Make no mistake: Amazon is going to take on delivery behemoths FedEx and UPS

Here’s why, and what delivery companies can do about it (part 1)

Ted S. Warren/AP Photo, File

One of the largest debates in the parcel delivery industry, as well as among Wall Street analysts, is whether Amazon is quietly planning to take on delivery behemoths FedEx and UPS. While some point out that “Jeff Bezos’ ambitions have no boundaries”, others strongly argue that “Amazon is nowhere close to building a delivery network the size and scale of [these giants]”. The problem is, that by and large the analyses presented to support these arguments are partial, and often based on a flawed understanding of the package delivery business as well as Amazon’s strategy.

In this article I put the pieces together, attempting to provide a fuller analysis of Amazon’s moves. I begin by summarizing the key investments that Amazon has been making in its “vertically integrated” supply chain since 2014, which leave little doubts about Amazon’s intentions; I then broaden the scope and explain the 7 reasons — often overlooked by Wall Street analysts — for why competing in the delivery market makes much sense for the retail giant.

Still, it is unlikely that Amazon will completely turn against its delivery partners overnight — Amazon is far too reliant on them at this point. But a careful examination of the company’s history, ambitions and long-term focus, as well as the rapid expansion of its delivery capacity since early 2014, should lead to the conclusion that competing head-to-head with FedEx and UPS is inevitable. Until that officially happens, Amazon will continue to play its usual strategic game: building more capacity, innocently claiming that it is only “supplementing” the capacity of its delivery partners, and gradually taking over the more profitable parts of the delivery business. And in doing so, Amazon will continue to squeeze margins and make life increasingly difficult for FedEx, UPS and their regional competitors.

This article will be followed by another article (part 2) in which I explain what the delivery market will likely look like once Amazon is a competitor, what UPS, FedEx and other industry incumbents should do to mitigate the impact, and how a new generation of market entrants is likely to evolve. As always, comments are welcome.

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That Amazon is building its own end-to-end delivery network, from purchase of items on its website to delivery to its customer doors, is old news. Since 2014, the e-commerce giant has been spending heavily on airplanes (it now reportedly leases 40 of them), truck trailers (it now owns thousands of which) self-service lockers (it now has over 6000 of them) and fulfillment, sorting and distribution centers in every major metropolitan area in the US (as of May 2018 it operates 328 such centers domestically, and 708 worldwide with 55 future facilities). This massive investment has given rise to speculations that Amazon is planning to eventually take on its delivery partners FedEx and UPS.

Nevertheless, the prevailing view among the parcel industry executives, at least publicly, is that —

[any such speculations] demonstrate a clear misunderstanding of the scale, infrastructure and complexity involved in running a global transportation network” — as FedEx’ executive Patrick Fitzgerald put it.

Or — as Fred Smith (founder and CEO of FedEx) puts it: “Amazon is a retailer; we are a transportation company.”

Smith further noted that “if [Amazon] wants to be in the transportation business, I can promise you that the customers [i.e. other retailers] are not going to approve of the channel conflict.

In other words — FedEx and UPS do not believe that Amazon, a company whose revenue is 3 times higher than theirs, and growing at 30% annually, and who has tamed its investors to forego any expectations for short-term profit, would ever make that investment.

Until recently, Wall Street seemed to be in complete agreement with Smith’s assessment (as we will see below — that’s all starting to change). And for the time being, both stocks are still priced close to their all-time high, as the e-commerce revolution continues to drive global demand for shipping.

Source: Google Finance (May 15th, 2018)

But a closer examination reveals a different picture.

Amazon as a Carrier: Speculations or Reality?

The decision to build its own delivery network was made by Amazon early in 2014 following the so-called ‘2013 Christmas Fiasco’. A few weeks earlier, on December 24, 2013, UPS announced that its network was overloaded, and that it would fail to deliver many of its packages on time for Christmas. Amazon was then forced to issue cancellations and refunds to a large number of angry customers — all of which made “Earth’s most customer-centric company” very unhappy.

