AMAZON TRANSPORTATION AND LOGISTICS – WHAT IT MEANS FOR YOUR BUSINESS

Written by Tony Nuzio on 

For many years now, UPS and FedEx have dominated the world of parcel shipping.  So much so that DHL decided it was time to leave the US domestic parcel business several years ago. And, up until recently it didn’t look good for other competitors to enter the market place either.  With UPS’ sales approaching $60 Billion annually and FedEx’s annual sales approaching $50 Billion, you can see why they are the major players in the parcel delivery marketplace; that is until just recently.

Several new entities have in fact entered the package delivery market including Google, Uber, Postmates and now what could be the biggest threat to both UPS and FedEx, Amazon.  Unless you have been sleeping under a rock for the past few years you had to notice that Amazon was beginning to create a strong local delivery presence in many of the US’ major cities; cities such as New York, Chicago, Los Angeles, San Francisco as well as many other major cities.

Amazon’s delivery network growth is evident in Europe and Asia as well.  Why has Amazon been on this mission you ask?  First of all because they have the financial resources as well as the desire and capability to take on both FedEx and UPS.  We can assure you it is not just a game Amazon is playing, it’s a much more serious endeavor to take on the big two in the parcel delivery business and to grab their slice of the pie.  Amazon clearly has been thoroughly engaged and totally focused on creating strong delivery networks, certainly in major metropolitan areas.  It remains to be seen if those major metropolitan delivery areas will be expanded into the suburbs; recent events clearly indicate they will.

So, what does all this mean to other parcel shippers and for FedEx and UPS?  For now, probably nothing; but you can bet that as the competition heats up we will see many different possible outcomes.  We obviously do not have a crystal ball however here are some examples of what we believe could happen:

• UPS and FedEx could find themselves under intense competitive pressure to reduce pricing to their major customers in order to retain market share and avoid a dilution of their business to Amazon.  (Just ask the LTL carriers how “market share” pricing worked out for them.)  The net result, declining profits, something UPS and FedEx are certainly not accustomed to
• UPS and FedEx could find themselves losing a significant portion of their business in major metropolitan delivery areas to Amazon.  Amazon continues to strengthen their delivery network specifically for these major metropolitan areas
• UPS and FedEx could be forced to significantly raise rates to smaller shippers who do not have the ability to negotiate competitive rates due to their lack of expertise with parcel pricing, in an effort to shore up profits that could be lost when they have to compete head on with Amazon
• Would those smaller shippers be in a position to negotiate directly with Amazon to keep from paying what could be exorbitant rates published by UPS and FedEx?
• Shippers, especially on-line retailers, could see their rates go up due to the fact that their shipments are often delivered to residences outside of major metropolitan areas
• The same could turn out to be true for commercial shippers whose customers are also located outside of these major metropolitan areas
• Could we see FedEx and UPS partner with Google, Uber, Postmates and perhaps even Amazon for that matter to take on the “last-mile” deliveries for them, just as they currently do with the USPS for their “Smart-Post” and “Sure-Post” services?
• Could we see UPS and FedEx strengthen their relationship with the USPS as Amazon has been doing, especially with the ability to handle Sunday deliveries?
• What would Amazon’s pricing look like for new shipper customers; we suspect it would be a simple pricing structure that would be competitive and make it easy to do business with Amazon
• Would UPS and FedEx now be willing to negotiate directly with third parties in an effort to increase market share; would Amazon deal directly with these third parties to gain new business?
• And probably the biggest concern for FedEx and UPS is just how much revenue could they lose if and when Amazon begins to handle all of their own deliveries?

Does Amazon  have the capabilities?  All indications point to yes.

According to new data from software maker, Channel Advisor, Amazon has added 21 new logistics facilities globally over the past year, bringing Amazon’s total to 173 facilities worldwide.  104 of these facilities are in North America and the remaining facilities are in Europe and Asia.  This tremendous growth does not sound like a “flash in the pan” decision by Amazon; it is a well thought out growth plan they will continue to stand behind and support for the long term.

As reported recently by DC Velocity, there are reports that Amazon is in the process of assembling a highly skilled executive team to help them create their own transportation network; this according to a source who is familiar with Amazon’s plans, but who wished to remain anonymous.  The plan apparently includes engaging one of the world’s leading recruitment firms to identify executives with strong skill sets in the parcel delivery area.  How many of the sought after executives will be from UPS and or FedEx remains to be seen.  Amazon clearly will be entering the parcel delivery marketplace and doing “whatever it takes to serve every community” in the United States, as also reported by the anonymous source.

Word is that Amazon has in the past reduced their reliability on FedEx’s services, with UPS apparently still the major parcel carrier service provider for Amazon, at least for now.  As the Amazon network grows, how will UPS and FedEx for that matter, react to what could amount to intense competitive pressure from a new and formidable Amazon delivery network?  Only time will tell.

But will Amazon Transportation and Logistics succeed?

In a recent report by Baird Equity Research, it was inevitable that Amazon would challenge UPS and FedEx in the parcel delivery arena.  Baird even suggested that Amazon’s logistics arm could be called “Amazon Transportation and Logistics” or (ATL).  Baird goes on to state that Amazon has the following key strengths that will make them a force to be reckoned with in the parcel delivery arena now and well into the future.

• Amazon has “powerhouse potential” in the large transportation and logistics network
• Amazon’s broadening fulfillment eco-system, internal domain expertise and experience with Prime Now, provides evidence that Amazon will offer more comprehensive third party services in the future
• Amazon may be the only company with the fulfillment/distribution density and scale to compete effectively with FedEx, UPS and DHL
• Another significant competitive advantage for Amazon is their tolerant investor base relative to traditional transportation and logistics shareholders