Amazon Ramps Up Its Logistics Integration, Threatening To Reshape The Future Of The Industry
Among other things, Amazon’s 2021 first quarter results confirm its long-standing strategy, which I first talked about early in 2018 and touched on again toward the middle of 2019: vertical integration as a logistics operator.
The company revealed an 80% increase in its capital investments earmarked for logistics-related operations, both in its fleets of vans, planes and trucks, as well as new warehouses, with the aim of becoming its own end-to-end logistics operator, which would be a huge coup for both private courier companies and, in many countries, national mail operators. By 2019, Amazon was already carrying almost half of its own shipments in the US, and by now that figure is almost two-thirds, bearing in mind that the pandemic has seen huge growth.
Amazon has always been highly customer-centric, which means that many of its metrics measure end-customer satisfaction, driving rigorous quality control at all stages, or applying a “no questions asked” returns or complaints policy. A good part of the problems the company encounters are related to shipments, to the moment when the package leaves an Amazon warehouse and is placed in the hands of a different logistics operator.
The logistics business is not characterized by this kind of customer care, and despite the fact that quality has been improving over the last few years, we are still talking about a high incidence of mishandled shipments, missed delivery schedules and other similar problems. When a good part of the complaints a company receives are beyond its control because they originate from logistics partners and it is forced to take them on to some extent as part of its customer satisfaction policy, it makes sense to go for vertical integration and handle its own logistics, despite the huge barrier to entry that is involved in setting up a shipping infrastructure on the scale of the e-commerce giant. However, everything points to the fact that, once these entry barriers and heavy initial investments have been overcome, these types of systems develop their own momentum, so that continuing to operate them from a given point becomes much simpler. In fact, such logistics integration would be key to improving the company’s expectations in terms of reducing the logistics cycle, with increasingly faster deliveries.
This would be in line with Amazon’s strategy of converting all its investments into platforms that are then offered to third parties. In this sense, part of the investment that Amazon mobilizes for the construction of its delivery system would be assumed by companies that would use it as an operator when selling through Amazon, in the same way that happens with the capacity of its warehouses or with the operation of its cloud computing. We can expect Amazon at some point to stop using Fedex, UPS or DHL and start competing directly with them, generating, due to its large volume, major disruption.
The FedEx executive who played down Amazon’s efforts to develop its complete logistics back in 2018, saying that the company “should not be confused as competition” may soon be eating his words. Not only is Amazon a competitor, it’s one of those competitors companies should really be afraid of. In the United States alone, logistics is a $1.5 trillion business. It remains to be seen how much of that market Amazon can take, and how many of its competitors will fall by the wayside in the process.