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.
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.
© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
In prior Supply Chain Matters commentary as well as 2016 predictions, we have raised awareness relative to the impact of increased parcel transportation rates on B2B and B2C online commerce. At the beginning of 2016, major parcel carriers FedEx and UPS initiated new 2016 rates and added surcharges, and the United States Postal Service (USPS) has now initiated its own 2016 rate hikes averaging 10 percent.
While our commentaries have focused on multi-industry impacts, there is certainly a small and medium business impact, one perhaps more acute relative to business impact.
Thus, we highlight perhaps one of growing representative evidence of such impacts. A published article originating from Maine’s Portland Press Herald, brings forward such impacts. (Metered free view). The article profiles two small but up and coming Maine based businesses, Dresden based Maine Medicinals and Winslow based Johnny’s Selected Seeds. The latter business is one that this author has been a fan of for many years.
Both businesses bring forward the realities of today’s online world, that consumers and customers incorporate shipping charges in their buying decisions. In the case of B2C online fulfillment, Free Shipping has become the norm as a result of the track record of Amazon Prime. Yet, more and more, retail executives have come to understand the new realities of increased costs associated with online fulfillment. Thus, as indicated by executives in the featured online businesses of the Press Herald report, the costs of shipping must now be adsorbed or offset by other cost efficiencies.
The other reality brought forward in the report is how the USPS was looked upon as the contingency strategy to avoid the higher transportation costs of the large parcel providers. Now, that option is off the table since the USPS needs to deal with its own needs for agency profitability on costs. More succinctly, the message brought forward is that in many cases, increased transportation costs stand to now directly impact the bottom line of many SMB businesses anchored in online commerce. Shipping fees can no longer cover the full cost of transportation and handling, and something has to give.
We suspect that among many SMB businesses, there is a hope that other viable, less costly transportation and handling options will become available. Within these building needs, online giants such as Alibaba, Amazon, Ebay and perhaps Walmart remain continued disruptors, offering hosted fulfillment services.
Unless and until more disruptors come forward, the market swath and influence of a few online commerce dominants may well continue and SMB’s will be among those most impacted.
The Seattle Times has shed additional light on Amazon’s plans to compete directly with global parcel and logistics carriers. In its article published yesterday, the publication indicates 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.
Sometime in the first quarter, Amazon is expected to acquire the 75 percent interest the e-retailer owns in French parcel delivery company Colis Prive. According to the publication, Amazon further acquired a 4.2 percent interest in UK parcel delivery company Yodel in 2014. Add to this the recent developments regarding the leasing of 20 767 Boeing cargo jets and the purchasing of thousands of Amazon Prime branded semi-trailers.
The Times article again cites an equity analyst as indicating that similar to the business model of Amazon Web Services (AWS) an Amazon delivery service could service more than the needs of just Amazon.
While the challenge of competing with the invested infrastructure and advanced fulfillment and delivery technology of DHL, FedEx or UPS is itself daunting, Amazon has not shied from thinking and executing big. At a minimum, it provides more leverage in negotiating rate structures and service agreements with such carriers.
The Seattle Times report comes after the late December report by The Wall Street Journal citing informed sources confirming that Amazon is pursuing alternative parcel transportation delivery methods which is currently straining its relationship with longtime partner UPS.
Many pieces of this strategy are becoming more visible and the implications and disruption potential for B2C / B2B online fulfillment are significant.
In April of 2015, global package delivery and transportation provider FedEx announced its intention to acquire Europe based TNT Express in all cash offering for TNT stock. At the time the transaction represented an implied value for Netherlands based TNT of approximately $4.8 billion. Last week a major regulatory hurdle was cleared regarding this acquisition.
Last week, European Union regulators granted unconditional approval, ending a six-month approval process. Regulators concluded that both parcel delivery companies were not close competitors in Europe and that the merged entity would face sufficient competition from existing competitors. The announcement was viewed by business media as an easier pass than that of UPS, which had previously attempted to acquire TNT in 2013, which later had to be abandoned because of EU anti-trust concerns. UPS had subsequently revised its proposal three different times in order to secure EU approval, which never came.
While both EU and U.S. regulators have now approved the merger, several countries such as Brazil and China have yet to weigh-in. While equity analysts expect FedEx to receive the green light from these additional countries, The Wall Street Journal recently opined that China good be a wild card given its propensities of-late toward more anti-trust scrutiny as well as stretching out its overall approval timeline.
