Amazon Delivery Services: Today Additional Capacity, Tomorrow More

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Amazon management talked in the Q4 earnings call about the companies recent forays into logistics, via TechInsider:

“What we found in order to properly serve our customers at peak, we’ve needed to add more of our own logistics to supplement our existing partners. That’s not meant to replace them,” Olsavsky said.

He blamed Amazon’s rapid growth and the fact that the carriers have not been able to keep up with its growing demand, especially during peak seasons.

“And those carriers are just no longer able to handle all of our capacity that we need at peak. They’ve been and continue to be great partners, and we look forward to working with them in the future. It’s just we’ve had to add some resources on our own,” he added.

Olsavsky noted that the thousands of truck trailers it bought last month are meant to be used “primarily for movement between our warehouses and our sort centers,” indicating they won’t be replacing the door-to-door delivery work UPS or FedEx have been doing for them.

The best thing about this is that it is (1) absolutely right. Amazon, one of the first among other online retailers but certainly not the only one, is feeling the bottleneck that is logistics within the current infrastructure. That infrastructure -UPS, FedEx, DHL and so on- frantically tries to keep up with the growth of online retail. That may work over the course of the year but it shows its limits at least in the holiday season. More than that: Trying to keep up is not the same as innovating. So, yes, it is absolutely right that Amazon needs to build up additional capacity.

But it is also right that (2) it makes sense for Amazon to go further into logistics itself. To do this the company has to enter into an awkward phase: It is starting slowly but surely to compete more and more with its current partners. It is going to be interesting how partnering logistics companies will respond to that. Frankly, they won’t be able to do much: Amazon is already their biggest customer. They might lose most of the business with that customer slowly over time but they are not going to alienate that customer. Building up inhouse logistics will also give Amazon more pricing power over time against logistics companies. (But this will take some time.)

The best lie has a grain of truth to it.

TechInsider:

In fact, Baird Equity Capital recently wrote in a note that there are plenty of signs that point to an Amazon logistics business and that it has “powerhouse potential” to become a major player in the space.

“Among other opportunities, Amazon has ‘powerhouse potential’ in the large transportation and logistics market, dominated by global enterprises such as DHL and UPS. Our assessment of Amazon’s broadening fulfillment ecosystem, internal domain expertise, and early initiatives with Prime Now to offer third-party delivery suggests there is evidence Amazon may ultimately pursue more comprehensive third-party services,” it wrote.

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5 comments

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