Fighting Amazon’s Supply Chain Takeover

Amazon’s investments in freight forwarding and air transport present new competition to logistics providers, here’s how freight forwarders and air cargo companies can adapt and survive. By Michael Bentley

November 15, 2016

In late 2015, Amazon received a license from the U.S. government to act as a freight forwarder for ocean container shipping.

That approval came on the heels of Amazon winning a similar license from the Chinese Ministry of Commerce.

Armed with licenses from both countries, the online retailer is now positioned to buy space on container ships at wholesale rates and resell at retail rates, which will allow the company to connect two of the world’s largest markets while cutting out competitors.

Then came another bold step: Amazon signed a deal with Air Transport Services Group to lease 20 Boeing 767 aircraft to shuttle merchandise around the U.S. as part of the online retailer’s efforts to reduce its high shipping expenses.

Combined, these moves confirm earlier reports that Amazon is planning a global expansion of its “Fulfillment by Amazon” service, which provides storage, packing and shipping to small independent merchants that sell products on Amazon’s Website - a project dubbed “Dragon Boat.” 

“As Amazon prepares to extend its reach further into the retail supply chain industry, failing to act is no longer an option for shipping companies”Michael Bentley,
Partner, Strategy Group, Revenue Analytics

By signing the Air Transport Services Group deal and receiving a license to act as a wholesaler for ocean container shipping, Amazon once again can reduce its inflated shipping costs and reliance on third-party logistics providers.

As evident from the recent Hanjin bankruptcy, shipping and air cargo companies can expect to see a continued shrinking market as Amazon enters the fray. 

Just as Amazon’s retail competitors have had to develop new strategies in order to survive, Amazon’s newest competitors will need to determine what they can learn from the online retail conglomerate, and then move resources to the most advantageous and vulnerable areas of their industry.  

Where Do We Stand?
Given Amazon’s new deal with Air Transport Services, freight forwarders and air cargo companies have reason to worry that they are the next vertical to be disrupted.

Because of this, the shipping industry can expect to see a decline in demand and heightened price competitiveness. In 2015, the top five ocean freight forwarders were listed, in order, as: Kuehne + Nagel, DHL, Sinotrans Limited, DB Schenker and Pantos Logistics.

These companies should look to Amazon’s e-commerce sales last year, which blew their biggest competitor - Walmart - out of the water, as an example of what their futures could hold if they don’t make some drastic changes. 

In fact, one freight forwarding giant has already fallen. As mentioned above, the world has just witnessed the largest container shipping bankruptcy in history with the collapse of South Korean shipping line Hanjin, the world’s seventh-largest container carrier.

While the full extent of the Hanjin fallout is not yet known, companies should be worried that, as competition decreases, Amazon will have an even greater opportunity to swoop in and dominate the market.

As for the air cargo industry, the following are the number of planes in some of the biggest companies: United Cargo, over 700; FedEx, over 600; UPS, 237; and DHL, 120. While so far Amazon has only a small number of planes compared to these established companies, they must continue to monitor both the progress of Amazon’s investments in the industry and how they perform at a comparable profitable rate.

There are steps, however, that the shipping and cargo industries can take to ensure they adapt, survive and even thrive in the world of Amazon.

Below, I examine how this new endeavor will affect these industries and what both can do to combat the latest expansion of Amazon’s ever-growing footprint.

Takeaway No. 1: You Can’t Ignore This
The competition from Amazon comes amid a well-documented decline in revenue for shippers in the past several years. In 2014, revenue decreased 3% compared with 2013, following a 5% decline from 2012. As of 2015, industry revenue remains more than 16% below its 2008 peak, according to a report from AlixPartners.

With the freight forwarding industry already seeing downward pricing pressure and greater internal competition, the danger of some companies failing even before Amazon’s entry was a real possibility. Given the fresh state of turmoil, Amazon will undoubtedly make things worse for companies that do not appropriately prepare.

