Is Amazon also a last mile delivery company?
To cope with their aggressive growth and product expansion, Amazon is reinventing last mile logistics.
Adoption of digitalization across the retail industry has been accelerating across every part of both the supply chain and the point of sale itself. With Amazon leading the charge driving e-commerce, which now accounts for nearly 10% [1] of the total retail volume in the US, all retailers have had to reinvent both the way they sell to customers and they way they fulfill said sales.
Interestingly enough, Amazon, moving faster than anybody else in the market has had to reinvent itself too to be able to cope with its own growth and constantly changing assortment of products – and yet, if there’s one company that has built the capabilities to change their business model over and over again, it’s Amazon. The Seattle behemoth, known for its transformation from an online bookstore to the “retailer of everything” is now entering a new market: last mile logistics.
Amazon currently accounts for 53% of the total revenue generated online in the country, and accounted for 47% [2] of total growth in 2016. Traditional last mile logistic companies that have served Amazon in the past (USPS, UPS, Fedex) are no longer being able to sustain the level of service or the price point required by Amazon to make a profit on this very low margin industry. Another challenge arose with the Q2 2017 acquisition of Whole Foods, which required new capabilities of fresh food deliveries that traditional last mile logistic companies simply do not have.
The solution to this challenges? Amazon is piloting several. In the short term, Amazon is already ramping up its own fleet of hired couriers, and using them primarily to deliver groceries and for same day deliveries out of their own operated warehouses. However, to enhance this operation, since early October they are piloting a program called “seller flex”, where retailers currently selling on Amazon can select shipping out of their own warehouses using the Amazon fleet to fulfill same day and 2-day orders. Both UPS and Fedex’s stock dipped (2.1% and 1.3% respectively) as the news broke out. [3]
In a more of a medium term play, Amazon is starting to pilot a “gig-economy” based model, outsourcing deliveries on demand to independent non commercial drivers (Uber for last mile deliveries) and calling the program Amazon Flex. [4]
On the long term, Amazon has been experimenting with drone deliveries, with a pilot in the UK already underway. While there are regulatory hurdles to be cleared before unmanned deliveries can be achieved this is definitely a major bet that the company is undertaking.
While relying on its massive scale and market liquidity to self build last mile capabilities in developed markets, Amazon faces a different challenge in the developing markets where they only started operating recently. Take for example Mexico, where despite entering the market in the summer of 2015, Amazon is already a top 3 player in terms of market share in e-commerce. [5] In order to accommodate and fuel growth in the country they are building smart infrastructure in form of an intelligent new mega-warehouse in the outskirts of Mexico City, as they have done in so many different markets. However, Amazon is still trying to figure out how to tackle last mile delivery in a country with very unsophisticated infrastructure. A job opening available on November 2nd (which has since been closed) for Sr Program Manager had job description specifically tailored to develop last mile capabilities within the country in innovative ways.
Being at the forefront of innovation in so many different fronts allows Amazon to design new creative solutions to the last mile problem. I would encourage management to pilot a “self pickup” from a convenient location program. With the level of automation already happening in their warehouses, Amazon could quickly pivot into a fully automated “mini warehouse” in a convenient location in the middle of the city where people could drive through to pick up their packages. This could potentially improve margins by reducing the requirement for last mile delivery that could be passed on to the final customer.
While the trend of digitalization sweeps the retail world no company in the world seems to be better prepared for this than Amazon. Still, risks always loom in the horizon, even for Amazon. As the company keeps growing and entering new markets, will regulators eventually declare it a monopoly and force it to divest? Is there a looming clash with Alibaba the Chinese giant that will finally put Amazon to the test? We’ll have to wait and see….
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[1] US Department of Commerce “Quarterly Retailer E-Commerce Sales, Q2 2017”. August 17, 2017. https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf
[2] Eugene Kim “More than half of online sales growth in the US came from Amazon last year”. Feb 2, 2017. Business Insider. http://www.businessinsider.com/amazon-drives-more-than-half-us-ecommerce-growth-2016-2017-2
[3] Spencer Soper “Amazon Is Testing Its Own Delivery Service to Rival FedEx and UPS”. October 5, 2017. Bloomberg Technology. https://www.bloomberg.com/news/articles/2017-10-05/amazon-is-said-to-test-own-delivery-service-to-rival-fedex-ups
[4] Amazon Flex website.
