Will Amazon enter the transportation and logistics business?

Amazon Airlines logo featureWill Amazon enter the transportation and logistics business? On one level, this is a stupid question, because we’ve all seen Amazon Fresh delivery trucks on the streets of our cities, and Amazon operates almost 170 distribution facilities worldwide. So, clearly, the company is already involved in transportation and logistics.

However, Amazon’s current involvement is on its own behalf, and the intent of the question, recently raised in a paper by Colin Sebastian of Baird Equity Research, is “will Amazon enter the transport and logistics arena as a third-party supplier?”

Why would anyone believe Amazon was about to move into the forwarding or contract logistics or transportation businesses? Well, think about this: Following Amazon’s development of massive cloud computing capabilities to support its e-commerce business, it launched Amazon Web Services (AWS) as a provider of cloud-based services on the open market. AWS now generates an estimated $7-to-$8 billion annually. Likewise, Amazon’s third-party Marketplace (including Fulfillment By Amazon) grew out of Amazon’s own e-commerce platform and now generates about $12 billion in annual revenue.

Based on these, and other similar moves, Mr. Sebastian speculates that Amazon may be planning to enter the transportation, forwarding, and contract logistics business. “AWS was borne out of Amazon’s proficiency in managing highly volatile computing workloads for its retail business; FBA was created to help drive more reliable fulfillment and customer service for physical products sold on (and off) Amazon; and in a similar vein, we believe Amazon can leverage the vast and expanding technology and fulfillment infrastructure supporting their own network of distribution, local sortation and data centers to offer logistical and delivery services to third parties.”

He notes that Amazon has begun advertising jobs with a strong focus on supply chain management, and adds: “We believe that global logistics is a highly competitive and fragmented market that has yet to capitalize fully on the emergence of web-based technologies such as cloud computing and datacentric analytics and optimizations that can reduce inefficiencies within the supply chain. As such, we believe certain segments of the logistics market, namely last-mile parcel delivery as well as the much larger contract logistics space, are areas in which Amazon could provide a compelling alternative to traditional shipping/logistics providers.”

The report, available from RW Baird, offers considerable detail regarding the ways in which Amazon is well placed to enter the freight forwarding, contract logistics, and US domestic parcel delivery markets, and the competition it would face in each.

Contract logistics: In many ways, this is a no-brainer. Amazon already operates an international supply chain including almost 170 distribution facilities totaling more than 9 million sq m (100 million sq ft) worldwide. Moving from operating this logistics business for itself to offering it on a third-party basis would be relatively straightforward.

Freight forwarding: Of the three areas of the logistics and transportation business discussed in the report, freight forwarding is the one most difficult to see Amazon move into. Success as a forwarder is based on relationships, and Amazon is not historically involved with either the providers of transportation (the providers of air, ocean, road, and rail capacity), nor the shippers that need that capacity. However, the report points out that “information technology is an increasingly important differentiating factor in the freight forwarding market, and as such, we believe Amazon could become a meaningful player should they decide to leverage their cloud computing resources/data analytics and repurpose those tools for external supply chain management.”

US domestic parcel delivery: As mentioned above, Amazon is already actively involved in parcel delivery, although currently only on the ground, and mostly on the last mile. It has a fleet of trucks and vans that deliver fresh produce and small packages to customers’ doors, as well as a growing delivery network of private drivers based on the Uber model. It is also working hard on the development of drones. But what about the rest of the package delivery chain? The non-last-mile part. The part which is currently dominated by FedEx and UPS?

Could Amazon be contemplating the development of an air/ground network that would enable it to provide end-to-end distribution of the packages generated by its own e-commerce business, and perhaps even offer a third-party integrated express service that would compete with FedEx and UPS? The Baird report says: “We believe Amazon may be the only company with the fulfillment/distribution density and scale to compete effectively with global UPS/FedEx/DHL, and with an investor base that historically is tolerant of margin volatility relative to the ‘profit mandates’ of traditional Transportation & Logistic shareholders, a significant competitive advantage in our view.”

Long-time readers of Cargo Facts will remember our skepticism when DHL announced its intent to move into the US domestic express market in direct competition with FedEx and UPS. In the end, we were proved right – even with its vast resources and long experience as an integrated express operator DHL was unable to compete, and lost billions of dollars trying.

Could Amazon succeed where DHL failed? Possibly. One major difference is that, initially, Amazon would be serving its own needs – setting up its own-controlled air and ground delivery system instead of outsourcing it to (mostly) UPS. This would involve significant contract lift, and sortation capability, but is certainly theoretically possible. If Amazon did choose to follow that path, then it could also choose, when the time was right, to offer express service to the open market.

We have already seen FBA (Fulfillment By Amazon), and AWS (Amazon Web Services) grow from in-house operations to major market players. Will we also see ATL (Amazon Transportation & Logistics) competing with the likes of Kuehne + Nagel, Expeditors, FedEx, and UPS?

Time will tell. (But if you want something to think about while you’re waiting, turn your mind to Alibaba, starting here.)

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