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[26 comments]

Amazon takes steps to own the last mile

April 28, 2014

Authenticating rumors in the marketplace, Amazon is indeed testing its own delivery network in the U.S., according to an extensive report last week in The Wall Street Journal.

The test, which further confirmed a report in early March on DCVelocity, was identified by a number of Ryder trucks in a parking lot at San Francisco's Candlestick Park alongside AmazonFresh trucks as well as packages reaching Bay Area residents with labels reading "AMZL" and "AMZN_US." Similar efforts were said to be under way in Los Angeles and New York.

In its annual shareholder letter, CEO Jeff Bezos also noted that Amazon had "created our own fast, last-mile delivery networks in the U.K. where commercial carriers couldn't support our peak volumes."

Building its own network of trucks could be a money saver with shipping expenses as a percent of sales increasing every year since 2009. It also offers flexibility, including potential drop-offs at night or at specific hours.

But a fleet would ultimately provide Amazon control of the "last mile" — the final leg of the online purchasing process. The project was said to have received greater urgency after Amazon packages delivered by UPS and FedEx missed promised delivery dates this past holiday.

DCVelocity reported that Amazon's privately held fleets would serve the U.S.'s top 40 markets, extending efforts already developed around AmazonFresh. Regional parcel delivery carriers and the USPS would serve the remaining markets.

The Journal report noted that it could take Amazon years or decades to match the efficiency of UPS and FedEx. The scale both carriers enjoy would also be missing.

But it also comes as Walmart with Walmart To Go and Google with Shopping Express are already exploring their own delivery fleets. A source also told DCVelocity that Amazon's fulfillment executives don't believe UPS and FedEx are investing enough in equipment and infrastructure to support Amazon's growth.

Wrote Darrell Etherington for TechCrunch, "Amazon clearly foresees a time when it might not be able to cost-effectively lean on others while remaining as competitive as it needs to be in the growing e-commerce market."

FINANCIALS:     [NASDAQ:AMZN] [ NYSE:UPS] [ ]

Discussion Questions:

How important is it for Amazon to eventually establish its own wide scale delivery network? Is the over-reliance on major carriers a weakness in the e-commerce model for big online retailers?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How important is it for Amazon to eventually establish its own wide scale delivery network?

Comments:

Major investments in the last mile is a another way for Amazon to out-invest much of its competition to create a sustainable competitive advantage.

Sure, owning your own trucks can enable same day delivery, which may or may not be an important part of the business. But it also allows Amazon to better control costs, flex based on demand, and offer features and services that others can't. It's easy to imagine Amazon offering very tight delivery windows (pick your delivery hour), white glove delivery/installation in-home, Sunday delivery, etc.

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Jason Goldberg, VP Commerce Strategy, Razorfish

In order to achieve same day delivery in major markets, owning wide scale delivery in those markets will be a critical stepping stone. Amazon has already experienced the pitfalls of not being able to deliver on time last holiday season.

In Amazon's case, the mantra has always been big fast growth. To achieve that with AmazonFresh will require efficient local delivery. Expect Amazon-owned or tightly controlled delivery in at least the top 25 markets.

However, every country is different requiring different solutions. In China's largest cities, Amazon is achieving rapid delivery in hours using the local network of a variety of delivery providers, including entrepreneurs on scooters.

Wonder what will happen in "fly over country"? Maybe Bezos's drones will in fact reach us in the heartland.

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Chris Petersen, PhD, President, Integrated Marketing Solutions

If they can achieve better efficiency and save money, it's a no-brainer. But I have my doubts about whether they can do either. This is a massive undertaking. Testing in major markets where they already have some infrastructure is fine, but going far beyond that may not be financially viable.

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Warren Thayer, Editor & Managing Partner, Frozen & Refrigerated Buyer

With Amazon's myriad of business interests, and its desire to cut delivery times, it makes sense for it to develop its own delivery systems. The last mile hurt Amazon during the 2013 holiday season, and with consumers increasingly turning online for purchases, Amazon cannot afford to have that experience repeated.

Few retailers will be able to attempt this feat. For most, the logistics and convenience offered by FedEx and UPS will suffice. That's not true for Amazon.

And don't completely discount the idea of drones.