[5] Daina Beth Solomon. “Amazon plans mega-warehouse for Mexico growth spurt”. September 13, 2017. Reuters. https://www.reuters.com/article/us-amazon-mexico-exclusive/exclusive-amazon-plans-mega-warehouse-for-mexico-growth-spurt-idUSKCN1BO1RD
What an interesting read! I agree on the last mile of delivery becoming increasingly important for online retailers like Amazon. In terms of what Amazon could do going forward, I think that looking into robotic-technology delivery systems could also be an potentially fruitful avenue to explore. Starship Technologies, an Estonia-based company started by Skype co-founders Ahti Heinla and Janus Friis, is actually seeking regulatory approval in Seattle for its 35-pound ground-based robots that deliver everything from parcels to vegetables. Also, as of March this year, when ordering a Dominos pizza in Hamburg, Germany, there is a good chance that it will be delivered by one of these robot. Hence, although we do not have any insights to the business case behind robotic-technology delivery, it seems there is already a substantial proof of concept.
Interesting topic and great write-up. I agree that last mile delivery is becoming increasingly important for retailers globally as consumers become accustomed to the immediate satisfaction of receiving their orders. I also agree with Phillip’s suggestion on automation, but only in certain very developed markets. I envision automated delivery working only in big cities in the United States and Europe where robots are not so far out of cultural norm. I recently read an article in Forbes that 60% of the cost of delivery is labor, which is especially expensive in the markets listed above. However, I am cautious about introducing automated, robotic delivery in a developing market like Mexico. Juanjo, I like your idea of self-pick up for Mexico as it addresses not only the complexity of delivering, but it also addresses the current cultural reaction and thought on online ordering. In my experience with family and friends in Mexico, the distrust of online ordering is just beginning to fade for the majority of the population. Instead of automating delivery via robots, I propose that Amazon actually double-down on traditional delivery and focus on the customer service aspect of delivery. I would not want Amazon to get caught in a race to the bottom to delivery goods for free at the drop of a pin. I recommend they use delivery people with branded Amazon trucks and mopeds (for smaller orders). The dual delivery system of truck and moped would allow smaller, perishable orders to reach customers quickly (and avoid CDMX traffic!). Amazon should load their delivery trucks and mopeds with additional products as an opportunity to up and cross-sell a customer when receiving their order to mimic the online checkout process. I think this could be an interesting revenue-stream that could counteract the cost of delivery, and an opportunity to build brand loyalty.
Great essay! I definitely agree with the challenges Amazon is facing in terms of digitalization in the last-mile delivery, but I am more concerned of the sustainability of the delivery from the variables caused by human aspects. Two more things that are worth considering: 1. Amazon recently announced Amazon Key, which is a smart lock that allows delivery people to leave items inside of your home, might cause more problems than benefits 2. How should Amazon treat the increased delivery force from legal perspective- are they employees, or temp hires?
On Issue 1. Despite the benefit of finally having your packages delivered to your home, instead of leaving them in the common area, customers are concerned about the cost of installing the Key Locks (cost up $150- $250 per Amazon), the time of replacing the old lock, and security- after all, how much do you trust a complete stranger to get inside of your home? The news this week broke that in Colorado, an Amazon delivery driver caught on camera urinating on homeowners’ doorstep. On issue 2. Uber went through the debate and litigation about how they should treat their drivers as the salary and benefits offered to drivers will differ significantly whether they are employees. With the backdrop of mass digitalization and the upcoming investment in scaling up and customizing the delivery service, one has to wonder who are these increased number of delivery people and the people behind the drone services to Amazon, and how should they get paid? After all, digitalization is still run by human and need human’s involvement in the last mile delivery.
Thank you for a great read! Last mile delivery is definitely a hot topic at Amazon as I have learnt through interaction with their employees during on campus recruiting! I found interesting that at Amazon, last mile delivery actually falls under the Finance team.
When I was reading the short paragraph on Amazon Flex, it reminded me of Veho – the winner of the New Venture Competition at the Rock Center this year. Veho is a start-up founded by HBS & MIT alumni about 1.5 year ago and it’s aim is to “replace large delivery trucks with a platform that enable anyone to deliver packages in his or her car.” It will be very interesting to see what will happen to this start-up now that Amazon announced its own version of this – and whether Amazon will use its platform only for their own deliveries or offer it as a service to the market. On the other hand, if Amazon succeeds but only uses Flex for its own, this might bring a lot of publicity for the start-up and hence create demand from smaller online retailers and other sources.
As I have also learn during the recruiting discussions from a person who actually led the team launching it – Amazon Europe is actually starting their own courier services in several European countries due to insufficient or inexistent existing infrastructure. I was surprised to hear that one example was of an inefficient infrastructure was the British Post Office. Amazon is planning to use both their own delivery service as well as the traditional couriers in these market for the moment – driving up competition and therefore improvements (both in quality and price) between those two.