Does Amazon really matter to intra-European express, postal, courier and ground transport?

A Google News search today of the term “Amazon” yields 566,000 hits. Indeed, the online retailing behemoth is seemingly everywhere, dominating discussions in the airfreight market, but just how important is Amazon to the intra-European freight market? The answer will surprise you.

Recently, we took a brief look at the importance of Amazon for the US domestic air freight and express market. In this article, we shift our focus to Amazon’s setup in Europe, the e-tailers’s most important international market, and discuss implications for the European express and parcel delivery business.

The upshot is that Amazon is a large customer of transportation services in Europe, but its airfreight operations are nothing more than a sideshow to the company’s overall spend on logistics and transportation for major markets in Europe. Cargo Facts Consulting estimates that Amazon’s transportation and logistics spend across Germany, UK, Italy France and Spain was in the order of EUR 4.2 billion ($4.7 billion), of which roughly half was in labor expenses.

Amazon Europe in Context

Understanding Amazon’s logistics operation must start with a review of overall business in Europe. Excluding Amazon Web Services, the company’s international footprint is about half the size of its North American footprint. In net revenue terms, Europe is the largest single international market for Amazon, representing over half of its international business. Net revenue in 2018 at Amazon EU SARL – the Luxembourg-based company at the heart of its European business – was EUR 27.9 billion ($31.4 billion).  But growth in Europe has lagged growth in North America. In 2018, net European Amazon revenue increased by 12% year-over-year from 2017, compared to 33% in North America.

Although Amazon is the largest e-tailer in Europe, European e-commerce is less concentrated than North America. According to the E-commerce Foundation, the total size of the European e-commerce market in 2017 was EUR 540 billion ($604 billion), an increase of 13% compared to 2016. This would imply an Amazon share of much less than 10% of the total market, in contrast with the US, where Amazon commands about half of the online shopping market.

Other important players in the European market include companies such as Otto and Zalando. According to Otto’s latest financials, the company generated EUR 7.9 billion ($8.4 billion) in the financial year ended February 2018 – about 30% of Amazon’s European revenue during the same period. According to Otto, the size of the online shopping market in Germany alone was EUR 58.5 billion ($65.5 billion) in 2017, 11% higher than 2016.  Otto is similar to Amazon and other Chinese e-commerce platforms in that it operates a vertically integrated business, which includes fulfillment and ownership in its own package company, Hermes, which also provides services to third parties across Germany and other parts of Europe. As part of our ongoing research, Cargo Facts Consulting tracks the operations of a number of key e-commerce and logistics providers in Europe.

Amazon’s Transportation and Logistics Footprint in Europe

Amazon’s European business is managed out of Luxembourg and operates through a network of companies and over 50 fulfillment centers across Europe, primarily in the UK (20), Germany (10), Italy (7), France (5), Poland (4), Spain (4), as well as Slovakia (2) and the Czech Republic (1).

                    See also: Mistral Air adds another 737-400F, will flights reflect Amazon Logistics’ ground presence?

Transport and logistics employment across the Germany, the United Kingdom, France, Italy and Spain alone is almost 48,000. Overall, we estimate at Amazon employment across Europe is approximately 80,000.

The scale of distribution centers varies throughout Europe with an average of 2,000 in Germany and around 1,000 in the UK, France and much smaller in Italy and Spain. Bad Heresfeld in Germany houses the company’s largest distribution center and employed close to 3,500 people in 2018.

Returning to Amazon’s transportation and logistics spend across major European markets, Cargo Facts Consulting estimates that roughly half of the outlays went towards labor expenses. This amount has been increasing strongly year after year as new distribution centers have been added. In Germany, France and Italy, the company maintains separate transportation companies to provide services to the group, including transportation to, from and between distribution centers and other locations, such as ports and airports. We estimate that spending on this transportation (which is included in the above number) was approximately EUR 730 million ($817 million) in 2018.

Other Companies’ Exposure to Amazon

As in North America, the various companies providing delivery services to Amazon tend to be silent about the overall importance of Amazon — and other individual e-commerce companies — to their business.

What we do know is that Amazon relies on a multitude of providers for last-mile and linehaul services – postal companies, integrators and parcel providers. The company has more providers in Europe than in the US, where the bulk of third-party linehaul and last-mile delivery is executed by USPS, UPS and FedEx, in that order. So far, the company has not insourced last-mile delivery in Europe, but this is something we are watching closely.

Key postal delivery partners include such as Royal Mail (UK), La Poste (France), Deutsche Post DHL (Germany), and Post Italiane (Italy), for whom e-commerce has provided (albeit not always profitable) growth to offset declining mail volumes. All of the above have seen a steady increase in domestic parcels over the last several years as e-commerce purchases have increased, according to recent statistics from the Universal Postal Union (UPU). Most of these postal companies provide little guidance on their exposure to Amazon. Still, we estimate that Royal Mail generates roughly 20% of its parcel volume with Amazon and some postal companies such as the Luxembourg Post generates over 50% of their parcel volumes with Amazon shipments. To keep costs down and guarantee service levels, Amazon has entered into multiyear agreements with many postal companies. For example, in mid-2018 Post Italiane and Amazon signed a three-year contract for the delivery of parcels.

In addition to DHL, UPS and to a lesser extent FedEX/TNT, Amazon relies on a large number of national and pan-European courier operators for last-mile delivery. This includes companies such as DPD (part of La Poste), Hermes (part of competitor Otto Group), and GLS (part of Royal Mail).

What about Amazon’s European air network?

Contrary to the United States where the company has grown its dedicated air network from nothing to a 40+ aircraft operation in the span of three years, Amazon’s dedicated European network is still in its infancy. Given the shorter distances between distribution centers and key markets, we feel there is less need and consequently less potential for development. This may change as the company widens its geographical footprint across the continent. Up to now there have been no aircraft operating in Prime Air livery in Europe. Moreover, none of Amazon’s European facilities are directly co-located with any major express hubs – although there are a number that are at least close.

Most of Amazon’s European flying has been and continues to be below the radar, but over the past three years there has been some development. Following some proof of concept flights between Poland, Germany and the UK, the company has transitioned to a mix of regular and ad-hoc operations between cargo hubs in Germany, UK, France, Italy an Spain. For the time being the scale of air operations is nothing like the Prime Air flying in the US.

We also note that among the 579 Amazon job openings currently posted at its European Headquarters in Luxembourg, a few relate to air operations. In February 2019, Amazon also announced that it would publish information on its carbon footprint later in the year. This information may give some insight into the scale and development of dedicated air operations across its network. For the moment, however, air operations in Europe remain a side show compared to Amazon’s extensive and growing ground logistics and transportation operation.

Frederic Horst is Managing Director of Cargo Facts Consulting. He can be reached at [email protected].  Guillermo Ochovo, an Analyst with Cargo Facts Consulting, contributed to the article. In the coming months Cargo Facts Consulting will be publishing a new report that looks into depth how e-commerce is affecting the logistics landscape and which business models are most likely to benefit – both in the air and on the ground.