Amazon: Partner, Competitor or Both?

This is part of a series of articles based on panel discussions held during the 2019 Harris Williams Transportation & Logistics 3PL Conference. The conference explored key trends in the space and the opportunities they are creating for 3PL companies and their prospective buyers. Note that the panel participant opinions expressed in this article do not necessarily reflect the views of Harris Williams.

When it comes to Amazon and its impact, most people immediately think about how the company has disrupted the traditional retail model. And it certainly has. But what’s less common is to hear sentiments about how Amazon is affecting the logistics industry. That’s likely to change, as Amazon continues to build out its Delivery Service Partner (DSP) program to assume greater control over the last-mile movement of products Amazon and its partner merchants sell.

In this panel discussion at the 2019 Harris Williams Third-Party Logistics conference, three logistics industry executives explored Amazon’s growing influence on parcel shipping, how the company is affecting 3PL providers and regional carriers, and how these companies can remain competitive without trying to beat Amazon at its own game.

Moderator: Satish Jindel, SJ Consulting
Panelists: Sean Burke, Echo Global Logistics; Dick Metzler, Lone Star Overnight; and Mike Willoughby, PFS

Key Takeaways

  • Among Amazon’s many impacts, increased customer expectations for visibility and speed and smaller, fast-moving orders were top of mind among 3PL panelists.
  • Panelists agreed that the way to remain relevant is to provide what Amazon doesn’t: a differentiated, branded, high-touch premium service experience.
  • However, opinion was split on the merit of FedEx’s decision to walk away from Amazon’s business.

How Amazon Is Affecting 3PLs and Carriers

In the past 15 years, Amazon has steadily built out its fulfillment and transportation infrastructure — to the point at which the company has become the largest 3PL globally, managing $2 billion in 3PL spend. That growth in 3PL capabilities, paired with the famed “Amazon effect,” has had a significant impact on various segments of the logistics industry.

According to one panelist, Amazon has dramatically changed what its customers expect from transportation. Increasingly, people who are used to dealing with Amazon in their personal life at home want to be able to get the same things Amazon offers when dealing with other providers at work — especially faster delivery and visibility into order and delivery status. “That’s true even for our industrial clients who want a continual update on where their shipments are because that’s what they get from Amazon,” he noted. “The trick for us is to work with those clients to understand what kind of visibility they expect and the value to them of having it.”

20193pl-7.jpgThe same panelist indicated Amazon’s growth has also substantially changed the size of orders and warehouses, as well as truckload volume and movement. “We are now seeing much smaller warehouse facilities for stocking locations, and more frequent and smaller shipments,” he said. “Instead of pushing 40,000 pounds, they might be pushing 18,000 or 20,000 pounds to make sure that shipments are getting to customers consistently and predictably.”

Another panelist noted it’s difficult to narrow down Amazon’s impact on his business because the company is both a competitor on the logistics side and a partner via its Amazon Web Services business. But the big question, he said, is whether Amazon decides to move into freight brokerage and what that might mean for traditional 3PLs.

For parcel carriers, the potential threat is certainly there. One panelist described Amazon’s DSP program as effectively replicating the FedEx Ground model, only much more efficiently and cost-effectively. But that doesn’t necessarily mean Amazon will own everything. There’s significant volume that has to be delivered to residents, which is the most expensive and complex part of delivery. “As Amazon grows DSP, it’s going to have a lot of people on a learning curve on routes, and there’s going to be a lot of turnover,” one panelist noted. “I don’t doubt Amazon will figure that out and continue to scale it tremendously. And it’ll cause regional carriers and companies like FedEx and UPS to adapt to that environment.”

Actions taken by established retailers in response to Amazon also could ultimately have an impact on 3PLs and carriers. One panelist said he expects many multichannel retailers to eventually adopt a multi-tiered distribution model in which store fulfillment facilities and centralized facilities are combined to most quickly and cost-effectively fulfill e-commerce orders. “Retailers can’t spend their working capital building 50 warehouses around the country to replicate their entire inventory base,” he said. “But if retailers can leverage either their store or regional inventory for direct-to-consumer fulfillment in a way that makes the most sense for each order, they can keep delivery costs down while providing a high service level.”

Opportunities in an Amazon World

Regardless of Amazon’s impact today, panelists agreed that the way to remain relevant is to provide what Amazon doesn’t — a differentiated, branded, high-touch premium service experience. “A lot of our clients are perfectly willing to sell their product, at least initially, through the Amazon Marketplace because it’s a very effective and efficient way to launch a business,” he explained. “But they may still want the post-click experience to be a non-Amazon experience. Instead, they want something that may be gift-wrapped or personalized, or will in some way delight the customer. So, for us the differentiator continues to be specializing in delivering a product that requires some value-add or complexity as part of the process — when it’s not just a simple fulfillment experience.”