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Max Goldberg, President, Max Goldberg & Associates

"...it could take Amazon years or decades to match the efficiency of UPS and FedEx" a true statement if ever there was one. It's folly to count Amazon out of anything, but this is a big undertaking that really takes more than trucks and drivers to justify the range of expenses and liabilities. To me, this could be one of two things: saber rattling to get the attention of FedEx and UPS or a (40 markets) supplemental program.

My belief is that this not the right direction for Amazon. They need to keep the focus on the merchandising/market building side and IMHO play the three carriers against each other to get the service level they need.

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Ken Lonyai, Digital Innovation Strategist, co-founder, ScreenPlay InterActive

For company the size and scale of Amazon, I think a mixed delivery network combining its own fleet plus existing logistics makes sense. I can see Amazon wanting to control the customer experience to the last mile, but the cost and scalability is going to be an issue except for specific markets where there is saturation. The reason why UPS and Fedex exist is for scale.

The other part that may limit private distribution networks is congestion and environmental impact. Cities may start cracking down if 5-6 private delivery trucks show up double parking in front of the same building at one time. In airports they used to have shuttle buses for each car rental brand, and they forced consolidation because it congested the road infrastructure and was fundamentally not as efficient as shared buses.

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Kenneth Leung, Director of Enterprise Industry Marketing, Avaya

It is a massive undertaking on the part of Amazon or any company to establish what FedEx and UPS already have in place. In the long run, I see no real savings to them having their own delivery network. Let Amazon do what they do best and let those who deliver do what they do best.

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Frank Riso, Principal, Frank Riso Associates, LLC

Amazon's delivery network is designed around their nearly 100 Fulfillment Centers (just over a third in the US) aimed at reducing the travel distance and delivery times to their prospective customers. They don't need a national network similar to FedEx, so their focus on the "last mile" is consistent with their supply chain design (well stated in the DCVelocity article). In this type of a model scale and efficiency of assets is restricted to the FC/region, but best practices can be shared and systems investments can be spread across the entire network. So, I don't see it as a wide-scale delivery network, but rather a metropolitan/region selective and focused "last mile" application of delivering all of Amazon's orders in a hybrid delivery model.

As to big online retailers, they may not have the customer density or scale to entertain options similar to Amazon's but can review on a case by case basis. The need to rely on major carriers will not go away.

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Mohamed Amer, Vice President, Global Consumer Industries, SAP

It is critical to the long-term growth of Amazon. Similarly, other large online retailers need to develop alternatives that address the issues Amazon has surfaced.

The "final mile" issue continues to concern online retailers. Despite the investment of Amazon and others to ship directly to home, I still see a real opportunity for food retailers to develop an online presence via "click & collect." This represents a terrific entry point to online for traditional brick & mortar food retailers. If successful, such a strategy will cause Amazon to consider more offline, i.e., physical store presence (Apple-like stores), in addition, to the drop box options it is currently using.

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Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University

The economy of scale necessary to make a delivery network feasible may still be years away for Amazon. FedEx and UPS are delivering for a myriad of companies including all types of manufacturing as well as commercial and retail companies. Unless Amazon goes end to end (which include mixing centers, airliners and terminals etc.) they will never be in total control of their product.

Having said that, if Amazon gets to the volume of goods to be shipped that they project their last mile or local delivery will give them a critical edge on competition and some leverage with the national shippers who move goods around the country.

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J. Peter Deeb, Managing Partner, Deeb MacDonald & Associates, L.L.C.

It's easy to dismiss this as too large an infrastructure play to crack the code, but if anyone can do this, it is Amazon. They already have established world class distribution warehouses and ecommerce and web services, so why not the last mile?

I think that if they take a market-by-market approach and use density as the guide, they will better match up the demand cycles. This would absolutely turn a weakness into a strength.

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Robert DiPietro, GVP Product Strategy & Business Development, Affinion Group

Sure seems like a waste of money that won't provide a significant customer advantage. Perhaps it will be a competitive advantage for Amazon by creating a thing no one else can afford - but it will only be that if either there's huge cost advantages (which I doubt) or huge consumer value.

Doug Garnett, Founder & CEO, Atomic Direct

Amazon, as will any other fulfillment organization will reach seasonal peaks. When you utilize one, two or three delivery methods and so does everyone else, you will reach the same clog at the peaks and also reach the same "over supply" of capability with the slow times. The smart buyer will avoid the peak log-jams and the sellers (Amazon) will price with discounts to fill in the slow dates. Once the big boxes start their own delivery systems, they will lose the savings that brought them into prominence in the first place.

