Speculation that Amazon is building its own logistics arm to compete with FedEx and UPS picked up steam again as the company announced its earnings for Q4 2017.

Shipping With Amazon is a third-party logistics service where couriers pick up products from businesses who sell through the e-commerce giant’s platform and deliver the merchandise to Amazon’s warehouses.

The service is rumored to launch in Los Angeles within the next couple of weeks, though Amazon has not confirmed details of these plans. As the news story broke, stocks of FedEx and UPS dropped.

“We’re always innovating and experimenting on behalf of customers and the businesses that sell and grow on Amazon to create faster lower-cost delivery choices,” an Amazon spokeswoman wrote in an email to the Washington Post.

Back in October, the e-commerce giant announced Amazon Seller Flex, a program designed to pick up packages from third-party merchants and deliver them to the customer.

Building a delivery network that’s large enough to compete with FedEx and UPS is an ambitious undertaking for Amazon that won’t happen overnight. The project could take decades, and would require billions of dollars to buy thousands of trucks, hundreds of planes and build more sorting centers to deliver packages, the Wall Street Journal reports.

Amazon Seller Flex represents the last mile, and Shipping With Amazon is another link in the supply chain.

Amazon’s Prior Hints of Building a Logistics Operation

If you’ve been following Amazon, you’ll know the company has been dropping hints about building a logistics operation for the past few years.

Since 2013, the company has improved its supply chain capacity by making a few key investments:

  • Building a new air cargo hub in Kentucky
  • Buying 40 Prime Air cargo planes
  • Acquiring a fleet of 4,000 semi trucks
  • Registering to provide ocean freight services
  • Experimenting with delivery drones

Why would Amazon even want to build its own supply chain operation? The answer is (sort of) simple: because they can.

As the e-commerce boom continues, more people are ordering online more than ever. And carriers are struggling to keep up with the demand. As they try to keep pace, shipping even the smallest packages is becoming more expensive.

FedEx and UPS have been getting more creative with surcharges and implementing new fee structures, such as the peak season surcharges that began in 2017. Carriers are also expanding the definition of existing surcharges to include more packages.

One example of this is with dimensional weight. FedEx and UPS first introduced these surcharges as a way to combat the influx of lightweight, yet bulky packages. The dimensional divisor, the standard used to calculate the surcharge, keeps dropping which translates to higher costs. For 2018, both carriers expanded the packages subject to dimensional weight to include SmartPost packages for FedEx and packages smaller than one cubic foot for UPS.

Amazon has the size and resources to bring shipping in-house. As the company increasingly dominates the marketplace, it only makes sense to invest in its own operations. Masters of efficiency, Amazon can better control costs and avoid ever rising carrier charges.

Amazon already delivers to nearly 40 U.S. cities, and it’s unlikely to expand to more remote areas, Neil Saunders the GlobalData Retail Managing Director, wrote in a note to the Wall Street Journal.

What Does This Mean For Your E-Commerce Business?

FedEx and UPS have been a de-facto duopoly for nearly a decade. More competition in the marketplace means legacy carriers will have to innovate to stay in the game. In the best case scenario, you’ll win. Expect to see improved service and lower rates in the long run.

Change is unlikely to happen overnight. Building a delivery network at scale could take tens of billions of dollars and decades.

Legacy carriers won’t see the dramatic drop in revenue you’d expect either. At least not right away. No one customer, including Amazon, makes up more than 3% of FedEx revenue. For rival UPS, Amazon makes up about 10% of revenue.

While you can’t bring shipping in-house, there are other ways to save money on shipping.

Re-negotiating your contract is one single action that can make a drastic impact that could amount to thousands of dollars. Securing a new agreement is the perfect opportunity to negotiate discounts on your base rate and surcharges.

A company like Reveel can help you prepare for negotiations. We’ll review your current contract, show you valuable benchmarks and provide expert advice on which discounts to pursue.

On average, Reveel has been able to save our clients up to 20% when they renegotiate their contract. Learn more about contract negotiation with our free guide, and check out some of our case studies.

 

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