Could Amazon.com’s logistics network compete with the trucking industry?
By Bethany May, Managing Editor
In December, news broke that Amazon.com, the nation’s largest internet retailer, had purchased a fleet of shipping trailers. Within a few weeks, there were rumors that the e-commerce company had also acquired a fleet of cargo planes to connect its large network of warehouses around the country. And on January 15, the U.S. Federal Maritime Commission granted Amazon a license to operate cargo shipments between China and the U.S.
Before many of us had taken down all the Christmas decorations and remembered to hang the new calendar, Amazon had begun to take control of its own operations on the land, in the air and at sea. And while there still is no clearance for commercial drones to operate deliveries in the U.S., the Seattle-based company has already been exploring that option in anticipation of the federal regulations that have yet to be written.
There’s a lot of speculation about what it means for transportation when one of the largest retailers in the country starts making logistical changes. The headlines have ranged from “Here’s How Amazon Could Offer Its Own Delivery Service and Crush UPS and FedEx” and “Amazon.com’s Next Move Could Be Bigger Than the iPhone,” to “No, Amazon Isn’t Planning to Kill FedEx” and “Amazon Logistics & The Soon to Fail Experiment.”
What is hyperbole and what are the real effects that Amazon’s operations decisions will have on the industry? Should we have expected these changes?
Brent Williams, chair of the department of supply chain management at the University of Arkansas’ Walton College of Business says, “I think in a lot of ways, it’s not surprising.”
“It’s not unusual for a large retailer to start to bring some of their transportation needs under their own control,” he says. “We see it with other large retailers, where they have large private fleets and then a large part of their transportation business is outsourced to other carriers.”
The more important question he wants us to ask is “What is going on in retail right now as an industry that is going to change trucking business?”
For Williams, the answer is omnichannel fulfillment.
If you’re thinking, omnichannel what? Williams defines the term like this: “This really means that shoppers can purchase across a retailer’s platforms in many different ways. That means in stores. It means online. It means mobile. Maybe even more specifically, it means, those channels can blur.”
The way that customers increasingly want more options for not just what they buy, but how they buy is what can drive changes to the system.
And that customer as catalyst is echoed in Amazon’s comments about their new fleets, “We are always looking for ways to innovate for customers. These new trailers empower Amazon to speed up order delivery times for customers and offer later order cut-off times by increasing capacity for Amazon package delivery between fulfillment centers.”
Increased control over its delivery network seems like a natural extension of the company’s custom-focused philosophy on innovation.
Williams agrees that certain retail trends show consumers demanding more personalization, and when it comes to delivery, consumers are not only demanding faster, but they are also demanding delivery within specific time windows.
“For example, if I work 8-5 in the office and get home at 6,” Williams explains, “and I’m getting groceries delivered to my door. I really don’t want them delivered at 10 am.”
Amazon Fresh offers the service Williams references, and it isn’t alone. Walmart and other grocers are delivering products that once only shut-ins and the elderly may have ordered.
Retail History in the Making
E-commerce itself, with Amazon.com at the helm, is changing freight business because the model allows consumers to have more say in fulfillment and delivery.
“If you look at the retail industry, it has kind of gone from mom and pop general store in a local community to a period in the 60s or 70s when the department store was king. Then, in the 80s, when mass retailers and big box retailers started to roll out, you started to see a consolidation in the industry.”
Now, the pull of e-commerce and the increased power of the consumer deconsolidates the retail systems of the past.
“In some ways, the revolution feels a little bit unprecedented,” Williams says.
“There are people out there that say, ‘The brick and mortar store is going to die,’ and I couldn’t disagree with that more. I do think that the role of the brick and mortar store changes over time. And it becomes more integrated with a retailer’s digital interface with the customer,” Williams explains.
“I think about subscription services from Walmart.com or Amazon.com or whoever that is, the way that we start to have good ready-for-pick-up-at-store or site-to-store services. All of that is leading me to say that shipments are going to continue to be decreasing in size.”
So while the headlines about Amazon’s delivery service sinking other carriers like FedEx and UPS seem far-fetched, the impact of internet retailers responding to the demands for faster and smaller deliveries is real.
How will the networks have to split an order to still get efficiencies?
