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Amazon’s Financial Reporting Validates Leanings Toward Continued Industry Disruption

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Last week, customer online fulfillment provider Amazon reported its best-ever financial performance that included a headline of the largest quarterly profit in the firm’s history. Within these results are more indications of evolving business strategy that includes moving further into transportation and last-mile fulfillment.  Amazon Prime Branded Trailors

For 4th Quarter financial performance, Amazon reported a 22 percent increase in net revenues to $35.7 billion while operating income increased 88 percent to $1.1 billion. Net income was reported as $482 million almost twice as that of a year ago. In its reporting for the full year 2015, Amazon recoded $107 billion in revenues. Full year operating income was $2.2 billion compared with $178 million in 2014. The Wall Street Journal observed that it took Walmart nearly 35 years to reach $100 billion in sales volume while Amazon has reached that mark in twenty years.

Indicators of Amazon’s evolving Omni-channel fulfillment business models were evident within the details of financial performance. For instance, in 2015, the Fulfillment by Amazon program that allows sellers to utilize the Amazon fulfillment processes reportedly shipped over one billion units on behalf of sellers.

An online fulfillment focused research firm had previously estimated that upwards of 40 percent of all online transactions during the 2015 holiday fulfillment period originated on the Amazon platform.  In essence, Amazon has become a dominant force for online fulfillment, either by Amazon directly or its network of hosted sellers.  In the B2B dimension, after only eight months after launch, Amazon Business serves more than 200,000 businesses ranging from small to Fortune 500.

The scale of Amazon’s fulfillment reach comes with its own set of logistics and transportation challenges. Shipping costs during the holiday fulfillment quarter rose a significant 37 percent to $4.2 billion, compared to 10.9 percent in the year earlier period.  Shipping costs as a percentage of net sales averaged 11.5 percent in all of 2015.  Absorb the magnitude of that number- over $4 billion in transportation and logistics costs in a single quarter.  That ladies and gentlemen, amounts to buyer power, influence and motivation towards a more innovative approach.

Amazon’s overall inventories have grown approximately $1 billion this year as more sellers and more merchandise become part of the Amazon fulfillment network. These combined expenses provide ample motivation for greater efficiencies and more innovative parcel delivery network approaches, especially since so many Amazon customers elect to enroll in the Amazon Prime program with its free shipping benefit. There are limits to how frequently the price of Amazon Prime can be raised over a certain annual period.

Some equity analysts question whether Amazon has been forced to resort to less efficient and more costly transportation and logistics services providers, hence the steady stream of evidence that indicates that Amazon is assuming more control of logistics and moving closer to last-mile fulfillment. In the recent earnings briefing with equity analysts, Amazon’s CFO validated that the online provider’s existing parcel delivery providers could not handle Amazon’s required delivery service commitments during the critical holiday fulfillment period.

In mid-January, Supply Chain Matters called attention to a Seattle Times report indicating the same and that within a few weeks, Amazon.com will begin competing directly with longtime partners United Parcel Service, FedEx and DHL in Europe, with pieces falling into place to make such competition a potential in the U.S. as well in time.  As the strategy continues to evolve, Amazon’s transportation and logistics capabilities will likely be shared for use by other service providers or Fulfilled by Amazon partners.

Supply Chain Matters continues to predict that Amazon will playout an industry disruptor role in 2016 and beyond.  Certain sectors of B2C / B2B online fulfillment, parcel logistics and transportation are ripe for process innovation facilitated by more innovative Cloud-based technology. We believe that Amazon is showing all of the tendencies to be that disruptor and existing industry players should be prepared.

Just like Amazon Web Services (AWS) provided a new model for utility based information technology services, Fulfilled and Delivered by Amazon will likely be the next disruption.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

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