According to a research note by financial analysts at RW Baird, the fragmented nature of the logistics industry, its relatively slow adoption of cloud-based computing and cutting-edge technology and the already substantial investments Amazon has made to support fulfilment of its retail business, make the industry ripe for the e-commerce leader to move into.
“We believe Amazon can leverage the vast and expanding technology and fulfilment infrastructure supporting their own network of distribution, local sortation and data centres to offer logistical and delivery services to third parties,” it said,
Suggesting a hypothetical division called Amazon Transportation & Logistics (ATL), RW Baird analysts believe that, just as Amazon’s e-commerce platform has created retail opportunities for hundreds of thousands small companies, so its technology could be utilised to offer them easier access to freight services
“Ideal customers for ATL would range from SMEs to enterprise businesses that lack financial resources, expertise, or technology horsepower to manage fulfilment/logistics internally, and with an offering that raises the competitive bar versus incumbent service providers. Amazon operates over 165 fulfilment centres worldwide, and is already testing “last-mile” delivery of products not sold via its own websites,” it said.
In addition to this footprint, the report suggests another clue could be the growing number of supply chain jobs for which it is recruiting.
“It’s apparent that logistics is becoming a more integral part of Amazon’s retail business and, as such, we believe they could look to externalise some of the logistics-centric technology as third-party services. While most of these openings are focused on serving internal logistics demand, it highlights the broader focus on transportation/logistics within Amazon,” it said.
RW Baird notes that an Amazon entrance into the freight business could take place in any one of three sectors: the US domestic parcel delivery sector, currently dominated by FedEx, UPS, DHL and the US Postal Service; freight forwarding; or contract logistics.
It is already inching into the first of those, with the launch of its Amazon Prime Now, Amazon Fresh and Amazon Flex, a package delivery service via on-demand contractors, serving increasing numbers of US cities.
It is the ease with which it is growing its presence in this sector that led RW Baird analysts to postulate it may expand into freight services.
“While we acknowledge Amazon currently lacks the legitimacy and scale of a global third-party forwarder, information technology is an increasingly important differentiating factor in the freight forwarding market and we believe Amazon could become a meaningful player should it decide to leverage its cloud computing resources and data analytics and repurpose those tools for external supply chain management.
“Additionally, Amazon could look to develop its own complementary cargo fleet to support freight forwarding initiatives, although perhaps more likely Amazon could utilise technology to function in more of a brokerage role,” it said.
Even if it did not build a bridgehead in freight forwarding, it would likely come up against the same competitors in the contract logistics business, which remains a significant portion of most 3PLs revenues.
Its offer to retailers and manufacturers which outsource subcontract logistics activities would again be based on the investment it has already made in technology to improve aspects such as warehouse utilisation.
“We believe Amazon could accelerate adoption of technology-oriented contracted logistics solutions. In fact, the current contract logistics market is not unlike that of the enterprise IT market prior to the explosion of cloud computing technology only a decade ago.
“Today, even with value-add services such as light-assembly and packaging, contract logistics is viewed by manufacturers largely as an undifferentiated, ‘commoditised’ service with selection based upon the lowest price, because, at the end of the day, inventory needs to be housed somewhere.”
The report argues that the financial incentive for the creation of ATL would effectively be a replication of the creation of Amazon Web Services (AWS), which “leverages the cloud computing platform developed for the company’s core retail website to offer companies infrastructure-as-a-service at a highly efficient scale”.
Revenues from AWS hit $1bn after five years and are expected to hit an annual revenue run rate of $10bn this year.
Similarly, the report argues that if Amazon won a 1% market share in each of the three logistics categories – annual revenues of $800m in US domestic parcel deliveries, $1.7bn in freight forwarding and $2.5bn in contract logistics – ATL could earn the company $5bn a year. And that could just be the start.