In fact, freight forwarders that willfully ignore this move will not survive past the next few years, as Amazon sinks its highly analytical teeth into the market. 

While the problem is less immediate for air cargo companies, those in the industry that take this change seriously will be better situated in the long term to compete with Amazon. This is largely because air cargo firms have a better business model than freight forwarders and have shown strong revenue growth in the past decade. 

But, they shouldn’t get too comfortable. Air cargo companies face many of the same challenges as freight forwarders in that Amazon will invest significantly in leveraging analytics and cost-cutting practices to become highly competitive with current companies.

The best thing they can do is to establish a strategy that makes them well positioned to compete with the e-commerce goliath. If freight forwarders and air cargo companies follow the strategy outlined below, they will be well equipped to drive profitable revenue growth and remain competitive.  

Takeaway No. 2: Imitation Will Get You Nowhere
As many retailers have learned, freight forwarders and air cargo companies should not try to imitate Amazon.

The online retail giant has a notable track record of beating incumbents in every market it enters, and that’s largely due to the fact that companies mistakenly try to copy their strategies. 

Additionally, Amazon uses some of the most sophisticated analytics and technologyavailable. Freight forwarders simply do not have the resources to compete at the same level and those who try may not be able to maintain a reasonable level of competition.

It is expected that Amazon will replicate their existing small package business model in the United States. This means that they will buy at a higher capacity than their competitors and use more advanced analytics, resulting in a faster and more efficient delivery model.

Based on volume, scale and buying power, Amazon will command more attractive pricing than other freight forwarders, enabling them to secure capacity at a lower cost and ensure profitability as they fill that space more easily than competitors.

Besides its sophisticated analytics, Amazon has another distinct advantage: The incredible support of its shareholders has allowed for a business model that places profits second to the goal of growing market share first. No freight forwarders or air cargo companies can say the same.

Many of these companies are already seeing a declining profit growth rate and any further cuts could result in a cessation of business.

Ultimately, companies that take on reactionary tactics to Amazon’s moves in an attempt to retain market share will not be able to sustain them in the long term. These companies cannot compete with Amazon’s boundless resources and will only lose money by trying to copy them. 

Takeaway No. 3: Focus On Where You Can Grow Market Share
As Amazon grows its presence in the market, freight forwarders will struggle to compete, and that means even more industry infighting.

As mentioned earlier, the top ocean freight forwarders include Kuehne + Nagel, DHL and Sinotrans Limited - all of which already compete aggressively for market share. 

Given this ultra-competitive environment, freight forwarders should focus on areas where they possess a strategic advantage in capturing and growing market share. The most obvious place to look is in commodities Amazon does not ship, such as agriculture, automotive, building supplies and heavy machinery.

While the consumer goods and retail space will surely decrease for freight forwarders, companies that focus on capturing share in these less competitive segments will establish a position of strength, leading to the potential to drive significant organic revenue growth outside of Amazon’s core segments. 

However, freight forwarders exploring these spaces for the first time will face an uphill climb. With Amazon’s expected impact on the market, these companies will no longer be able to use the project-by-project tactical approach that is the industry norm. Amazon’s resources, especially in sophisticated analytics and data, will squeeze companies who refuse to change their business models.

Conversely, air cargo companies will have a stronger recourse for fighting Amazon. While UPS and FedEx both experienced strong growth in 2015, they should not become complacent. Companies that currently dominate the air cargo industry will eventually be forced to lower costs to compete with Amazon, and those with reputations for delays and logistical problems will see shrinking revenue streams.

Although both UPS and FedEx are currently experiencing success, Amazon’s foray into the market means they will no longer be able to maintain their current business strategies in the long term.

Both air cargo companies and freight forwarders must look for areas where they have a differentiated value proposition. Just as Amazon has built a reputation as an expert in retail products, companies that have known value in specific niches must leverage them to maintain, and possibly increase, market share.