Panelists stressed that when competing with Amazon, it’s important to understand consumer behavior and look for areas where people still want a human-centric experience. The consensus among the panel was that any company that doesn’t offer a differentiated consumer experience will end up at some point in Amazon’s crosshairs because of the company’s overriding focus to make everything as efficient as possible. “We would rather concentrate on providing a great experience versus trying to play Amazon’s game,” one panelist explained. “As powerful as Amazon is, they can’t cover everything.”

Differentiating in this way will be especially important if, as one panelist noted, Amazon continues to bring the order-fulfillment process in house to handle its own shipments and, potentially, begins selling its logistics capacity to anyone that needs it — effectively becoming the third major parcel company along with UPS and FedEx. “I have no doubt that at some point we’re going to have Prime trailers on our docks next to UPS and FedEx trailers,” he predicted. “It just depends on when Amazon decides they want to make last-mile as well as normal parcel transportation capability available outside of its own machine. At some point I think that they probably will.”

Panelists cited several other opportunities that established 3PLs and carriers could capitalize on — “white space,” so to speak, that Amazon isn’t currently addressing. One, as mentioned, is providing customers greater visibility into delivery status, and more broadly “consumerizing” the business-to-business experience. Another is developing tighter integration and collaboration across the supply chain to improve efficiencies and service levels. One panelist sees significant potential to improve the product-returns process — making it easier for customers to execute returns and get refunded, getting the returned items back into a location where they can be sold, and generally removing time and cost from the process.

20193pl-8.jpgBeyond UPS and FedEx, there’s another entity that has provided a huge chunk of delivery capacity for Amazon: the United States Postal Service. With Amazon assuming control of more last-mile delivery with DSP, the USPS is suffering a major hit to its parcel volume. However, despite not being as finely tuned as its competitors, and facing lower-price competition from regional carriers, the USPS still has a big, valuable asset: in-depth knowledge of the areas it serves and how to navigate the complexities of neighborhoods and apartment complexes. That institutional knowledge can’t be developed overnight, and it’s something shippers need to consider as more volume shifts to local couriers and regional delivery experts.

The reality is, e-commerce today still accounts for only 10% of all retail.1 At some point, it will reach 35% or 40%, but not all of that will come from Amazon. Panelists believe that as other retailers continue to ramp up their own e-commerce sales, there will be a lot more non-Amazon volume that will still need to be moved, and that represents a significant opportunity for 3PLs and carriers. “Every retailer I deal with is finding that, even if they’re losing share, their e-commerce business is accelerating very quickly,” one panelist noted.

 

What About FedEx?

FedEx’s decision to walk away from Amazon’s business is a controversial one. Will the company be better off with some distance from Amazon, or is FedEx making a big mistake that will damage its financial performance? Panelists were split on the answer.

One panelist was emphatic that it’s possible for FedEx to thrive without Amazon, which accounted for just 1% to 2% of FedEx’s business. Importantly, FedEx also continues to handle significant volume from shippers on Amazon’s Marketplace — small, independent businesses that want to maintain as much autonomy as possible and create their own customer experience on the delivery side. “You can debate if the way and when FedEx exited the Amazon relationship were right,” he said. “But is FedEx still delivering packages that are sold on Amazon? There’s no question they are.”

The holiday shopping season — with millions of orders needed to be delivered — is another reason why some panelists believe there’s life after Amazon for FedEx. If Amazon were to actually disrupt FedEx (and UPS, for that matter), it would have to build enough fulfillment capacity to deliver other sellers’ packages during that period. But without some kind of technological revolution and a whole different kind of transportation model — perhaps autonomous cars and delivery drones — it’s not economically practical for Amazon to carry that much excess capacity the other 11 months of the year.

Conversely, another panelist believes FedEx made a mistake, suggesting the company has not replaced the revenue it lost. “Amazon’s going to be a more difficult competitor to FedEx than UPS is because Amazon controls delivery of packages that originated with Amazon,” the panelist said. “If I consider FedEx’s future outlook compared with that of UPS, I think FedEx has got a lot more hard work ahead.”

Conclusion

With Amazon’s clout extending into an ever-larger part of the economy, new market segments are beginning to feel the impact. For carriers and 3PLs, Amazon’s drive to control more of its order fulfillment certainly bears watching — and likely will require some rethinking of their business and how they differentiate themselves when Amazon is a dominant force.

“What customers expect in terms of delivery has changed dramatically, and companies that can help customers get what they want can be incredibly valuable,” observed Jeff Burkett, a director in the Harris Williams Transportation & Logistics Group. “Just as Amazon has been a catalyst for traditional retailers to up their games, it’s going to push 3PLs and carriers to get more innovative, more responsive and more efficient. Those that can answer the call with differentiated value will be well-positioned for growth.”

Read more from the 2019 Harris Williams Transportation & Logistics 3PL Conference:

 

Published December 2019