According to the Wall Street Journal last week, “Amazon to Launch Delivery Service That Would Vie With FedEx, UPS“. Also, “the company is preparing to begin the offering in Los Angeles with its ‘third-party merchants’ and then roll it out more broadly”. #AmazonDelivery
As an avid industry watcher, this is the least surprising announcement from Amazon.
Equally unsurprising is its announcement that Prime users can get grocery items delivered to their house from Whole Foods in a couple of hours.
Amazon has destroyed supply chain, logistics, retail and, computing dogma since the day it started. I think it has to do with their unique audience led paradigm. I wrote about it in an earlier article, titled “In the age of Amazon, retail is about audience building not about transactions“.
So why “Shipping With Amazon”?
Here’s what everyone who follows business even casually knows; Amazon makes little to no money from retailing in the US (it loses in International) and primary profits come from Amazon Web Services.
A click down finds the description of the Bezos/Amazon “Virtuous Cycle” or the “Flywheel Effect” (look it up). Basically, the way it works is; deliver great customer experience at any cost to drive traffic. Let other sellers sell into this traffic, which drives selection (at no incremental cost of goods). This, in turn, entices more customers (maybe as Prime members) thus reinforcing the cycle and spurring growth. With this growth, drive cost optimization to lower prices which go back to the consumers thus further feeding the growth cycle.
Makes sense to also take the cost optimizations that drove lower prices and offer these services to 3rd parties for a fee.
Amazon offers subscriptions to its highly optimized computing environment custom built for unparalleled customer experience via AWS.
Also, it lets sellers subscribe to use its unique and highly optimized supply chain via FBA.
Then, if you follow this trail, why not let businesses subscribe to its highly optimized transportation and logistics infrastructure for a fee. Ergo “Shipping with Amazon”.
Is this just additional revenue or does Amazon get cost efficiencies also?
Yes, why of course it does. Computing is a great example of how scale drives down cost especially if you think of it as a “cloud”. Cost goes down if a method is created that can use the computing resources (CPU, Storage, services etc) like electricity. Subscribers use only when they have a need. With this usage pattern, the capital deployed in the underlying infrastructure is more efficiently used with lesser resource lying idle than in individually owned infrastructure. In addition, use is correlated to economic value; when the usage dials are turning, Amazon is getting paid.
A perfect way to sweat the asset.
It’s important to note that Amazon had to do pretty radical tech stuff to make this happen and since their perspective is guided by the Virtuous Cycle, they persevered where many a technology company didn’t and most retailers didn’t even try!
In the real world, they get unit cost advantages in square foot rental rates for warehouses through economies of scale. Similarly, in carrier costs for delivering packages and, in interchange rates for credit card processing; everything where scale brings unit cost economies. They pass this value on to everyone contributing to the underlying assets, whether its sellers in FBA, on the marketplace or, AWS customers.
This method can be leveraged and re-leveraged across any line in their financials. We already see it in advertising, freight forwarding, real-world groceries and recently, HQ competitions!
Code objects aren’t like real objects!
However, there is one key difference. The cost of building a technology business like AWS goes down on a unit basis as revenues/utilization increases. However, in the real world where objects need to be physically moved, unit costs can only be optimized till they hit diminishing returns. Also costs inevitably rise as transactions (revenues) do. More on this incongruity in the two models in another article coming soon.
Back in the case of Amazon, these costs rise faster than revenues. Disclaimer here, I have no financial background, I am just a measly (non-practicing) engineer. I did some rough math to ensure my logic trail held up.
In 2017 versus 2016 total revenues rose 31% but operating expenses rose 32%. Fulfillment cost alone grew 43%. In fact, the CAGR on fulfillment costs from 2014 to 2017 has been about 33% and the revenue CAGR has trailed at about 26%. This is not to make some point that Amazon is an economically substandard corporation in any way; not at all. In fact, on the contrary, it further reinforces the Flywheel thesis. If you feed any part of that Virtuous Cycle you will keep growing and feeding and that is what Amazon is doing.
To make a fine point, the revenue CAGR on AWS from 2013 to 2016 was roughly 62% but the operating profit was roughly 202%! Yeah, code scales like nothing else and packages, well they don’t!
However, getting stuff to people is a key part of the Virtuous Cycle in terms of providing excellent customer service to ensure that the traffic comes and stays.
Why the heck is the last mile a cost pit?
