Since last November, Supply Chain Matters has highlighted developments indicating how Amazon is rolling out a strategy for managing and controlling its own logistics, transportation and customer fulfillment capabilities. They have included the long-term leasing from ATSG of dedicated air cargo aircraft, Amazon branded semi-trailers and advanced logistics sortation facilities.
Now social media and industry outlets are echoing a report from a German-language newspaper indicating that the online retailer may be negotiating a deal to buy the Frankfurt-Hahn Airport in Germany.
The focus of these reports emanates from a German language daily, Sueddeutsche Zeitung. A Tech Insider posting echoing this report indicates that the German report did not indicate what the discussions might have been about or how recently they occurred, but that three airport acquisition offers from unnamed parties were made for the airport. A posting on Geek Wire added that the subject Hahn airport is located near Koblenz where Amazon currently owns a large fulfillment center.
We would add that is the same pattern demonstrated when Amazon initially executed the lease of air cargo aircraft from ATSG last fall, electing a U.S. airport that was close by existing large Amazon customer fulfillment centers. Further, a published Seattle Times report in January indicated that the online retailer would 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. That report might have indicated that Europe would have been the initial target.
Thus, if or when this potential acquisition of a European based airport does come to pass, it will be another stepping stone toward rolling out a global customer fulfillment capability totally managed by Amazon. Whether its Hahn airport, or another opportunity, the signs point to an active investment and deployment strategy underway, and online retailers and producers had better pay attention.
At the conclusion of its fiscal year ending in March of this year, Chinese online retailer Alibaba declared this week that it has officially become the world’s largest online retail platform with trading volume exceeding 3 trillion yuan ($475.9 billion) according to a report from China Daily.
While the online retailer apparently did not formally disclose what is termed as total gross merchandise value (GMV) for the recently completed fiscal year, it did reveal that its online retail marketplace platforms have already surpassed the 3 trillion yuan milestone.
The report makes a comparison to Wal-Mart’s $482 billion in total retail revenues for its latest fiscal year, and that in 13 years, Alibaba has demonstrated that world’s largest retail marketplace has shifted from physical brick and mortar (offline) to online.
Just for comparison sake, Amazon’s 2015 revenues amounted to $107 billion.
Whether readers agree or disagree with this comparison, the report does provide a sobering indication of the scale of China’s online marketplaces in 2016.
Alibaba has set its sights to be a business platform serving 2 billion consumers by 2024, not to mention demonstrating leading-edge big-data and predictive analytics capabilities.
They are an online provider to be watched and admired and one that will continue to make news in the months to come.
Prediction Nine within our 2016 Predictions for Industry and Global Supply Chains (Available for complementary downloading in our Supply Chain Matters Research Center) predicts that online customer fulfillment providers Alibaba and Amazon, by virtue of playing the role of industry disruptor, will expand their presence in direct customer logistics fulfillment. Of late, we have featured a number of commentaries pointing to evidence that Amazon has initiated efforts to be its own air cargo provider as well as efforts focused in last-mile logistics fulfillment. We would be remiss without amplifying efforts related to China based Alibaba.
This week, Tech blog Tech Crunch featured a posting concerning Cainiao, the noted under the radar logistics fulfillment arm of Alibaba, specifically efforts to secure new external funding to expand its logistics capabilities. Alibaba itself has a business model that does not include holding inventory, and that is where its logistics arm provides such capabilities. Specifically, while any details of the funding have not been publically disclosed, Tech Crunch indicates the external funding round involved four Asia based investment firms and further cites Caixin, an Asia financial news site as indicating an estimated funding round of upwards of 10 billion yuan or $1.54 billion. Alibaba has already recorded the largest U.S. IPO in history, and its current reported $7.7 billion valuation provided leverage for Cainiao to secure funding. Reuters reported that is Cainiao’s first funding round since Alibaba founded it three years ago. Bloomberg in-turn reported that the company is angling toward a public offering to bankroll its expansion, envisioning the ability to support daily package deliveries of 200 million.
What should be of more interest is the context of a cited interview among Cainiao President and Freight Week last year indicating a long-term plan to invest $16 billion over the next 5-8 years to deliver goods not only in China but also worldwide. Tech Crunch observes: “Further, Cainiao’s efforts to build a global network are aligned with Alibaba’s own focus on growing its retail network outside of China.”
Obviously, upwards of $1.54 billion in financial resources can provide the means for for a lot of additional logistics and fulfillment capability investments as well as strategic partnerships with other global transportation and logistics players. China is a huge country with significant logistics challenges needing to be overcome but Cainiao has already proven that it can meet a significant fulfillment surge as witnessed by last year’s Singles Day holiday fulfillment event across China. Thus, Supply Chain Matters anticipates that some of Cainiao’s investments will emphasize broader global logistics support.
There have also been multiple media reports indicating that Alibaba itself is seeking $3-$4 billion in additional funding from external Asia based and other banks to fund further expansion of operations.
Couple Alibaba and Cainiao investment resources with Amazon’s ongoing efforts as transportation and logistics industry disruptor and our prediction has already taken on significance. As we declared, the industry dynamics of B2C online customer fulfillment are about to change.
