For Amazon, the big question is have they gone a truck too far? Actually, a truck, a plane, a scooter or a drone too far?
With its announcement a few days ago that it was going to buy 100,000 electric trucks from a startup company that has yet to sell a single vehicle (Amazon likes to do everything in a big way, often with risky strategies), attention has focused on the online seller’s goal to take over its final-mile delivery process from third parties like FedEx and UPS.
For those of you not paying attention, that process is already far along—very far along. Amazon owns 60 big cargo planes, bigger than the national airlines of some developing countries. It runs 60,000 of its own delivery trucks, not counting the 100,000 now on order. And, perhaps most startling, it says it now delivers 60% of its packages through its own drivers.
Those are astonishing numbers and wholly consistent with the company’s overall strategy of controlling as much of the logistical process of its business as possible, from Amazon Web Services to its nearly 400 gargantuan distribution centers around the planet that help it move more than $160 billion worth of stuff each year.
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But there are five big reasons why this Amazon strategy to control its entire supply chain may not be the slam dunk some are saying it will be.
1. The two companies with the most to lose by all of this are not exactly going to park their planes and trucks and go into the soft-serve ice cream business. UPS, with $53 billion in annual revenue, and FedEx, with $42 billion, are right now invariably working on plans to fight back and regain market share. While the Amazon business is less than you might think for each shipper (10% of its total for UPS, 2% for FedEx, according to my Forbes colleague Stephen McBride), they are going to get aggressive on replacing that business. That could mean more attractive deals for other online shippers like Walmart, Target, Macy’s and Kohl’s or enhanced services that an in-house Amazon unit can’t provide. It’s quite possible that the Amazon move could have the opposite ultimate effect of creating more online business for its competitors.
2. Hub-and-spoke logistics has been the backbone for FedEx and UPS since the creation of the overnight delivery business and it’s the reason why it can be cost-effective. And even if point-to-point distribution has gained in popularity over the years it’s still more expensive in most cases. With 400 DC hubs, Amazon will be at a disadvantage to the two big national shippers. Pennies can be the difference between profit and loss in the free-delivery game.
3. If Amazon is counting on getting business from other online sellers, it may need a reality check. If you’re a smaller e-commerce company, would you rather give your shipping contract to a third-party delivery company like FedEx or to your biggest competitor, which will then take your fees to fund itself and offer even lower prices? This is different than Amazon Web Services , which has developed a strong third-party business. Let’s face it: most e-commerce companies hate and despise Amazon.
4. Many of those same companies doing e-commerce have set up their own distribution networks that don’t go through Amazon. And with Amazon itself increasingly moving to the marketplace model where it just hosts sellers and takes a cut off the top, never touching the product itself, how much use will those deliveries get from an Amazon truck or plane? Some of that product will go through Amazon DCs, but a lot of it won’t.
5. Finally, there is the intangible of how big is too big. Retail history suggests there is a tipping point when companies try to control too much of their food chain and end up stumbling. The poster child for this is of course Sears, which once went so far as to run its entire operation that it owned some of the suppliers who made its private label products. That ultimately proved to be too much, locking it into having to buy from specified factories and missing out on the offerings from others, while having to keep its factories going regardless of retail sales. Other retailers, including Montgomery Wards and Marshall Fields, had similar arrangements, albeit on smaller scales. If you’re noticing a common thread through these companies—they are out of business or close to it—that may not be a coincidence. Companies that specialize often turn out to be lousy generalists.
Of course, betting against Amazon has proven to be a fool’s game. The company has obviously been enormously successful breaking so many rules in the process when others said that was impossible. On the other hand, it has had some colossal failures too, burying the bodies before they did any long-term damage.
Amazon is believed to now be the shipper of record for one out of every five deliveries in the country. How much further it gets will depend on many factors, but for anyone who thinks this is inevitable, the check is in the mail—or on the truck.
Date: September 26, 2019