Amazon’s Growing Transportation Network
As Amazon expands across the globe, enhancing its logistics capabilities as well as adding to the list of perks for its Amazon Prime members, retailers and logistics providers are taking note.
The pressure is on for retailers to not only meet customer expectations, but to also exceed them as differentiation in the retail industry becomes paramount. Amazon has raised the bar for expectations with offers such as same-day delivery and free shipping, and its influence is spreading as it becomes one of the world’s biggest retailers.
As the battlefield moves into logistics, retailers continue to eye Amazon warily as it builds its international network. The company is constructing a massive fulfillment facility network that allows two-day delivery service as well as a same-day option. It is also growing its cross-border and fulfillment services. The result? Amazon is becoming a global logistics provider and could potentially rival the likes of DHL, FedEx and UPS.
In the United States, Amazon expanded its footprint with more than two dozen new fulfillment facilities in 2016 that link to its sortation spaces, delivery partners and its own nascent airfreight and ground capabilities. Combined, these capabilities allow Amazon to deliver goods to customers quicker and with greater efficiency. In addition, fulfillment by Amazon continues to gain traction with small-to-medium size businesses that are looking to take advantage of perks such as Amazon Prime, preferential placement on Amazon’s website, and the outsourcing of fulfillment and shipping.
The situation in Europe is similar as Amazon introduces faster delivery times. While FedEx and UPS have refused to publicly acknowledge that Amazon is competing on their home turf, DHL in Europe has noted that Amazon is indeed a threat and British Royal Mail has confirmed that Amazon is affecting its business.
In Munich, Germany, Amazon has 240 delivery vans operated by six subcontractors. And according to German business newspaper Handelsblatt, Amazon has taken about a third of DHL’s business in Munich. DHL’s CEO has stated that Amazon is one of its largest customers as well as competitors.
Meanwhile, as Amazon gains ground in both the U.S. and European markets, Asia has become more problematic with Amazon rethinking its strategy. In 2004, Amazon entered the Chinese market by adding Chinese e-tailer, Joyo.com. At the time of the acquisition, an Amazon spokesperson said the company would use the same template for running the Chinese operation that it applied in other regions.
This strategy soon proved difficult as it struggled to improve upon its approximate 2% domestic market share — Chinese e-commerce behemoth, Alibaba, has a projected 80% share of the domestic Chinese market.
With its new airfreight capabilities, Amazon has shifted gears once again, launching its cross-border capabilities between the United States and China. As a result it has reduced delivery times for U.S. Amazon Prime members from an average of eight days to five days on items such as USB cables, smartphone screen protectors, cosmetics and other small, flat products. This makes Amazon’s delivery of small, inexpensive items from China much faster than the two weeks to 30 days it can take using marketplaces owned by Alibaba, eBay and Wish.com.
China isn’t the only geographic region where Amazon is looking to gain. It is rumored that the company will be expanding into Southeast Asia in early 2017 and will compete head-to-head with Alibaba for dominance in this growing market.
India is also a much sought-after region for Amazon as it pumps billions of dollars into that domestic market. Competing against leading local online marketplaces Flipkart and Snapdeal, Amazon established a subsidiary service, Amazon Transportation Services Private Limited, to deliver goods directly to customers, and is taking market share from the two leading Indian online marketplaces.
Many businesses are wondering whether to concede or fight back. Logistics providers are fighting back by improving their own networks, while retailers are offering faster delivery services. But this begs the question: At what cost is all of this being done?
For logistics providers such as DHL, FedEx and UPS, operations investments are a norm and are usually included in annual budgets. However, the margins for retailers can be much tighter and the increasing logistics costs may be more difficult to recoup in retail sales.
Instead of trying to fight back, maybe it’s time for retailers to consider Amazon as a logistics partner. Among the benefits are the ability for retailers to reduce costs if Amazon is managing a retailer’s fulfillment and transportation needs.
Also, in terms of sourcing from Chinese suppliers, retailers can benefit by having their goods remain in one network without any handoffs to other logistics providers.
In other words, Amazon is able to pick up goods from a Chinese supplier and either utilize its NVOCC license and arrange ocean freight, or use its airfreight capabilities to ship the goods straight into one of its U.S. fulfillment facilities — and ultimately to the customer’s front door or locker. It’s not an easy decision, given Amazon’s track record of cutting out the intermediary and going straight to the end customer.
Determining Amazon’s impact on retailers will certainly vary from one retailer to the next. As with any strategic plan, everyone must do their homework and perform critical analytics. Welcome to the new retail industry dynamics.
John Haber is the founder and CEO of Spend Management Experts.
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