Amazon North America leases about 130 Million square feet of warehouse space. At the end of 2017 US nationwide vacancy stood at roughly 5% versus roughly 8% for the previous 10 years. New capacity comes in at around 8% but demand outstrips this significantly primarily due to the growth of eCommerce. This is a constrained resource which is increasing in cost with unfettered demand and restricted supply. As these facilities come online then hiring has to come into the historically low unemployment rate.
Then we have the truck shortage. For every truck in the US, there are 7 to 12 loads available to choose from depending on whom you ask. If its perishable and needs a refrigerated trailer, good luck! That cost is increasing at an accelerated pace. At the same time, ancillary costs are up. For example, in 2017 Fedex reported that they are using twice the number of tires versus what they did 20 years ago for the same mileage. Gas is and will always be what it is.
Then there are the commercial truck drivers. There is a shortage there too. A report from the American Trucking Association says that the industry needs to hire almost 900,000 drivers to meet the rising demand. In fact, the average age of a commercial truck driver in America is 55 years old. Self-driving trucks, a darling of the venture investment community are a long way away from hauling around 70% of all freight in the US as trucks do today. Till then these costs should go up and to the right, just ask Warren Buffet whose firm majority invested into the Flying J, the truck stop operator.
So the places to keep stuff, the trucks to move the stuff and, the people to operate; all are constrained in supply.
It’s almost like manufacturers, wholesalers, retailers didn’t believe that eCommerce was going to take off! A slow-motion cost bomb that everyone saw coming.
A zero-sum game for brands, retailers and, manufacturers who are not Amazon!
These are macroeconomic forces and the cost profile for anyone engaged in the business remains the same. However, unless a firm has the scale of say a Walmart, their unit costs for fulfillment are inevitably relatively higher. Essentially the supply chain is making them less competitive.
So yeah. “Shipping by Amazon” makes perfect sense.
In fact unlike computing, which is ephemeral and (sort of) highly scalable; fulfillment is a zero-sum game. Industrial warehouse space is real and tangible, unlike computing where you can theoretically keep spinning up more. If Amazon rents it, someone else doesn’t. Same for trucks. Same for drivers.
Regarding drivers; the acute shortage is in On the Road (OTR) and full-truckload (FTL) shipping not in Less Than Truckload (LTL) and Van type shipping. Therefore; Amazon lockers, Campus (and Retail) Pick up, Amazon Hub; all make sense to pursue. Also, queue the acquisition of Grand Junction and Shipt by Target.
However, Amazon is a closed ecosystem designed to create unyielding economic pressures on all competitors in all areas of the Virtuous Cycle. This cycle, however, is only virtuous for Amazon and simultaneously in the real world its a vicious cycle for everyone else. A flywheel of pain!
We @Packyge focus on the digital consumer’s interaction at the last mile
We raised seed, assembled a seasoned team and, started building our network of retail locations to accept packages on behalf of users. We hope to create micro-aggregation of deliveries at the edge which should create economic value for all participants.
A SAAS platform using a state of the art micro services architecture allows participants to access the network easily and in a user elegant way.
We built it on Google Cloud, they gave us a startup scholarship so props go out to them. We also filed a patent for parts of this technology.
We help drive elasticity in the use of existing locations, kind of like a smart location cloud.
We focused on user experience and designed it to serve not only the consumer but also the retailer in an easy and elegant way.
- Retail Chains: if you don’t have ship-to-store implemented yet, we could light you up in a matter of weeks using our easily extensible technology.
- Pure Play Online Retailers: Use the same tech to allow users to access a store network for pickups and returns.
- Retail Locations: Join us to make yourselves available to online site users and enjoy fully qualified foot traffic and possible incremental fee revenue.
We do strategy engagements for a few select clients where we think we can end up deploying our platform as a part of the solution. We especially like engagements where feedback from the client will help us enhance the feature-set/robustness of the platform which addresses white spaces in the marketplace.
We mainly work on digital impact in retail/wholesale/manufacturer/brands especially in the context of the last mile and consumer engagement. Our expertise is in:
- Defining new revenue models using existing assets but with the application of new digital technology
- Impacting current cost by using digital solutions to liberate cost pools to use in the business in a new way
- Structural (re)definition of organizations and help to pursue these new commercial models very quickly as they build talent
- Deploying solutions using cloud technology (AWS, Google Cloud, Azure) to leverage AI/Advanced Analytics
- Blockchain, especially in the context of supply chain reinvention and cost transformation.