The Rise of Amazon Logistics

There is a running joke in the research department about how often we seem to tweet about Amazon, and if you are a follower of @Ti_Research then I am sure you will be well aware of this.

But there is a serious point underlined here; Amazon is a very high profile, very innovative company.

As such, given the significance of logistics to the company’s operations, and the significance of the company, in turn, to the retail sector, we observe Amazon’s activities with keen interest.

One trend that we are observing in particular is the development of Amazon Logistics.

Amazon Logistics is the company’s own delivery service, and its usage removes the need for go-betweens such as Royal Mail, FedEx or UPS, thus ensuring that the profits for carrying out deliveries stay within the company, rather than being ‘lost’.

Having been quietly rolled out in the US during 2013, Amazon Logistics has become an increasingly common site on delivery invoices, and is becoming ever more visible in both the US and UK. The service is essentially Amazon taking on the last mile delivery of goods through its own network of depots, however, the actual delivery work is principally undertaken by small local companies and owner-operators. In the UK alone, it has opened 14 delivery depots, with many more in the United States, and it appears that more is to come.

In 2014, Amazon’s fulfilment expenditure (which includes web-site costs as well as physical logistics) amounted to 12% of annual revenue, and the company is conscious that by taking a portion of its logistics operations in-house, it will be able to save a significant amount of the money it currently spends on delivery partners.

Amazon Logistics is being implemented to support the company’s most important customers; its Prime subscriber base. This has been underlined by the roll-out of Prime Now, Amazon’s one hour delivery service, to additional locations during 2015. Prime Now is at present provided to Prime subscribers in 9 cities in the US, and 2 in the UK.

Amazon intends to not only maximise control and minimise costs by handling last mile deliveries internally, but also to further its ecosystem of Amazon devices using Amazon content. Now they will also be arriving in Amazon vehicles, and soon, drones.

The importance of Prime cannot be overstated. Prime members spend around twice as much as non-Prime customers, and they are growing rapidly as a segment of the company’s users; membership rose by 53% in 2014, and servicing these customers effectively is vital to the company’s future success.

The utility of Amazon logistics does not end here though. By operating its own delivery service, Amazon will benefit from a veritable treasure trove of data, which it will be able to use to optimise its service, as it has done with customer recommendations, for example. Amazon is well known for innovation, and this provides it with more opportunities to work on the next big thing. This may well turn out to be Amazon Fresh, which is currently offering online groceries to customers in six US cities, and appears to be poised for a launch in the UK during 2015.

Nonetheless, Amazon’s development of this operation has significant repercussions beyond the company itself, and this is something to keep tabs on.

Amazon Logistics is not intended to serve as a complete replacement for partners such as UPS or FedEx. Rather, the e-commerce vendor has sought to supplement the delivery capacity of these carriers with its own. For starters, this will give the company a greater ability to deal with demand surges at important points during the year, such as Christmas, when even UPS has occasionally been unable to deal with the sheer number of parcels. More significantly though, Amazon Logistics will allow the company to cherry-pick the most profitable deliveries for itself, whilst using partners to handle the last-mile in low-density areas, such as rural locations.

In this way, the company has ensured that it can strengthen the appeal of its services, whilst saving money and dealing a blow to couriers at the same time. In particular, postal services such as Royal Mail and the USPS have been placed in a difficult position. Whilst depending on parcel services to balance the loss of mail volumes, and tied into a universal service obligation, postal services are compelled to take on Amazon deliveries wherever they are offered in order to make up some of their losses on delivery routes they would have to serve regardless.

The takeaway then is that Amazon has made a shrewd move that has enabled it to improve both control and costs, whilst putting further pressure on postal services and logistics providers. The long-term impact of this manoeuvre appears to further strengthen Amazon’s position as the premier B2C e-commerce vendor out there, and it will be interesting to see how competitors such as Alibaba and the latest ‘Amazon killer’ Jet.com respond.

One thing is certain: having done so much to shape the B2C delivery market since 1995, Amazon will continue to have a major say in how this sector evolves, with significant repercussions for the logistics providers operating within it.

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