Winners and losers in the E-Commerce Business

Amazon's domestic US own air operation today is about 20% the size of FedEx and 15% the size of UPS, measured in tonnes carried. In the 8 months ended August 2019, we estimate that Amazon moved over 1 billion lbs on dedicated Atlas and ATSG flights, an increase of 29%. Growth has accelerated since the company upgraded its prime offering from two day to overnight shipping. While ATSG, Atlas, and ASL in Europe have done well out of dedicated e-commerce flying, express companies such as Fedex, UPS, and DHL have seen declining yields and USPS profits have gone from bad to worse.

In our recent Global E-Commerce Logistics Outlook we took a close look at where the opportunities and risks are for the transportation providers are. Subsequent research has centered more deeply on the evolving e-commerce platform strategies and profits (or lack thereof) and what this means for the logistics business going forward. The global e-commerce business is dominated by a handful of platforms - 12 account for 44% of global gross merchandise value (GMV), with the top three - Alibaba, Jd.com and Amazon making up the bulk of this (see Figure 1).

Figure 1 - Top E-Commerce Platforms based on 2018 Gross Merchandise Value

While the geographical scope of these companies is very different, they share a lot of similarities - specifically a focus on own controlled logistics, increased reliance on third party sellers and a shift to faster shipping. This is having fundamental implications for companies providing logistics services. Platforms are becoming integrated commerce, logistics and financial providers, and have made moves to insource volumes where possible to drive costs down. This has hurt some transportation providers, but in general fulfillment and shipping costs have been growing faster than revenues.

Figure 2 provides an overview of how this has unfolded at Amazon. In the first three quarters of 2019 shipping costs grew by 35% while North American and International revenues grew by "only" 20% and 13%, respectively. Figure 2 - Amazon Fulfilment Costs, Shipping Cost and Revenue Growth 2017 - 2019Q3

Amazon is not unique in this regard. Alibaba's logistics spend through Cainiao increased approximately 50% between April – Sep 2019, while revenue growth was about 40%. Otto the German e-tailer reported an increase of logistics spend in FY2019 of 8.3% compared to revenue growth of 3.5%. Jumia's fulfilment spend for the first nine months of the year increased by 63% while revenues went up by 28%. Mercado Libre, which has been subsidizing free shipping since 2010 saw the cost of this subsidy increase by 50% for the year to September 2019. Jd.com seems to be one of the few bucking the trend with revenues actually growing faster than fulfillment costs.

It is worth noting that large parts of the business do not make money. Regional champions such as Mercado Libre and Jumia are losing significant amounts of money. Amazon overall makes money, but most profits come from its cloud computing business. Operating margins on its North American business have declined to about 4% and its international business has been consistently losing money. Alibaba seems to run the most sustainable business: its cumulative profits in the last five years were $42.3b. By comparison, Jd.com has lost a cumulative $4.1b in the last five years, but seems to have turned a corner in 2019. While noone expects Amazon to disappear any time soon, suppliers to Mercado Libre or Jumia should be considering their level of exposure and engagement.

Some parts of the logistics business have done well out of e-commerce, while others have not: Express : EBIT margins between 2006 and 2018 generally flat for UPS and FedEx, increasing for DHL Express and Aramex. However, international yields have been trending downwards for all three big integrators. US Domestic yields have shown no clear upward or downward trend although FedEx is higher today than 10 years ago and UPS is not. 2019 seems to be an inflection point for the US domestic express business, with yields dropping and volumes increasing. Contract flying : e-commerce has not had a detrimental effect on company margins. Air Cargo : volumes have increased, but traffic is low density and low yielding. Postal : revenue and package growth. Companies have generally become more profitable. USPS is an exception and is not profiting from the changes taking place in the postal and package market. The company has lost a cumulative $25.3 billion over the past five years. The company has sought to improve results through price increases, but has been affected by large customers insourcing volumes.

Winners and losers in the E-Commerce Business

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