Williams predicts that the networks are going to shift in some way, but he is hesitant to say how. “I don’t know exactly how. I think that to maintain efficiency, those retailers and transportation companies have to collaborate and actually have to share data.”
Faster isn’t Free.
During Christmas of 2013, peak shipping season, disappointed Amazon.com customers found that thousands of packages wouldn’t be delivered until December 26. Even if the packages contained horseshoes or hand grenades, almost on time really doesn’t count on Christmas morning.
Analysts speculated that when Amazon’s carriers couldn’t keep up with demand during its peak, it was inevitable that new solutions would have to be found.
Covenant Transportation Group executive commented in January on news that Amazon was acquiring its own trailers. The company works closely with Amazon, specializing in expedited shipments.
“They’re growing so dramatically that it’s hard for anybody to keep up with what they are doing in the marketplace,” said Joey Hogan, Covenant’s CEO, on the company’s quarterly earnings call. “They need every truck they can get their hands on.”
Doug Voss, associate professor at the University of Central Arkansas, explains that there are two reasons to start a private fleet: 1) the company has enough volume to do its shipping cheaper and/or 2) the company has strict enough service needs that existing carriers can’t meet those needs.
As Amazon continues to add subscribers to its prime service, more customers are promised free two-day shipping on a large percentage of the website’s offerings. Consumer Intelligence Research Partners reported the number of Amazon Prime memberships increased 35 percent in 2015 to a total of 54 million, almost half of American households.
Amazon’s existing carriers couldn’t meet service needs December 2013, and as more online shoppers learn to expect free two-day shipping, the risk that there’s another service failure increases.
Brent Williams has been conducting soon-to-be-published research on customer preference and expectation when there is a stock outage at a brick and mortar store. Looking at the influence of speed and the influence of convenience, his research team found that preference is for speed when replacing that out-of-stock item. Williams argues that there’s a dissonance between consumer demand for speed and an understanding of how much it costs.
“I think a real question has to be asked of ourselves as consumers, how much of the speed are we willing to pay for? Right now, so much of the cost in online from a shipping standpoint is not exposed to us as the consumer, so if I expect free shipping, in reality, we know that the shipping really isn’t free.”
Whether speedy shipping costs are passed on to the customer in a transparent, line-item way in the future is anyone’s guess, but customers don’t seem to mind the fee rolled into a subscription service.
They do seem to want their deliveries even faster than the two days allowed in Prime membership shipments; Amazon has recently rolled out one hour delivery on certain orders in select cities.
So how does Amazon’s race to the customer affect trucking?
Amazon won’t be putting trucking companies out of business, but if we do see Amazon as a new player in the logistics market, there could certainly be a real impact based on the size and influence of a company like Amazon.
Voss doesn’t see Amazon clearing the obstacles of building a sophisticated carrier empire any time soon, particularly when it comes to drones. “This is a somewhat pie in the sky thing. It sounds good. It’s a great idea, but there are so many regulatory hurdles that [they] will have to jump.”
The circumstances for this to really be a game changer?
“IF” he stresses, “it’s successful on a large scale, then there could be an impact on the industry. It will have some impact, for some carriers, in some lanes.” He emphasizes the qualifier some.
Williams agrees that it’s too hyperbolic to call Amazon’s entry into the industry a “game changer” or “disruption.”
“My view tends to be that it will increase competition, and I actually think that it will make the carriers even better at what they do. But I suspect that anytime that you introduce competition, the margin is just going to get more efficient. The really good carriers are going to respond to that.”
To compete, carriers may have to offer a broader set of solutions to their customers. “Because the way that retailers were shipping 10 years ago may not be the way that they are going to be shipping now or in 5 years from now,” Williams says.
Instead, he urges carriers to think beyond the possibility of competition with Amazon. “I think the thing to be thinking about if I’m a transportation executive is the way the shopper is buying, giving them power will affect the things will ship in some way, shape, or form. And carriers need to be able to create a broad enough portfolio of services or connect with the right companies that make them a part of that network.”
The bottom line is it’s “too early to tell,” Voss says. “We’ll just have to see how it all pans out.”
While it may be too early to forecast the disruption of freight as we know it, Amazon certainly seems to be taking advantage of all the tools in its belt and even creating some new ones to answer customer demand for “faster, faster.”
