DC Velocity - May 2016

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

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 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.

LOGISTICS SHAKEUP AHEAD?

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 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. (RPS) did in the 1980s and 1990s to pose the first meaningful challenge to UPS’s near monopoly of the U.S. ground parcel market. Memphis, Tenn.-based FedEx Corp. acquired RPS’s 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.