CSCMP's Supply Chain Quarterly
October 19, 2018
Forward Thinking

Will Amazon dominate last-mile delivery? Consensus, right now, is probably not

Industry observers see rumored U.S. testing of the company's "Seller Flex" service as an attempt to stay ahead of surging demand, not as a market-share play.

Is Inc.'s rumored move to start "last mile" deliveries for non-fulfillment customers in the U.S. another step in its plans for logistics domination, or is it an effort to keep up with ever-increasing demand by supplementing its current delivery network with its own capacity?

The Seattle-based e-tailer earlier this year launched a U.S. pilot of a service called "Seller Flex," under which it picks up goods at the warehouses of merchants that use Amazon to sell, but not to fulfill orders, and then delivers the products to the merchants' end customers. The service, which has been operational in India for two years, has begun testing on the West Coast ahead of a possible nationwide rollout during 2018, according to a story posted yesterday on the Bloomberg website.

According to the story, a key motivation for the move is to ease strains on Amazon's fulfillment network, which has seen spikes in demand as the company's "Fulfillment by Amazon" warehousing, distribution, and delivery program has gained significant traction in recent years. By making pickups at customer warehouses, Amazon effectively de-emphasizes the need for merchants to rely on the company's resources for fulfillment, according to those commenting for the story who are familiar with Amazon's thinking.

A tip-off to the service may have come in April, when Supply Chain Quarterly's sister publication, DC Velocity, reported that Amazon was looking to recruit as many as 30,000 independent drivers to support a last-mile delivery service.

An undetermined number of merchants use Amazon as a virtual storefront to market and sell their products. However, they do not use Amazon for fulfillment. Those types of merchants are usually small businesses that can self-fulfill and don't have the order volumes to justify turning over the fulfillment function to a third party.

Businesses that don't use Amazon's fulfillment services will rely on other parties to deliver their goods. As soon as the Seller Flex story broke, the share prices of three companies that work in the last-mile space—Atlanta-based UPS Inc., Memphis-based FedEx Corp., and Greenwich, Conn.-based XPO Logistics Inc., took hits amid a knee-jerk reaction that Amazon's move was an effort to take business away from them. However, by the close of trading, UPS and XPO had recovered some of their losses, and shares of FedEx ended up on the plus side.

Satish Jindel, founder and head of consultancy SJ Consulting, said the rapid pace of Amazon's growth requires that it augment the services of its delivery vendors with its own network in order to keep up with demand and honor its customer commitments. Amazon could not handle last-mile deliveries on its own, given the burgeoning scope of its operations, Jindel said in a phone interview.

Colin Sebastian, who follows Amazon and e-commerce for investment firm Robert W. Baird & Co. Inc., said the move is not a market-share play but an effort to "leverage their increasing capabilities in logistics, and to exert more control over the end customer's experience." Sebastian agreed that the company needs to take some of the pressure off its own fulfillment centers.

Amazon is building out a transport and logistics network to support its "Prime" delivery service, which guarantees two-day delivery anywhere in the country on most products for a $99 annual fee. Its "Prime Now" service offers free deliveries within two hours. There is a $7.99 fee for deliveries made within one hour.

Within the past year two years, Amazon has leased 40 cargo airplanes and purchased thousands of 53-foot truck-trailers. Its Chinese subsidiary has received authority from the U.S. government to operate as a non-vessel operating common carrier (NVOCC) to move oceangoing cargo from China to the U.S. under its own bill of lading. In February, it announced plans to build an air hub in Cincinnati to support the two-day delivery product.

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

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