among incumbent players about the prospect of competing against Amazon.

The fear is that, just like cloud services or digital entertainment, Amazon doesn’t enter into new business such as ocean transportation as a traditional competitor. Amazon Web Services was initially a way to market excess server capacity. Kindle offered a delivery mechanism for digital books, a natural extension of Amazon’s original business selling hard copies. The Kindle and apps built to run on other devices such as iPads enabled delivery of other media — movies and now original series — that are in turn offered free as an inducement to loyal customers enrolled in Amazon Prime. It’s all integrated.

How does being an NVOCC in the trans-Pacific fit in? Ryan Peterson, CEO of San Francisco-based logistics company Flexport (“The Freight Forwarder for the Internet Age”), which broke the story of Amazon becoming a registered ocean transport intermediary with the Federal Maritime Commission, believes the move is a tool primarily to provide greater access for Chinese sellers to Amazon’s U.S. market. 

“Amazon’s ocean freight services will be far more attractive to Chinese sellers than to American buyers,” he wrote in January. Chinese suppliers would love direct access to Amazon’s vast American customer base. “But the idea of buying ocean freight is far less appealing for U.S. companies selling on the Amazon Marketplace. As the freight forwarder on a company’s shipments, Amazon would see both the name of the supplier and the wholesale price paid by the importer. For most of the more than 40,000 sellers currently earning more than $1 million per year selling products on Amazon, this data is too sensitive to entrust with a company that is both a primary distribution channel and a ruthless competitor. It would be too easy for Amazon to use that data against them, either as an anchor in price negotiations or, worse, to purchase directly from the supplier, cutting the U.S. merchant out altogether.”

But if the business model is to integrate the transportation, sales and distribution of products into consumer markets on behalf of sellers, leveraging Amazon’s user experience, it should be scalable. The company operates online marketplaces in nine countries in addition to the U.S., including Japan, India, France, Germany, the U.K. and China.

Amazon’s pitch to sellers is simple: “When you register to sell in one of these Amazon marketplaces, you gain immediate access to customers who know and trust the Amazon buying experience. Expanding your sales to one or more Amazon marketplaces means you can benefit from the Amazon brand without shouldering the upfront costs of building business name recognition on your own in a new sales environment.”

Bolting on a transportation solution from the origin would complete the cross-border, indeed. global selling process. I can see how legacy forwarders would be worried.