Innovation has always been the driver of Amazon’s success. The company has taken the e-commerce world by storm with its innovative business approach. It has developed as a tech giant focusing on cloud computing, artificial intelligence, and digital streaming, and now it seems to be developing its transportation and logistics business. This could be anticipated as the reason why its stocks dropped in the third quarter last year. The significant investments and higher costs of shipping have been the prime cause of these lowered profits. However, this setback is expected to be only temporary, as investments in logistics will improve sales and attract more customers.
But why has Amazon decided to take on logistics, and why now? Until very recently, the company seemed to have a profitable relationship with delivery services like UPS, FedEx, and the United States Postal Service. What has changed?
Now let’s rewind to where it all started :
Amazon has had its sights on developing logistics ever since the 2013 incident with UPS and FedEx. Thousands of Amazon packages failed to arrive by Christmas morning due to bad weather and unforeseen demand. This had caused quite an outrage among shoppers and harmed Amazon's reputation.
Over the past few years, Amazon has been investing more and more in its “in-house logistics”, attempting to reduce its reliance on external delivery services.
To control every aspect of delivery, Amazon has made large investments. In the second quarter of 2019, the company invested $800 million to improve the delivery speed for its Prime members and offer one-day delivery services.
It has been reported that Amazon will invest over $1.5 billion to develop an air hub in Kentucky that’s set to house 50 aircraft and enhance delivery even further. . The air hub is announced to be opened in 2021.
While all these are huge investments that are currently affecting Amazon's profitability, these efforts are expected to become lucrative in the long run. And thus, it has been predicted that the company will be able to reduce the costs of delivery significantly.
Rivalry with FedEx and UPS
While Amazon already has strong competitors every day, this expansion to logistics would have the company battling on every front. Slowly, but steadily, Amazon is becoming a fierce rival to its long-time partners FedEx and UPS.
The delivery service companies are now facing the same dilemma that most of the online retailers are facing — to partner up with Amazon or leave it as a competitor? Amazon has already stated in its SEC filing that its current and potential competitors include, "companies that provide fulfillment and logistics services for themselves or the third parties". It is a very clear indication of Amazon's vision for business expansion on this front.
FedEx has already ended the ground delivery contract with Amazon. While this may have caused some concern, the partnership doesn't seem to have been truly important to the delivery service giant. Less than 1.3% of FedEx’s profits come from Amazon, meaning that the end of the contract is not a material loss to the company.
Amazon is still currently partnered with UPS (and USPS), but the development of its logistics division might mean that more contracts are about to be nulled.
Amazon Prime and High Expectations
One of the main reasons why Amazon has set its sights on transportation and logistics is the rising popularity of its Prime services. Amazon has first revolutionized the online marketplace with the introduction of its two-day delivery services, and now Prime members have access to one-day and same-day delivery services.
The expectations are high for fast and smooth delivery. Amazon now has more Prime members than ever before, and the service is becoming more popular with each passing day. In just one week during the holidays in December, over 5 million people started a trial or signed up for Amazon Prime. That caused a significant increase in the number of items that came with free same-day or one-day delivery.
The high expectations are a double-edged sword. While an influx of Prime subscribers has brought profits for Amazon, the demand for fast delivery has proven to be unsurprisingly expensive. But in any case, Amazon stays committed to offering superior services to its Prime members.
The High Cost of in-House Logistics
Currently, Amazon delivers approximately half of all of its packages, and it’s expected that by 2022, around 6.5 billion packages will be delivered through Amazon logistics. Compared to USP’s 5 billion and FedEx’s 3.4 billion, it is quite visible why Amazon is set to become their strongest competitor.
Between June and September last year, Amazon has spent an astonishing $9.6 billion on fulfilling orders, which tells us exactly how expensive the free & fast delivery can be. A lot of money is being spent on developing the Amazon fleet as well. The fleet, which is already so impressive, is planned to be expanded even further. Currently, Amazon has 50 aircraft, over 5,300 ocean freight containers, and over 20,000 vans. The company has created 120 U.S. fulfillment centers and has 52 Prime Now hubs. Innovation being Amazon's greatest asset, the company is now offering $10k to its employees so they can start their own delivery companies and assist Amazon. All these expenditures and investments are to blame for the third quarter stock fall of 2019, but again, this seems to be just a temporary setback.
Why Does it Matter to You?
Spending inordinate amounts of money on improving its delivery services has more considerable implications for Amazon. This includes an increase in the number of Prime members, which will be the most remarkable result. More Prime members bring more revenue to Amazon from subscriptions. Prime members bring more revenue to Amazon from subscriptions. Prime members are also known to spend much more money on Amazon than the rest of the customer categories, which naturally impacts the number of orders globally. (In 2018, Prime members spent an average of $1,400 on Amazon, whereas non-Prime members spent around $600.)
The bottom line is: the more Amazon will invest in and improve its delivery service, the bigger the audience for the products will be, and thus more audience will be willing to spend money through a fast and painless delivery process.
Bright days ahead, my fellow Amazon sellers :)