I manufacture a specific purpose product and I tell all of my commercial installers not to jump into other dimensions of the industry. Those that have stayed with the limited "winning" purpose have made millions, while those that have taken on all sorts of accessories and services have killed their profits by the "dog days" and vacancies in the other areas...those that followed the path of success that got them where they are are reaping the $$$$ and those that tried to pick all of the "fruit" have "broken backs" from taking on too much in the name of bigness!

'thunder1'

This is a massive undertaking for Amazon or anyone. It does matter how deep the money pockets are because this is going to be a huge expense. Let's start with the first expense and problem. It is insurance. Insurance for the vehicles and the employees. Then there is the increased labor as well as the hiring, training etc.

Whew...let sleeping dogs lie and make arrangements with those who are the true professionals so delivery schedules can be met. Maybe drones can be like the homing pigeons of this decade. Send them out with the package and let them return to the nest to await their next delivery.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

Amazon is all about controlling the experience and this is that last mile in making sure they have control at least in the major population centers.

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Mel Kleiman, President, Humetrics

So far, Amazon has outsourced its delivery. Bringing it in-house is an interesting proposition. I'm sure if they are looking at this, it must be making financial sense. Still, should they leave certain things to the experts (UPS, FedEx, etc.)? From an outsiders view, it may be best to have a hybrid; local or regional deliver can be handled by Amazon while many of their other items can be shipped via traditional methods they have always used. That said, I know this about Amazon. If anyone can pull it off, they can.

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Shep Hyken, Chief Amazement Officer, Shepard Presentations, LLC

With traditional retailers forging ahead with ship-from-store capabilities to improve speed to customer amongst other features, the same day delivery would no longer be a competitive advantage that Amazon tried to achieve by localized distribution centers. Owning the "last mile delivery" gives Amazon control over delivery appointments, essential for grocery and high-value products such that customers can select with high confidence a narrow time window for delivery to happen, and the delivery actually happens within that time window.

Needless to say, Amazon's 1 Billion+ yearly shipments are delivered by small package carriers and couriers which is the single biggest risk to its operations that Amazon is trying to change. There are potential cost advantages to be realized by owning last mile delivery, however, like the post states, the break-even point for this scale of investment could be years away. With other challenges in the transportation industry such as unionization, regulations, liability concerns, etc. makes me wonder if Amazon traded one big risk for several other smaller risks.

Anurag Rohatgi, Director, Omnichannel Solutions, SCA llc

Nailing the last mile: A fantastic competitive advantage. Really great vision. Is it possible - yes, because Amazon has already established a strong shopper base (justifying investment and reducing risk with future income streams).

Rock on Amazon!

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Liz Crawford, VP, Strategy & Insights, Match Drive

It's a massive undertaking with a negligible competitive advantage. FedEx and UPS are not slouches. And no one cares who travels the last mile.

On the other hand, I learned many years ago that Dominos wasn't in the pizza business; it was in the delivery business. And that was followed up by a recent conversation with a close friend in the newspaper business who told me delivery was one of his industry's core competencies. He added they just needed to find a partner who could leverage the fact that newspapers travel every road in the nation every day.

Maybe it's not so crazy.

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Christopher P. Ramey, President, Affluent Insights

I agree with the other naysayers here: rather than temper people's unrealistic expectations, Amazon wants to dig the hole deeper trying to meet them...good luck guys.

But let's cut to the chase; I think that far more prescient - at least in the long run - were a pair of recent articles (in the WSJ and NYT) pointing out that so-often overlooked point: Amazon doesn't make money...still (or at least it doesn't make a lot of it, consistently).

'notcom'

You could see this one coming, right? But establishing your own shipping company is a HUGE undertaking -- seems like more of a leverage point with the carriers than reality to me.

The other question, though about retailers, is a good one. Consider this: shouldn't stores start acting differently? In other words, instead of being just a place where goods are stored on a shelf, shouldn't "stores" (as we now call them) partially become fulfillment centers for major retailers? The idea being BOPIS (buy online, pick up in-store) or, for a small fee, just running the goods to someone's house. After all, that's how people shop now; not just at shelf, but everywhere.

