Why Is Amazon Increasing Focus On Delivery?

Recently the Wall Street Journal reported that Amazon (NASDAQ:AMZN)  has held discussions with air-cargo companies to lease airplanes and establish its own freight operation. ^[1] Reports also suggest that Amazon is looking to reduce its reliance on the UPS and get greater control over logistics. ^[2] While it is difficult for Amazon to its emerge as a competitor for UPS, it appears that the former is strengthening its delivery network by owning parts of the delivery chain to provide better service.  As an increasing number of consumers rely on e-commerce for their shopping needs (including perishable groceries), delivery times will be a key differentiator. Having a better control over its delivery network will give Amazon a competitive edge and boost its Prime membership to provide faster delivery options.

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Lower Costs, Speedy Delivery Can Provide Competitive Edge

Amazon’s fulfilment costs were more than 12% of its net sales for the nine months ended September 2015. ^[3] As the company aims to increase its Prime memberships, which are a key revenue driver, it will need to provide faster delivery to a large number of users. Amazon’s Prime Now members can advantage of a free two- and even one-day delivery on much of its offered merchandise, offering a key benefit to recent last minute holiday shoppers to attract more customers. Given the high fulfillment costs, the company needs to look at ways in which these can be reduced in the long term. While huge investments in its own delivery chain could impact margins in the short term, the company can benefit from this investment in future as they drive additional revenue streams.

To fulfill its fast delivery options, Amazon has invested heavily in logistics required for its delivery chain. Distribution centers are equipped with conveyor belts and “Kiva” robots to make the shipping process as efficient as possible is one such example. The company also recently introduced  its own truck trailers and hires on demand delivery workers when required. Reports of investing in cargo airplanes indicate that the company is getting more serious about having a greater control on its delivery network, which will definitely provide a solid foundation for the company to dominate the e-commerce space in future.

While the e-commerce market  gets increasingly competitive with new players such as Etsy and jet.com, Amazon also faces competition from brick and mortar retailers such as Walmart who increasingly target online retailing.  On top of this, even as foot traffic falls in many stores, many consumers still prefer the convenience of picking up household items from a local store over ordering online and waiting for deliveries. Competition in this space is increasing with Google Shopping Express, which provides next day delivery of household items, and UberRush which offers expedited delivery of certain retail items.  For Amazon to compete in this environment, a faster and more controlled delivery network could be the key differentiator.  However, it is uncertain if consumers will be willing to pay for faster deliveries and if Amazon will be able to gain operating leverage for its logistics investments. For now it appears that Amazon is investing heavily to develop a cheaper and more controlled delivery network.  Over time, the benefits will be visible once revenues start increasing.

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1. Amazon Seeks Cargo Planes for Air Freight Operation, The Wall Street Journal, December 18, 2015 [↩]
2. Amazon Seeks To Ease Ties With UPS, The Wall Street Journal, December 22, 2015 [↩]
3. Amazon SEC Filings [↩]