Amazon’s Ambition is Not to Compete With Fedex and UPS

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Last year I published an article titled “We’ll All Be Working for Amazon If We Don’t Pay Attention” In it I touched on the fact that Amazon were making moves into developing their own distribution, logistical and delivery services.

I followed that with a subsequent article in January 2016 titled “Amazon’s Quest for Total World Logistics Domination” in which I explored the same theme in a bit more detail. I discussed their purchase of thousands of branded semi truck trailers, leasing 20 Boeing 767 aircraft and purchasing the remaining 75% stock of Colis Prive, an independent French parcel carrier.

When I recently read the Wall Street Journal’s article “Amazon’s Newest Ambition: Competing Directly with UPS and FedEx ” I had to smile. Amazon’s newest ambition is not to compete directly with UPS and FedEx! The truth is that Amazon’s oldest ambition, ever since the days when Jeff Bezos loaded the back of his Chevy Suburban with hand packaged books and personally delivered them to USPS, has been to find the fastest and cheapest method to deliver his products to his customers. In the early days he had to rely on third parties to deliver for him but apparently not any longer.

The Tipping Point

The tipping point was Christmas 2013. UPS and to a small degree FedEx were completely overwhelmed with the volume of Amazon packages. As a result a lot of packages did not arrive by Christmas Day and it cost Amazon a pretty penny in refunds.

“Amazon fulfillment centers processed and tendered customer orders to delivery carriers in time for holiday delivery,” an Amazon spokeswoman said at the time.

Amazon were not happy!

From that point on Amazon accelerated its efforts to undo the reliance they had on third-party parcel carriers.

The Numbers Speak for Themselves

Amazon’s shipping costs as a percentage of sales have risen every year since 2009. Last year it was 10.8% or $11.5 billion on total revenues for the year of $107 billion. According to Citigroup Inc. analysts Amazon could save up to $3 or more on a typical delivery by doing it themselves, a savings of $1.1 billion annually.

And we mustn’t forget that the scale of Amazon’s business is huge. According to a Bloomberg BusinessWeek article “Will Amazon Kill FedEx?

“This year we estimate Amazon is going to sell 7.2 billion items,” says Gene Munster, an internet industry analyst at Piper Jaffray. “In 2020, which is only four years away, we expect them to sell 12.6 billion items.”

The Next Obvious Step

Once they’ve built the infrastructure to start delivering their own goods they will then offer that service to other shippers.

According to Bloomberg:

Others believe that Amazon will make a business out of its delivery network, as it did with Amazon Web Services, thereby challenging the world’s leading shipping companies. “I fully expect Amazon to build out a logistics supply chain that others can use,” says John Rossman, a former Amazon executive who’s now a managing director at the restructuring firm Alvarez & Marsal. “Over the next five years? I doubt it. Over 10 or 15 years? Oh yeah.”

So what do UPS and FedEx think about this?

According to the Wall Street Journal:

“The level of global investment in facilities, sorting, aircraft, vehicles, people to replicate the service we provide, or our primary competitor provides, is just daunting, and frankly, in our view, unrealistic,” says FedEx CFO Alan Graf. “We’ve been at this for 40 years.”

Atlanta-based UPS has played down any competitive threat. On a conference call with analysts, Chief Commercial Officer Alan Gershenhorn said UPS’s network would be “very difficult to match.

Sorry guys, this kind of skeptical, head in the sand reaction, will come back and bite you down the road.

No Constraints

What-You-Want-Before

PHOTO COURTESY: TRUCKERS LOGIC

Amazon is big, very big. Its market cap is about $366 billion, roughly equal to the combined worth of Walmart, FedEx and Boeing. It employs nearly 270,000 people.

Amazon is from the tech sector. It is not constrained by the “this is the way we have always done business” thinking exhibited by FedEx CFO Alan Graf and predominant throughout the logistics industry.

These two factors alone give Amazon the power to disrupt and reinvent a sector of the logistics industry.

They also have another unique and powerful advantage. They are the seller and have deep behavioral insight into their customers.

In 2013 they patented a machine learning based technology called anticipatory shipping. Based on a customer’s previous buying habits Amazon can predict future buying habits, which in turn means they can deploy the right inventory to the right location prior to it being ordered. With 44% of the US population within 20 miles of an Amazon facility anticipatory shipping significantly reduces freight costs.

Learn, Adapt and Succeed

I applaud and welcome the influx of technology companies into our logistics space. They bring new ideas and new ways of doing things that us seasoned logistics professionals can all learn from.

For example key to the success of Amazon’s anticipatory shipping is that nearly half of their distribution centers are only 20 miles from their customers. I’m only a humble railyard and transloading facility operator, why should I care about that? I care about that because New Mexico Transloading is now a distribution center too.

Our clients can store their goods in our facility and therefore hold inventory much closer to their customers. Delivery time and shipping costs are reduced making for much happier customers. (This is a business model used with great success by Certified DEF featured in last week’s client spotlight) So by learning from a new disruptive player in the logistics industry we have adapted and offer a new and valuable service to all of our clients.

Disruption is good for the industry. Amazon is good for the industry. Amazon’s ambition is not to compete with FedEx and UPS. Amazon’s ambition is to provide a much better service for their customers and make money at the same time. It’s up to FedEx and UPS to compete if they can.

If you’re interested in learning how shipping by rail might better meet your freight transportation needs call New Mexico Transloading at 505 – 908 – 1911. We’d be delighted to have a conversation with you.

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