New York -- Amazon will cement its position as major retail price setter for years to come by exploiting its logistics opportunity, according to a new ResearchFarm report.
The report predicts that that Amazon will focus on logistics in the future and become a major 3PL provider by increasing the fulfillment center footprint, linking up the various international marketplaces and adding front-end capacity such as the locker roll-out. Once Amazon has a handle on delivery costs and has completed the transition towards making shipping a fixed cost by leveraging its FBA service for its marketplace sellers, the pureplay will reinforce its outsized influence on pricing levels going forward.
According to ResearchFarm, Amazon always invests first in its own operations and then, once the infrastructure has been established, it charges others rents for using the platform. The marketplace was the first manifestation of its business strategy in action, and it is still the main profit contributor and growing faster than Amazon itself. Other examples of providing infrastructure to 3P include the Kindle platform and Amazon publishing, the server business AWS and the advertising platform, Adzinia.
“Looking ahead, we believe the next stage of this process will be on the logistic side,” the ResearchFarm report stated. “Again Amazon will build the infrastructure up for its own purposes first. At the moment the opportunity clearly lies at the back end, in building of a lot more fulfillment centers and warehouses across the globe to be nearer to customers (which drives down delivery costs) and to be able to extend ranges even more, even though Amazon has to watch inventory costs, when doing so.”
Ramping up logistics will enable the company to offer more same day delivery and to link up the various fulfillment centers, even across borders. If the link up between fulfillment centers is efficient, this could lead to Amazon having to stock less inventory as a percentage of sales in total. As soon as the infrastructure is up and running, it will be opened up to 3P, through Amazon’s fulfillment service FBA. Indeed it is Amazon’s strategy to push as many of its 3P sellers into FBA as possible, so it can charge higher fees. We think that FBA will become a profit driver in its own right in future, as Amazon can bundle orders from both 3P and 1P and achieve much better load utilization factors — this will lead to huge synergies and cost savings by in effect subsidizing 1P shipping through 3P fees.
ResearchFarm believes that lockers will also play an integral part in the logistics strategy. The report notes that Amazon has installed the lockers for four reasons:
1. Convenience — so customers don’t have to wait at home for delivery, but can pick their orders up at a time and place convenient to them;
2. To cut costs — multiple deliveries can be bundled into one trip;
3. Security and loss prevention reasons; and
4. To be able to offer more targeted time slots, which is easier for Amazon to do itself, rather than having to rely on a logistics provider such as DHL or UPS.
“We believe that Amazon is basically all about logistics going forward because, to slightly exaggerate the point, in the past price was ‘cost of product (and tax, insurance, salaries and rents etc)’ + ‘margin’; whereas in future price will be the same ‘cost of product’ (- all store based costs) + ‘margin’ + 'delivery cost,’” said Daniel Lucht, research director of ResearchFarm, London.
If Amazon manages to control delivery costs cost through its logistics operation by leveraging marketplace and FBA, the widening fulfillment center footprint and the locker roll out, then the company’s effect on pricing level overall, will become much greater than it is today, when the main threats are Amazon price matching and the showrooming app, advised ResearchFarm.