Amazon.com Inc.’s announcement on Monday that it would open its rather large logistics network to third parties has been a long time coming after some fits and starts.
The e-commerce retailer had opened up its parcel delivery network to third parties in the past and then reversed course when pandemic demand flooded its system. Now, Amazon has named initial customers — Procter & Gamble Co., 3M Co. and Lands’ End Inc. — that cut across industry, retail and consumer packaged goods. There’s no turning back now.
Investors certainly showed their concern across the logistics sector, driving down shares of parcel carriers, trucking companies, freight brokers and even warehouse operators. Companies that dropped more than 9% or more in intraday trading on Monday included C.H. Robinson Worldwide Inc., RXO Inc., warehouse operator GXO Logistics Inc., FedEx Corp. and United Parcel Service Inc., which counts Amazon as its largest customer.
Ravi Shanker, a transportation analyst with Morgan Stanley, said the announcement “could be a watershed moment” for the North American freight market. On the other end of the spectrum, Wells Fargo analyst Christian Wetherbee said in a note the “true impact will be minimal” because Amazon has already been offering these logistics services piecemeal. The change is that all these services will now be coordinated under Amazon’s new unit, referred to as ASCS.
There’s no doubt that Amazon will begin to take market share now that it has declared that its third-party logistics business is here to stay. This move allays concerns among potential customers that Amazon’s offerings wouldn’t be permanent or would take a back seat to its own volume during periods of peak freight.
Still, all the freight segments — air, ocean, train, truck, warehouse and parcel — have mature competitors that are financially sound and technologically advanced. They won’t just roll over in the face of Amazon competition.
Amazon has proved that it can bring innovation and new ideas to logistics. The company single-handedly sped up package delivery from several days to now within hours. The secret to the e-commerce giant’s delivery speed is a business model that keeps inventory of the most popular items in distribution centers near large metropolitan areas. The delivery from those centers to residences and businesses is uncomplicated.
Package delivery gets more complicated with full-service parcel in which Amazon picks up packages, sorts them by final destination and then takes them to facilities around the country for final delivery. That will require more sorting capability, which is a competitive advantage for UPS and FedEx.
FedEx and UPS are both moving away from the short-distance parcel deliveries, which have become more of a commoditized business because of the rise of asset-light delivery companies that employ gig drivers who use their own vehicles. Amazon uses contract companies that hire drivers and lease delivery vehicles from Amazon, similar to FedEx contractors for its ground delivery service. While cost-effective, the driver turnover can become a problem for customer service and even safety.
Amazon certainly can’t be ignored. The company has shown that it can build out a logistics network in a hurry. Only two decades ago, the company began its “fulfillment by Amazon” service with third-party drivers. It then embarked on assembling its own parcel network, which has overtaken the US Postal Service as the largest package delivery company. A decade ago, the company started Amazon Air to lower its air freight costs. It also built out its trucking business to haul goods between distribution centers.
Peter Larsen, vice president of ASCS, pointed out these feats in the announcement and even compared the launching of this new business group to Amazon Web Services, the wildly successful cloud-computing service. The big difference is that AWS had operating profit margins of 35% last year. The logistics business would be doing great if it achieved a third of AWS’s profitability. UPS’ supply chain solutions business last year had operating margins of 10%.
Then again, Amazon is accustomed to a high-volume, low-margin business. Its North American e-commerce business had operating margins of 6.9% last year and 2.9% for international e-commerce.
Amazon has built an impressive in-house logistics business over the years and has experimented intermittently with third-party offerings. Now, the company has declared it’s open to everyone for an end-to-end logistics service. There’s little doubt Amazon will gain market share in a $500 billion third-party logistics market that’s still highly fragmented and very competitive.
Even though transportation-industry investors scrambled on Amazon’s announcement, the reality is that it will take time to sort out the winners and losers. With the increased competition, the only certain winners are the shippers like 3M and Procter & Gamble.
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