FedEx was willing to pay a 42 percent premium for TNT shares in April in order to position the combined entity as the third largest player in European international express delivery behind DHL and UPS.
Timing to secure all additional approvals remains rather important since TNT’s financial position has been eroding. The sooner FedEx can add its presence and resources, the more beneficial this deal will become for both parties.
Our Supply Chain Matters and Ferrari Consulting and Research Group 2016 Predictions for Industry and Global Supply Chains were featured throughout December and are now available for downloading in our Research Center.
During the process and over the past few days, we have also read and received other supply chain management related predictions which we found interesting and feel should be of interest to our audience as well.
In alphabetical order:
Chris Jones, Executive Vice President, Marketing and Services at Descartes produced a number of insightful predictions. Two that resonated were:
Parcel power- There will be more of it and it will cost more in 2016. The continued double-digit growth of E-commerce has carriers clearly having market leverage and the impact will be felt by B2B and consumer-oriented commerce alike. With the recent changes in shipping charges, optimizing parcel shipping will be critical for E-commerce-based companies to maintain their margins in 2016.
Increased security- The recent attacks in Paris and San Bernardino will drive more screening of supply chain partners, carriers, employees, etc. Rather than traditional batch or bulk screening, the screening process will be more dynamic and at a transaction level in 2016. Governments will continue to reach further into importer and exporter supply chains for information to better understand all of the parties involved and how goods are being moved. One of the biggest challenges for importers and exporters in 2016 will be the ability to efficiently gather timelier supply chain data to keep goods flowing across borders.
Phil Lambert– The termed SupermarketGuru came out with eight 2016 Predictions featured on Consumer Goods Technology. Two that caught our attention were:
Trend #3. Bioregions:“Local” has been one of the biggest trends in the supermarket aisles for almost ten years. It is an unsustainable trend as weather conditions and climate change force changes to the sourcing of foods. Think bioregions. Nature defines the regions for what crops and livestock grow and thrive best in which climates, and we will see changes accordingly. Think about this: California farmers moving to Georgia because of the cost of water, and more wines coming from South Carolina. Produce growers moving to Peru. A recent study by A.T. Kearney found that women and children – are willing to pay more for locally produced food. The ultimate in local? Growing lettuces, herbs and yes even kale in your own kitchen year-round without herbicides. Perhaps the ultimate in bioregions? The Urban Cultivator and Grove are coming to your home very soon.
Trend #4. Micro-stores:Far from the everything-and-the-kitchen-sink hypermarkets, look for smaller, neighborhood grocers to spring up. These stores, such as ALDI (with over 1,400 locations in the U.S. and counting), Bfresh in Boston, Green Zebra in Portland are more relaxed, attentive and curated, with a heavy emphasis on products that Millennials yearn for, and buy. Excellent private and exclusive brands with prices that this generation can afford. Think about how Lund’s & Byerlys’ Kitchen with 17,000 square foot that includes a 4,000 square feett sit-down restaurant and scores of local beers on tap. The grocerant trend will continue as more supermarkets look to share of stomach vs. market share against their traditional competitors. These retailers are proactive offering benefits to their shoppers to build that relationship across many touch points. One example is how ALDI announced their decision to remove certified synthetic colors, partially hydrogenated oils and MSG from all its exclusive brand foods by the end of 2015. Look for these micro-stores to take a stand and dispel the belief that you need to stock 50,000 SKUs to be successful, or that you have to serve everyone everything.
Brian Miller, Vice President of Services at Intesource points to the expected increase of foodborne diseases and food recalls next year and strategies that companies will need to implement in order to counteract these issues.
Mickey North Rizza, Vice President of Strategic Services at BravoSolution believes that in 2016, the focus will be on supplier value, not just supplier relationships — a supplier’s total economic contribution to the buying organization’s operating profit will be the new financial value by which procurement teams will be measured.
Pierre-Francois Thaler, co-CEO of EcoVadis, believes that in 2016, companies will finally realize sustainable procurement is about more than just compliance and reporting and can shed some light into what leading organizations will do to integrate sustainability throughout all their systems and practices.
Continue to send us 2016 Predictions you feel are important and we will publish them in another Supply Chain Matters predictions update.