Yesterday, business media officially confirmed in action what Supply Chain Matters and other online fulfillment focused social media sites had been predicting, namely that Amazon will reduce its sole dependence on traditional parcel carriers for air and surface transportation and logistics fulfillment.
Air Transport Services Group (ATSG) confirmed a deal for Amazon Fulfillment Services to lease as many as 20 ATSG owned Boeing 767 aircraft for air cargo transportation needs.
Supply Chain Matters initially echoed reports that ATSG was possibly piloting air cargo services for what was, in the fall, speculated to be Amazon. The program initially involved two 767 aircraft which was expanded to 5 aircraft in November. The pilot program was to run through this month.
With the new announcement, Amazon has seriously upped its commitment toward supporting its own domestic air cargo support operations, shuttling inventory and shipments among its U.S. customer fulfillment centers. A fleet of 20 large size aircraft provides considerable lift capacity as well as next-day or two day delivery capability. Once more, with the agreement, ATSG has granted Amazon warrants for acquiring up to 19.9 percent equity ownership in the leasing firm.
According to reporting by The Wall Street Journal, Amazon has taken such steps to reduce its reliance on traditional parcel delivery services firms such as FedEx and UPS and to build out its own network of last-mile delivery services. An Amazon spokesperson indicated to the WSJ that the ATSG deal will help further develop its Amazon Prime delivery services.
The new ATSG deal reinforces remarks from Amazon CFO in February when the online retailer formally reported financial results. The CFO essentially disclosed that those existing parcel delivery providers could not handle Amazon’s delivery service commitments this pas holiday season. In mid-January, a Seattle Times report indicated similar speculation, reporting that Amazon would begin competing directly with longtime parcel partners in a matter of weeks.
As the WSJ noted in this week’s report, Amazon branded delivery vans have already made their presence among large U.S. cities and suburban locations. This author has made multiple spotting’s of such delivery vans in the Boston area.
While Amazon is not disclosing any plans to implement similar leasing of air freight services to support international fulfillment needs, we would speculate that expansion is just a matter of time, depending on the learning from U.S. deployment. The Seattle Times report in January indicated that sometime in the first quarter, Amazon was expected to acquire the 75 percent interest the e-retailer owns in French parcel delivery company Colis Prive to add to its prior 4.2 percent interest in UK parcel delivery company Yodel in 2014.
As noted in our prior Supply Chain Matters commentaries, Amazon is a company that thinks and executes boldly, and the pieces of its industry disruptor strategy are once again becoming more visible. In addition to air lift capability, we provided our readers with visibility to the leasing of hundreds of Amazon Prime branded semi-trailers.
The implications for B2C / B2B online fulfillment are significant and industry teams need to keep a keen eye out for opportunities as well as threats. On the one hand, Amazon could become a longer term option for online parcel delivery fulfillment. On the other, its continued juggernaut and dominance of online retail fulfillment from shopping discovery through last file fulfillment will present considerable market threats.
There is yet another research study reinforcing the high costs that retailers and their supply chain’s bear in supporting today’s Omni-channel online customer fulfillment requirements. A study conducted by EKN Research in partnership with Aptos, Inc. adds additional data reinforcement of the higher costs and added complexities being driven by today’s Omni-channel requirements.
We raise awareness to this study because EKN describes itself as a boutique research advisory firm catering to the retail, consumer goods and other services industries.
According to this study, retailers spend 18 cents of every dollar of revenue in satisfying current customer expectations related to Omni-channel fulfillment. The study revealed 8 in 10 retailers indicating in increase in order management and fulfillment costs compared to the prior year, with an average year-on-year increase of 5.07 percent.
That finding is consistent with other conducted surveys related to Omni-channel customer fulfillment. As Supply Chain Matters readers are aware, the 2015 holiday period presented retailers with higher parcel transportation and logistics costs since both FedEx and UPS elected to raise shipping and surcharge rates just prior to the beginning of the fourth quarter. Added to these unplanned costs were those associated with trying to support a seamless Omni-channel customer experience with processes and systems that were not originally designed to do so. We recently called reader attention to the third annual PwC Viewpoint study involving 300 retail and consumer goods CEO’s that concluded that less than 20 percent of Retail CEO’s believe that they are fulfilling orders profitably, while the majority of these executives were still attempting to breakdown the organizational silos that were hampering a singular Omni-channel customer fulfillment process.
EKN researchers found that many retailers struggle with inconsistent or undefined workflows for each order type which leads to inconsistencies on order management. An observation in the report indicates:
“In the next 12-24 months, 23% of retailers plan to offer next-day delivery, and same-day shipping is expected to reach 75% saturation. With speed comes complexity. And complexity tends to put severe pressure on the entire organization. In the past, when face with competitive pressures for speed and/or flexibility, too many retailers responded with processes that were thrown together quickly, with an eye to fulfilling customer service expectations and much less regard for scalability, efficacy or cost.”
Further noted were three challenges that are of the highest concern, which include:
- The need to improve order cycle time productivity.
- Alignment of inventory, order and supply chain operations as retailers are forced to be more reactive to quickly changing customer fulfillment needs.
- Broader visibility across order functions and processes because of existing sales channel silos or lack of standardized processes across channels.
More and more of this survey data continues to consistently point to the need for unified leadership, strategies and initiatives related to Omni-channel fulfillment, supply chain response and systems support strategies.