Takeaway No. 4: Ramp Up Your Analytics
Amazon uses advanced analytics in every aspect of its business. When they apply this analytical rigor to the shipping industry, companies that do not implement similar tactics will see their pricing actions consistently outmaneuvered and business taken away.

As I mentioned before, companies cannot and should not exactly match Amazon’s business practices. However, those that cannot present credible, high-level numbers to back up their business proposals and contracts will see clients begin to disappear. 

There are two techniques freight forwarders should consider implementing:

1. Behavioral segmentation. Rather than relying on dated business segments and a one-size-fits-all solution utilized by much of the industry, those that leverage their unique business models and historical data to study which products and customers generate the most volume and profit will be able to use that information to adjust prices accordingly.
2. Price sensitivity. Freight forwarders that use their wealth of transaction-level data to measure how sensitive customers are to price will allow them to make the necessary changes to streamline processes and determine how much they should raise or lower rates, driving profitable growth.

Air cargo companies should implement these same techniques. As Amazon invests more resources into understanding the industry, it will begin to realize where costs can be cut and prices can be lowered.

Companies that prepare for this will be much better prepared to stay competitive and retain current clients. They can do this by leveraging available data to ensure that they have a holistic understanding of their own internal practices, as well as those being used by competitors. 

These bespoke solutions have seen huge success in the U.S. retail market. Using a myriad of competitor and merchant data, companies have been able to scientifically determine where and when lower competitive prices should be matched, as well as answering when value-added components offset higher prices.

In fact, one leading consumer goods retailer saw a 6.8% revenue uplift when using this targeted approach, with a 30% uplift in select product lines, equating to tens of millions of dollars when extended across the organization. 

Amazon didn’t become one of the most sophisticated companies in the world overnight, and neither will anyone else. The best way to implement change at a company is to treat it as a unique entity.

While some companies look to cookie-cutter approaches and generalized software, it is much more beneficial to invest in a bespoke solution specific to their own businesses. This approach will deliver organic revenue growth and a greater return on investment. 

One major ocean freight company used comprehensive statistical analysis to develop an analytically driven pricing framework and corresponding strategy. This approach identified an opportunity to lift gross profit by 4.2% annually, driving change across analytics, data management, corporate strategy, business processes and operations. 

These types of investments prove that profitable growth is still possible in the shipping industry. Companies that invest internally to identify where opportunities exist to drive revenue growth are much more likely to succeed than those who simply price match against competitors.  

A First Step
This is only Amazon’s first step toward entering the $350 billion ocean freight market. Even when companies implement advanced analytics and figure out where they can compete with Amazon, there will be additional challenges as the conglomerate continues to pour money and resources into the industry in order to fully integrate across verticals.

Amazon’s growth leaves up for grabs only a percentage of the demand that existed before for retail. Those in the space that continue to compete as before will be forced to price their services at unsustainable rates. This shaky business model will put them at significant risk of being out of business within the next several years. 

Instead, the freight industry can best combat this by further exploring other B2B commodities that Amazon does not ship. Companies that focus on these areas will improve their chances of locking down those markets, and achieving market share growth. This will stall the inevitable rise in competition from companies shut out of the retail market and in need of fresh sources of revenue. 

Although Amazon is still in the early stages of entering the air cargo industry, companies in the space should be concerned that Amazon will underbid them and fully integrate its shipping process, providing an end-to-end solution from warehouse to doorstep. 

There is already significant downward pricing pressure in the shipping industry, and Amazon’s entry is sure to create even more aggressive competition in the space. The best course of action is to push hard to leverage analytics in an effort to capture market share in products Amazon does not sell (cars, commodities, agriculture, etc.). 

Only by establishing a position of strength in the remaining markets will these companies survive and potentially thrive. As Amazon prepares to extend its reach further into the retail supply chain industry, failing to act is no longer an option for shipping companies.

This supply chain power play may be the catalyst that sends the industry into a Darwinian scenario of survival of the most analytically fit.