The elephant in the market: Amazon’s move into logistics

 In Industry News

There are signs that Amazon is coming ever closer to being a serious player in the transportation industry.

For some time now, Amazon has been reducing its reliance on the major carriers by shifting some of its business to independent, regional providers, while also growing its own fleet of private trucks. Perhaps the most telling development is that Amazon’s FYE 2018 (Dec. 31) SEC annual report 10‑K stated that the company faced intense competition in “transportation and logistics services” — a clear indicator that Amazon considers this industry to be one in which it is competing, although it did not name any specific companies it was competing against.

Amazon is downplaying its involvement in the logistics market, but that hasn’t stopped speculation from running rife that the company is positioning itself to become a cost-competitive alternative in that arena, especially for retailers that sell through the Amazon marketplace.

Paying to play

Shipping is one of Amazon’s biggest expenditures — in 2018 it amounted to almost 20% of cost of sales. That year, the company’s shipping costs rose almost 30% from 2017, to $27.7 billion (from $21.7 billion), with $9 billion being spent in just the fourth quarter. For this reason alone, Amazon has strong incentive to reduce the cost of delivery, and it’s pouring millions of dollars into its transportation strategy.

The chart below, from Geekwire, demonstrates the upward arc of shipping costs for the retailer.

a bar chart depicting Amazon's increasing shipping costs from quarter 4, 2010, to quarter 4, 2018

There are two main factors playing into Amazon’s rising shipping costs: its desire to maintain more control over the customer experience, and its desire to be the fastest shipper in the online market. A third, growing factor, is the popularity of the Amazon Prime program, which gives members free 2-day delivery and now has over 100 million subscribers.

In its SEC filing, the company laid out its strategy: “We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing our fulfillment network, negotiating better terms with our suppliers, and achieving better operating efficiencies.”

Amazon evidently sees long-term as returns as being the reward of the massive expenditures its making now in its own logistics network: new distribution hubs, an increased number of trucks and planes, and even more control in the ocean freight market have all been areas in which Amazon has made substantial investments.

In December 2018 Amazon signed a deal with Air Transport Services Group to lease another 10 aircraft to service its in-house logistics network. The deal includes multiyear extensions of the current aircraft leases, and it also gives Amazon the right to buy up to a 39.9% share in the Wilmington, Ohio, air transport company, which may indicate that Amazon has an eye to buying it in the future.

None of this is going unnoticed by FedEx and UPS, although both major carriers have also publicly downplayed Amazon’s involvement in the market. Amazon is famous for its aggressiveness in becoming and staying the biggest player in ecommerce. If Amazon turns that aggressiveness toward the logistics industry, expect to see the growing giant eating up market share soon.

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