That's also another way to slow Amazon down. Start acting more like them, only with a massive physical advantage.

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Lee Peterson, EVP Creative Services, WD Partners

Not that I like it, but I think it's terribly important for Amazon to establish its own wide-scale delivery network, controlling the whole issue of delivery -- what, where, how, and, most importantly, when. This is the way to get and KEEP customers, so it should be well worth the expense to be the alpha provider and deliverer.

FedEx started out with wonderful service, empowering its employees to do anything to absolutely, positively get it there. My recent experience with FedEx made it clear that those days are gone: Sorry, we can't deliver it till Monday (even though it was promised for next day delivery), and there was a "weather condition" that delayed the delivery and today's delivery already went out and that's too bad; and it was mismarked so it's in the wrong bin; sorry, we can't go into the delivery bin to get your particular package; do you want to have the delivery on Monday or do you want it returned; etc.

By the way, it was a delivery from a third party retailer on Amazon -- they didn't deserve to be in business -- they were extremely blase and slow to fulfill the order, the mailing, and the delivery, which they knew absolutely, positively had to be to me on Friday -- I was leaving town on Saturday!

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Naomi K. Shapiro, Strategic Market Communications, Upstream Commerce

This looks like the dotcom failure known as WebVan just being rehashed 15 years later....

Ed Dunn, Founder, (Stealth Operation)

Jeff Bezos is absolutely committed to the shopper, and MUST deliver TO the shopper. This requires super-efficiency, as does everything that Amazon does. For 100 years, bricks retailers have ignored the gross inefficiencies of shoppers in their stores, and getting the goods home.

100 years ago, A&P ate a LOT of lunches, through massive supply chain and operational efficiencies. Then 50 years ago Walmart ate a lot of lunches, through massive supply chain and operational efficiencies. And now Amazon is eating a lot of lunches, and a lot more to come, through massive supply chain, operational AND SHOPPER EFFICIENCIES.

Bricks retailing is inherently conservative, believing their mostly profitable historical model is THE right way to do things. So...their shoppers are like that, too. That is, shopper's think the way things are is the way they are supposed to be. In other words, after a lifetime of being dumped into "rat maze" stores, and left to do their own stock-picking in these neighborhood warehouses, they have come to accept their abuse, and consider it the norm - the way it is supposed to be. But Amazon is slowly, steadily, showing them a better way.

Until bricks retailers are routinely monitoring shopper efficiency, they are simply whistling in the dark - ALL of them! But notice what happens when Kroger focuses on a single point of inefficiency for the shopper, the checkout. The result: general increases in sales, due to SHOPPER efficiency! Of course checkout is actuated by the retailer, but shoppers whose total shopping trip is more efficient, spend more money. Every second saved, per dollar spent, is worth an extra million dollars in annual revenue for the retailer. Who cares? Maybe it's easier to just squeeze the suppliers a little more. Tsk, tsk! YOU deserve to have Jeff Bezos eat your lunch. ;-)

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Shopper Scientist LLC

Slowing growth thanks to sales tax collection is a big problem for the present and gloomier for the long haul. This combined with skimpy earnings is a business plan that establishes itself as out of control. With no money and sliding sales, I will be looking for mergers and acquisitions instead of the elusive same day delivery plan.

The competition, as in eBay and Walmart and several newbies, are not going to back off and allow for a comeback of any kind. Fiscal Year 2014 is not going to create many fond business memories for retail and e-commerce and Amazon will be very likely to struggle through it poised to be removed from the number one position it now owns. Growth is important but for Amazon, there needs to be a focus on cash flow, quickly.

'gjarnoldjr'

It is almost inconceivable to me that Amazon will not eventually establish or buy their own wide scale delivery network. Looking at this from a purely strategic view, it is the next logical step for Amazon to take over this piece of the market - no other player does this, and it gives them complete control over the distribution of their products, which is a key contributor to their customer satisfaction.

It will be tough at first for Amazon to match the efficiency to that of a UPS or FedEx, but once they master that (and I have no question that they will), Amazon will become unstoppable. Let's bear in mind that they may buy or acquire an existing network, or build their own, and building their own may involve new technologies (e.g. drones) that leapfrog existing methods.

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Alexander Rink, CEO, 360pi

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