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December 16, 2017
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Forward Thinking

So you think Amazon rules the world? New report says you ain't seen nothing yet.

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A new report says Amazon is prepared to force out other intermediaries that stand between the producer and the consumer.

That Amazon.com Inc. is transforming the way commerce is conducted has become obvious even to the casual observer. But if Satish Jindel, who is hardly a casual observer, is correct about where the Seattle-based e-commerce giant is headed, it hasn't gotten started yet.

Given Amazon's relentless pace of innovation, there will likely be no finish line. But at the company's present rate of development, it will become the world's ultimate retail monster, with its only rival being the Chinese firm Alibaba.com, which dominates its own market using similar strategies and execution, Jindel reckoned.

In a 50-page study accompanied by more than 25 charts and tables, a summary of which was made available to our sister publication, DC Velocity, SJ Consulting Group Inc., a transport and logistics consultancy founded by Jindel, said that Amazon's goal is to be the primary conduit between manufacturers and customers. Everyone in the middle will be forced to work with Amazon or disappear, and producers will have no choice but to do business only with Amazon because there will be few, if any, alternatives available, according to Jindel.

Traditional retailers such as Bentonville, Ark.-based Wal-Mart Stores Inc., Richfield, Minn.-based Best Buy Co. Inc., and Minneapolis-based Target Corp. will survive only if they build models similar to Amazon's, which at this stage seems highly unlikely, Jindel said. In fact, while Amazon's strategy stands to badly hurt Wal-Mart's bricks-and-mortar profit margins, Wal-Mart's e-commerce channel will not threaten Amazon's position, Jindel said. Wal-Mart generated about $355 billion in total sales last year, nearly four times as much as Amazon.

Retailing practices will change forever as a result, SJ forecast. Free shipping will become a universal service; retailers that don't offer it will be unable to compete, according to the report. Amazon, which currently charges a $99 annual fee for two-day deliveries under its "Prime" service, will eventually offer two-tier pricing for delivery services, Jindel said. One will be a "Gold Prime" membership costing $199 to $249 a year that covers next-day deliveries, the other a platinum membership for $399 a year that includes same-day deliveries. Jindel said the pricing scheme will take effect only after Amazon builds out its distribution infrastructure, which is a work in progress. However, it will be a template that all retailers will need to follow to recover their shipping costs and remain relevant to the demands of modern-day consumers, according to the report.

Jindel said Amazon plans to leverage its massive procurement power to force logistics companies to either work with it on an exclusive basis or be pushed out of business. Amazon will rely on specialists for the blocking and tackling, but it will become so deeply embedded in its partners' operations that it will be able to buy services at wholesale prices instead of at retail cost, and will become the exclusive partner of the providers it chooses through its massive and growing volume base, Jindel said.

Amazon's agreement in March to lease 20 Boeing 767 freighters from Wilmington, Ohio-based Air Transport Services Group (ATSG) is a prototype of the strategy: ATSG manages aircraft operations, but does so exclusively to support Amazon's two-day delivery commitments. Similar arrangements with other transport and logistics partners will follow suit, the report predicted.

Without identifying any company by name, SJ warned in the report that the established parcel giants will be severely punished for failing to adjust their networks as fast as Amazon to the rapidly changing needs of e-commerce, namely in speed of delivery, fulfillment strategy and execution, and customer experience. Though not cited in the report's summary, Jindel said after the ATSG deal was announced that Atlanta-based UPS Inc. could face the biggest hit, because two-day deliveries from Amazon's warehouses and DCs to consumers accounted for two-thirds of the $2.1 billion in revenue UPS generated from Amazon last year.

Jindel said Amazon has the capability to build an "asset light" ground-delivery model—one that effectively controls the capacity without owning the equipment—similar to what the former Roadway Package System Inc. did in the 1980s and 1990s to pose the first meaningful challenge to UPS' near monopoly of the U.S. ground parcel market. Memphis-based FedEx Corp. acquired RPS' parent in 1998, rebranded RPS as FedEx Ground, and turned it into a $14-billion-a-year business that is today solidly profitable.

To put Amazon's shipping growth in perspective, it transported more than 1 billion parcels of its own goods last year, more than FedEx Ground's entire fiscal year 2012 annual volume. If current trends continue, Amazon by 2019 could be shipping as many parcels per year as FedEx Ground, SJ forecast.

Amazon will continue to invest heavily in transport services. It spent $11.5 billion in outbound shipping in 2015, and SJ forecasts that number to rise to $16.4 billion in 2016, $22.34 billion in 2017, and $29.6 billion in 2018.

Unless a better mousetrap comes along, Alibaba remains Amazon's sole long-term threat, Jindel said. In a bid to build logistics capabilities to establish itself as the sole middleman in all e-commerce transactions, Alibaba owns a 48-percent stake in Cainiao.com, a logistics consortium founded in 2013 to support deliveries across China and worldwide. According to a mid-March story in the publication Techcrunch, Alibaba, through Cainiao, operates 128 warehouses and 180,000 express-delivery stations in China, offering same-day delivery in seven Chinese cities and next-day delivery in an additional 90. On November 11, 2014, the date of the popular "Singles Day" in China, Cainiao handled 278 million packages, according to the story. Other reports said Cainiao will spend billions of dollars through the rest of this decade and into the next in order to deliver goods anywhere.

Cognizant of the threat, Amazon will do what it can to limit Alibaba's ability to help manufacturers sell directly to consumers, Jindel said in his summary. One tailwind for Amazon is that while it has established a decent footprint in China, Alibaba is unlikely to make a dent in Amazon's U.S. dominance. "That train has left the station," he said in a phone interview.

SJ's report is not the first tome to examine Amazon's fulfillment strategy and its implications for the retail supply chain. But it stands out for several reasons. Jindel is a seasoned and highly regarded consultant with a reputation for producing thoughtful reports bereft of any eyeball-luring sizzle. Moreover, Jindel has been a long-time Amazon skeptic. While consistently lauding the company for executing a highly effective model, he has for years been dubious about its profit-generating potential. Jindel held to that position as Amazon's stock marched from $8 a share some 14 years ago to yesterday's closing price of $683.50 a share. The takeaways from his firm's research have made Jindel rethink his views, he acknowledged.

What may go unnoticed is that, despite its burgeoning size, Amazon controls just a fraction of the total U.S. retail market, Jindel said. According to SJ estimates, e-commerce accounts for about 12 percent of all retail sales, and Amazon has a roughly 30-percent share of the e-commerce market. Thus, Amazon has roughly 5 to 6 percent of the overall market, and there is a lot of share opportunity still available to it, Jindel noted.

Mark Solomon is executive editor—news at DC Velocity, a sister publication of CSCMP's Supply Chain Quarterly.

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