Amazon widens its moat
Last Christmas Eve, Amazon received a patent for "anticipatory package shipping" that describes a method for transporting a package to the end destination’s geographical area without specifying the delivery address at the time of shipment. The final destination is defined en route. This combined with some other actions Amazon is pursuing should set off alarms for retailers as it indicates how the online giant is working to widen the already sizable "moat" separating it from the competition.
One of those activities involves opening 15 sortation facilities across the U.S. this year. Each of these support Amazon’s goal to exert more influence over the last mile of the delivery process, including enabling Sunday deliveries, something no one else currently offers. Whereas before, packages would be picked up by a shipper at one of Amazon’s fulfillment facilities, many of these will now be carried by Amazon to the relevant sortation center to be delivered to the post office by 8 a.m. for same-day delivery.
The sortation facilities also enable later ordering times for two-day delivery as well as the ability to hedge Amazon’s exposure to both UPS and FedEx, both having issues last holiday season in getting packages to customers on time. Most importantly, the strategy helps lower shipping costs and sets up the ability to deliver directly from the sortation centers, bypassing third party shippers all together.
Amazon making its own deliveries? While this has been a hypothetical for quite some time, it now appears to be emerging as reality. Besides the challenges last holiday season, I also suspect this is being driven by UPS’ and FedEx’s move to dimensional pricing after the 2014 holiday season. The net effect of the new pricing structure should be increased shipping costs for most retailers, whereas Amazon has been pursuing ways to lower its expenses over the long haul for the better part of at least a year.
Say what you want about their ongoing infrastructure investment strategy, but Amazon is clearly focused on a different end game. If Amazon can lower its costs by taking on more of its own logistics, competitors would encounter a moat that may be impossible to cross.
- Amazon Knows What You Want Before You Buy It – Mashable
- Amazon’s new sorting centers aim to help with controlling deliveries – The Columbus Dispatch (tiered sub.)
- Christmas delayed: Amazon offers $20 gift cards, refunds shipping charges after UPS and FedEx problems – GeekWire
- UPS Follows FedEx in Basing prices on Size, Not Weight – Bloomberg News
Discussion Questions
What do you see as the net effect of Amazon taking on more of its own logistics? Would Amazon be making a mistake by bypassing experienced third party carriers? How do you see retailers reacting to these developments and which, if any, retailer(s) do you see being able to effectively respond to this?
Commentators often focus on Amazon’s site design and user experience, but its supply chain and logistics are probably its single most compelling advantage.
Without its capital-intensive network of fulfillment centers, Amazon couldn’t offer the world’s largest selection—dwarfing competitors—or promise two-day delivery (or faster) on millions of items.
When others superficially copy Amazon, especially as it relates to selection and delivery, the key questions are always where and how the inventory will be stored, picked, packed and delivered.
Owning and managing more of the supply chain gives Amazon increasing control over its customers’ experience and its own economic destiny.
Experience is key to the supply chain/carrier space. This is not a space or retail season to try out new ideas and unproven patents.
Retailers have dealt with their competitors very well over the years and Amazon is no different. They still lack the service and personal relationship element of store-based retailers. That cannot be replaced.
Retailers will always address Amazon by having tight controls on their in-store inventory and making sure the product is there when the shopper wants it—not two days later. The NOW element is still what makes shopping fun. You get it NOW and not later on your porch.
If Amazon can better control or lower its shipping cost, the company could save millions of dollars, passing that savings to consumers or its own bottom line. Amazon could conceivably position itself to handle logistics for its competitors. Smart move by Bezos and company. If it works, this would give Amazon a significant competitive advantage.
As an an exclusively online retailer, Amazon has had the fortune to concentrate and develop its supply chain and delivery strategies without having the burden of dealing with any, and all, the challenges associated with brick-and-mortar retailing. As traditional retailers continue to search for context and relevance in the digital era, Amazon is driven to innovation, given its business model. They may well create a valued solution that will make it extremely difficult for other retailers to compete on this front. The wild cards will be what FedEx, UPS and the postal service will do to compete.
The answer is, of course, contingent on the efficacy of the execution.
If Amazon does it well it will leapfrog them ahead of both their physical and online competitors, reduce cost and broaden customer service.
If they do it poorly, costs will increases there will be frequent service interruptions and sales will suffer.
It probably would be a mistake for Amazon to bypass all third-party carriers now, BUT that may not be their real goal. The threat of a bypass may force FedEx and UPS to reconsider—and presumably reduce—their fee structure. So, this looks like it may be equal parts logistical improvement and old-fashioned power politics.
Can’t see any retailers effectively countering this strategy now, but the century is still young.
The move by Amazon to take on more of their logistics definitely puts pressure on all of their third-party suppliers to offer better service at a reduced or the same price. If Amazon can find a way to manage their logistics more efficiently at the same or a lower cost, they could certainly bypass third-party providers, and that is the threat to those providers.
Retailers have been working hard to increase their efficiency with delivery services. Amazon’s efforts mean the retailers must continue to push for improvements in this area. The retailers, like Macy’s, that have been actively improving their delivery process and that continue to improve their efforts will be fine. Retailers who have not kept up and will now have to jump several steps at once to stay competitive have a huge hurdle. If they do not make moves now, they are likely to lose a lot of business.
I have to wonder if Amazon controlling its own logistics makes financial sense? If it does (and why would they do it if it didn’t), then this could set off some concern for the third-party shippers who will lose business, and for other retailers who may not be able to deliver at the same level as Amazon.
And, if this works for Amazon, why wouldn’t they open this up to other retailers, just as they have their website? It seems like Amazon is expanding their business model. Shipping and logistics seems like a natural extension, as long as it doesn’t take them away from doing what they already do best.
If Amazon can master logistics as efficiently as UPS or FedEx is a big “if.”
The potential problem with widening moats is that they can further distance you from your customer as well as your competitors.
Also, it’s doubtful that UPS and FedEx have been sitting idly by after last year’s disappointing performance. They’ve been in the logistics business far longer than Amazon ever will be, so I wouldn’t dismiss their ability to further streamline their own performances.
Furthermore, all carriers are dependent upon the availability of merchandise from manufacturers and distribution centers. Weather plays no favorites, either.
I doubt that this move by Amazon will result in any long-term advantage.
The more logistics Amazon can take on and do right, the better the bottom line. Period! Amazon’s strength is in this area and we all know that they could use some profit improvement, so kudos to them.
As to which retailers can most effectively respond to this? Retailers with stores, and stores that are ready to become fulfillment centers. Several, such as Macy’s, are already well on their way.
… And that’s my two cents.
Managing transportation costs is not good enough for the companies that desire to be the biggest and the best; owning the solution is the need. Logistics and distribution is what Walmart owns and feeds to stay alive and grow.
While the discussions in Amazon were taking place as to what is needed to expand in a worldwide market smothered in an economic depression, someone must have mentioned the price of shipping to deaf ears. Now that Amazon Prime is getting it’s teeth kicked in, perhaps another look was taken with a more practical realization resulting from open discussion and experience.
Whatever the case, there appears to be more appreciation for how things get to where they need to be leaving money left over from the whole sale for a profit. Amazon is too big to make costly mistakes without market and investor ramifications.
No company is better at the supply chain or logistics operations than Amazon. Yes, this widens the “moat” just a little more. But, have no fear my friends, the others are feverishly working to catch up…as is every other horse in a race except the leader.