Is There More To Amazon’s New Delivery System Than Meets The Eye?
Summary
Amazon decides to piggyback on third-party warehouses’ storage and delivery systems.
Benefits to the company.
The data-gathering element not many are taking into consideration.
Potential impact on FedEx and UPS.
Source: supplychain247
Some of the reasons behind Amazon’s (AMZN) decision to test a new delivery system by taking more control by using existing warehouses from third-party merchants are readily apparent, including better serving customers in the busy holiday season, cutting costs, opening up more space in its fulfillment centers and streamlining its operations.
What’s not so obvious is where this could take the company in the years ahead if it’s successful in providing excellent customer delivery service of the last mile, where the success of implementing its two-day promise is determined.
A secondary factor will be how it may impact existing delivery businesses like FedEx (FDX) and UPS (UPS), which provide much of the delivery services for Amazon at this time, in the latter part of the delivery process.
What Amazon is attempting
Although many have reported the news that Amazon is rolling out a new delivery service, in fact, it launched it in India a couple of years ago, partially because the infrastructure would have been hard to build out under existing conditions and the numerous existing businesses were the most efficient way to go because of existing facilities.
For some time, Amazon has been quietly marketing the service to its partners in anticipation of a larger rollout in the U.S. in the not-too-distant future.
Amazon is realizing it wouldn’t be cost-effective or efficient to attempt to build more warehouses or fulfillment centers in order to better deliver on its promise of two-day delivery. Working with third-party vendors that already have the facilities makes a lot of sense, and will allow the company to implement the plan much quicker.
Citing an unnamed source, Bloomberg said the service will be called Seller Flex and a testing period on the West Coast is already underway, and it will be rolled out on a larger level in 2018.
Another value associated with the effort would be for more products to be made available for two-day delivery, while shrinking the number of products at its existing warehouses.
Amazon’s role in this will be to manage the process of picking up packages at third-party warehouses that sell products on Amazon.com and delivering them to the homes of customers. Basically, Amazon is making the decision on how a package will be delivered, rather than those selling the merchandise.
The bottom line is Amazon is transitioning from a centralized delivery system to a more decentralized system, with the purpose of cutting costs, having more control over the last mile and cutting back on capital expenditures for new warehouses.
It will also allow for better delivery results from its existing fulfillment centers, with the shrinking of storage demand during the busy holiday season.
What the market may be missing
Something I’ve thought about with this obvious move by Amazon is where it could take the company beyond its existing third-party vendors. By that, I mean with a number of its larger sellers.
I think a lot of investors are thinking in terms of smaller vendors and warehouses with the implementation of this strategy, but I believe it will quickly embrace all the vendors that sell on the e-commerce platform of Amazon, and that means it does have the potential to be more disruptive in the long term in the delivery market.
It could also allow the company to be more aggressive and move quicker if it is able to convince most, if not all major manufacturers, to get on board the program. Significant but smaller sellers will without a doubt work with Amazon with the initiative.
In the short term, this isn’t going to be a meaningful threat to FedEx or UPS; but depending on whether or not Amazon becomes extremely efficient at this, it could be a direct competitor to the delivery companies over the long term.
Finally, a factor I have heard little being talked about is how Amazon will be able to gather more practical data in this process, which will further enhance its competitive edge. This could be more important and vital to the company than all the other benefits associated with the rolling out of the program.
FedEx and UPS
In the near term, this isn’t that big of a deal for FedEx and UPS, although UPS has more exposure to risk than FedEx. Amazon accounts for 5 percent to 10 percent of UPS revenue, while FedEx’s revenue from Amazon is under 3 percent.
One thing to consider is e-commerce in the U.S. only accounts for about 11 percent of all retail sales. It has a long way to go before hitting a growth ceiling, even as it enjoys annual double-digit growth.
So, while it’s not insignificant for UPS and FedEx to lose some of Amazon’s business, the expected growth in delivery demand in the years ahead will obscure the effect of that on the two transportation giants. This is why the market isn’t going to punish the two companies – at least for now.
We all know if they underperform though, the first question will be whether or not it’s because of the decision by Amazon to take more control of delivery.
However it’s spun, the fact is UPS and FedEx will lose some business because of this, and even with a robust e-commerce growth outlook, they’ll be generating less revenue and earnings than if Amazon hadn’t taken these steps.
Further out, this could become a big challenge if Amazon starts to have expansion ambitions beyond its own delivery needs. If it does have a long-term plan in play in that regard, it will take many years to put it into effect.
Conclusion
The market wasn’t surprised by the news Amazon was going to take more control of the delivery process, which is why it didn’t rattle or surprise the market like the announcement it was going to acquire Whole Foods, which almost nobody saw coming.
This is a decision Amazon had to make because it wasn’t cost-effective to think in terms of building more facilities to improve its two-day delivery promise and goal. Going with third-party sellers helps it to more quickly mitigate the plan while lowering existing costs, saving it a lot of money from not having to build more warehouses.
It will also give it a lot of information and data from the third-party sellers, which may help it to expand beyond its own needs and compete directly in the space if it chooses to go that route sometime in the future.
As for FedEx and UPS, this isn’t likely to have much of an impact over the next couple of years. Even so, if they do stumble or the economy slows down, investors will start to look at the effect Amazon’s decision had on them.
Again, just because e-commerce in the U.S. will continue to grow at a double-digit pace doesn’t take away the fact UPS and FedEx will be losing some business they otherwise would have had.
For Amazon, it’ll further solidify its important Amazon Prime customer base by making it even harder to leave because of the real and perceived benefits. That gives it pricing power if it ever needs to boost annual prices in the future.
When all is said and done, I see data gathering associated with the move as probably being the most important part of this strategy. That’s impossible to measure in dollars, but it will add another piece of the puzzle to its already formidable database. That continues to be one of Amazon’s biggest moats against its competitors.
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