CSCMP's Supply Chain Quarterly
March 31, 2020
Forward Thinking

Commentary: What we're missing about the FedEx/Amazon split

When FedEx chose not to renew its contract with Amazon, some thought it would negatively affect the e-commerce giant. But in fact, it was exactly what Amazon wanted.

In August, FedEx announced it hadn't renewed its contract with Amazon for deliveries through its ground network, following an earlier decision to drop Amazon from its Express service. FedEx's official statement noted the company made the decision so it could focus on the broader e-commerce market.

Analysis from Logistics Trends & Insights' Cathy Roberson notes that in terms of ground volume, FedEx wasn't doing much with Amazon anyway and wasn't making its margins with Amazon. Navigo Consulting Group's Tim Sailor suggested that Amazon might face a scramble to fill the void, but there is plenty of capacity in the industry. Some worried that the news might compromise Amazon's ability to meet consumers' growing demand for two-day and one-day shipping.

These initial rumblings, although valid assumptions, may have missed the true implications of this news. Amazon's choice to individuate from FedEx is yet another pivotal moment in the industry as the company prepares for a new standard in shipping and delivery.

The near-term ramifications of the dissolved partnership

Amazon is increasingly delivering packages using its own trucks, aircraft, and delivery staff, particularly during the so-called "last mile." The company was expected to end the year with a fleet of 50 aircraft, up from 40 at the end of 2018. In four years, the company could have as many as 200 aircraft, according to the financial firm Cowen. Meanwhile, Amazon represented less than 1.3% of FedEx's total revenue in 2018.

The news does have a positive impact on FedEx's competitors, however. Providers like UPS, the U.S. Postal Service, OnTrac, and other shipping providers and regional package carriers stand to make gains from the breakup, as they pick up FedEx's business. The shortfall came at an ideal time for these competitors, as the holiday season was just around the corner.

Amazon's long-term strategy is revealed

While some argue the news might have a negative impact on Amazon, it's quite the opposite. This is exactly what Amazon wanted. The goal of Amazon's split with FedEx isn't simply to encroach on FedEx and other competitors' territory—in fact, that's not even the primary goal.

Amazon is now handling every aspect of product sales and distribution by taking over the last mile of the delivery process (from purchase to delivery). As a result, Amazon now has full control over the customer experience and opens the door to a delivery landscape that has yet to be seen.

The company is "personalizing the supply chain" for its customers by housing the entire delivery process (ordering, delivery, and post-delivery feedback via reviews) under one umbrella. Controlling the last mile—which was likely the company's goal all along since that's what the customer sees—will enable Amazon to introduce advances like specific delivery windows (down to the hour), or even a premium offering that charges customers for priority delivery times. Because the company already has its Prime program in place, this can be quickly operationalized. And there's an appetite for this approach: Consumers are willing to pay a staggering 16% more for speed and convenience. It's a win-win for Amazon and its customers.

By controlling the last mile, Amazon is cutting out the middleman, including distribution centers, and is setting itself up to be a business that will be intertwined in consumers' lives for the next 100 years. Its vision of owning the entire delivery cycle isn't primarily driven by revenue-generation motivations—it's aiming much higher.

Amazon is trying to create self-sustaining brand affinity that is generational and lasts 100+ years. If the strategy is successful, it will further embed Amazon as a company that is a regular part of its customers' lives. As opposed to seeing the UPS truck arrive once a day, you'll see the Amazon sprinters flying through the neighborhood multiple times a day—and that's the type of brand recognition that is necessary for Amazon to stay top of mind before, during and after peak holiday season. The goal is to increase brand affinity tenfold by generating that slight increase of consumer serotonin just from the sight of an Amazon delivery truck. Amazon is no longer just a platform where you go to buy products and goods, it'll deliver those products and goods right to your door, whenever you want, however fast you need it.

So, what does this mean for others who are regularly fighting to combat the dreaded "Amazon effect?"

A tipping point for the shipping and logistics industry

What Amazon is doing here is leveraging the power of its business ecosystem, as the ecosystem provides Amazon with invaluable customer data that enables it to be highly attuned to its customers' preferences and buying behaviors. When you capture insights from your ecosystem, you can now start to offer layers of services on top of what your customers are buying.

In response to Amazon's move, UPS, the U.S. Postal Service, and other delivery providers will start to ask themselves, what retailer/wholesaler/distributor should I be aligned with? This is a major shift—a few years ago, delivery providers needed to be agnostic, but now they are "picking teams." Within the next 12 months, expect Target to introduce a major partnership with a chosen logistics provider to gain end-to-end visibility into the delivery process. Expect a retailer like an Aldi to partner with an Uber to give consumers their own dedicated car delivery service. Aldi tells Uber, "You've got a car going in this direction, let me give you a trunk-full of groceries to take along the way."

By splitting with FedEx, Amazon is freeing itself to pursue much loftier goals than taking market share in the delivery sector—it's laying the groundwork to own the entire delivery lifecycle. And, by owning the delivery lifecycle, Amazon is moving another step closer towards becoming an interwoven part of consumers' lives. That's the long game Amazon is playing with this move: engendering a degree of brand loyalty that is unparalleled across any industry.  

Frank Kenney is the Director of Market Strategy for the integration platform Cleo.

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