Amazon’s instant gratification service aims to disrupt delivery
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The Amazon distribution centre in Tracy, California, looks more like Willy Wonka’s chocolate factory than a traditional warehouse. Items zoom around on conveyor belts and are sorted into chutes by robotic hands. Mechanical arms paste on shipping labels, while thousands of orange “Kiva” robots fetch stacks of items as soon as they are requested.
The technology inside Amazon’s distribution centres has long been a key advantage for the group, which has built more than 120 giant warehouses worldwide. They form a competitive moat that has for years helped keep would-be Amazon competitors, such as Walmart and Target, at bay.
Now Amazon has set its sights on a new goal — taking its logistics technology beyond the warehouse and direct to customers’ doors, as the company pushes into same-day and one-hour delivery.
Amazon has been investing heavily in the logistics needed to extend all the way through its delivery chain. It is buying its own truck trailers, hiring on-demand delivery workers and building a new type of delivery hub — with technology that has thus far been kept under wraps — in major cities from Seattle to New York.
Analysts believe door to door delivery could be the next big sector that Amazon disrupts, in the same way it shook up cloud computing services by launching Amazon Web Services.
“The logical next step is, if you are going to have all this infrastructure, why not open it up to be a competitor to logistics networks like FedEx and UPS,” says Scot Wingo, executive chairman of ChannelAdvisor, a software provider for retailers that use Amazon and eBay. “I fully believe it’s something they could go after and be successful at.”
Amazon’s shipping costs have surged in recent years, with shipping losses reaching more than $1.2bn in the most recent quarter, a third-quarter record.
The cost of getting packages to customers’ doors has been rising relative to sales, reaching 12 per cent of net sales in the most recent quarter. Analysts say the group is experimenting with doing more deliveries itself — rather than using parcel delivery and postal services — as a way to potentially cut costs over time.
A core plank of the expansion is Amazon’s one-hour and two-hour delivery service, known as Prime Now. Launched a year ago, Amazon introduced the expedited service to more than 20 cities, including London and Milan. In the process it has helped fuel the so-called “delivery wars” as other retailers, such as the UK’s Argos, seek to compete.
To power the service, Amazon has opened more than two dozen Prime Now delivery hubs within these cities, and could one day use drones for rapid delivery if regulatory approval is obtained.
“They are really gearing up for a highly responsive, high-speed logistics network to service their customer base,” says Marc Wulfraat, president of MWPVL, a supply chain consultancy. “They are doing it very secretly, they really don’t want anyone to know the address or location or where they are positioning themselves.”
He has tracked 29 new Prime Now hubs built over the past year.
Amazon has traditionally relied on third-party partners for the last mile — getting packages to a customer’s door — such as UPS, FedEx and the US Postal Service.
However, for the Prime Now service, Amazon has hired delivery drivers in more than a dozen cities who use their own vehicles and work flexible hours, somewhat like an Uber driver. Workers in the programme, known as “Amazon Flex”, receive much of their pay in tips that customers can programme into the Prime Now app.
Amazon declined to say whether this logistics push might supplant current delivery partners. “We use and will continue to use many different [delivery] partners who do a great job,” says spokesman Craig Berman. “They work super hard, especially this time of year, and we are very grateful for the work that they do.”
Amazon started to shift its delivery strategy after the winter of 2013, when a surge of orders just before Christmas, combined with severe winter storms, caused delays for UPS and FedEx and caused some packages to be delivered after Christmas. Amazon responded by increasing its reliance on the US postal system, which today handles last-mile delivery for the bulk of Amazon packages.
“In 2014 we saw this big push away from UPS and FedEx that really hurt,” says Mr Wulfraat. He estimates about 4 per cent of UPS’s overall volume is tied to Amazon.
Amazon’s push to locate more infrastructure close to consumers is also linked to a gradual change in US tax rules. When Amazon first started selling books, most US states did not collect taxes on items that were shipped from another state, prompting the company to build giant warehouses in states with low or no sales tax. The rules have largely changed. Roughly half of US states now collect sales tax based on delivery address, removing the advantage of sourcing from an out-of-state warehouse.
Amazon has been building out a new network of midsized distribution centres, or “sortation centres”, that act as a staging ground between the mega-warehouses and local post offices.
Last week the company said it had purchased a fleet of thousands of Amazon-branded truck trailers to ferry goods from distribution centres to sortation centres, marking the first time the company has owned truck trailers.
The move highlights how Amazon is exerting more control over its delivery process through both the Prime Now hubs and through sortation centers.
Analysts are sceptical that customer demand will support the high cost of expedited delivery.
“Customers will say, getting free shipping is more important than getting it fast,” says Satish Jindel of SJ Consulting, a logistics consultancy. He believes that Amazon’s real goal is to increase its leverage over the delivery companies it uses, and to test whether it can replicate these services more cheaply in-house.
The upcoming holiday season — the fourth quarter is always Amazon’s busiest — is set to be a big test for the Prime Now service, both in terms of demand and the logistics chain behind it.
Amazon’s dominance of rapid response shopping is also facing a growing crowd of competitors, from Google Shopping Express, which delivers next-day household items, to UberRush, which offers expedited delivery of certain retail items.
Amazon does not disclose the volume of Prime Now sales or the cost of its new rapid delivery network. “Customers love Prime Now,” says Mr Berman, the spokesman. “We continue to add selection to it. It will be interesting to see where that ends up.”