What Amazon realized in the days post the ‘Christmas Fiasco’ is that UPS, FedEx and their regional competitors are far from ready for the age of e-commerce, nor will they ever likely to be: Their infrastructure is old and not oriented around home-delivery; their technology is dated, and they lack the flexibility and scalability (both from a mental and practical standpoint) to power the e-commerce revolution.

Amazon then decided that it was no longer willing to be fully dependent on FedEx, UPS and their likes to deliver its packages. Publicly, it announced that it would build a fully integrated delivery network to “supplement our existing partners”. However, in private conversations the plans discussed were much bigger.

Building Capacity in every part of the supply chain

In the years that followed the ‘Christmas Fiasco’, Amazon launched Amazon Logistics (AMZL), under which the company’s delivery network is being developed. It continued to open distribution and fulfillment centers in every corner of the country, stuffing its products on shelves closer and closer to the consumer door to allow for shorter delivery times. In 2014, it launched a last mile delivery program, enabling services like Amazon Prime Same Day and Amazon Prime Now — its two hour and one-hour delivery service. In Europe, it bought a French delivery company named Colis Prive’, and a stake at UK-based delivery company Yodel.

In 2015 it launched Amazon Flex — an Uber-like crowdsourced delivery service, now available in more than 50 US markets, which utilizes approximately 100,000(!) drivers (I recently wrote more about Amazon Flex and the final mile crowdsourcing revolution in a separate article); it also began rolling out its fleet of trailer trucks, which now number in the thousands. In 2016, on top of leasing 40 airplanes, it made a move into global freight shipping — a $350B industry, when registering Amazon China as an ocean freight forwarder. Amazon explained this move as a step to achieve more control over shipping costs, but according to Bloomberg report, Amazon’s real goal is to disintermediate DHL, UPS and FedEx, and allow sellers on its platform to book cargo space directly with Amazon through a ‘one click-ship platform for seamless international trade and shipping’.

Need more proof?

In it’s 2016 10-K report (an annual report required by the U.S. Securities and Exchange Commission), Amazon stated clearly for the first time that —

“our current and potential competitors include … companies that provide fulfillment and logistics services for themselves or for third parties”.

Since when does a retailer need an Airport Hub?

As if these were not enough, at the beginning of 2017 Amazon announced a $1.5 billion investment in a Kentucky based airport to serve as the new cargo hub for its aircraft fleet, which is eventually planned to support 100 Prime aircrafts and 2700 employees. Throughout the year it continued to experiment with delivery drones, self-driving cars and other forms of delivery automation, and rolled out a mobile app called Relay, which allows it to harness tens of thousands of independent truck drivers to overcome the increasing shortage of driver supply across the trucking industry.

Then, late in the year, Amazon was rumored to potentially make a bid for XPO Logistics — a $15 billion trucking company that specializes in LTL logistics (Less Than Truckload) and in last mile delivery of bulky items such as furniture.

Leaving little doubt

All the while, Wall Street remained largely confident about the positive prospects of FedEx and UPS’ shares. But this view has recently begun to shift in light of two of Amazon’s latest steps.

a. Seller Flex

As the first step, Amazon recently announced that it is now testing, and soon planning to expand, a new service that allows Amazon.com sellers to grant Amazon full control of their shipping logistics. Already today, Amazon drivers deliver packages for Amazon’s sellers, but up until now this service has been provided only to sellers who ship from Amazon’s fulfillment centers. Under Project Seller Flex, Amazon would now oversee pickup of packages directly from the seller’s warehouses, and determine how these packages would be delivered — a task that was previously left to the seller, who often contracted with FedEx and UPS. This step effectively gives Amazon even more negotiation power over FedEx and UPS, and allows the company to gradually divert packages to its own delivery fleet.

b. Ship-with-Amazon

Once Seller Flex is on, the way to disintermediate FedEx and UPS becomes rather simple. Earlier in February the Wall Street Journal reported that Amazon is now preparing to offer its own delivery service to its third-party merchants.

In this second step, Amazon will use third-party couriers to transport packages from the sellers’ warehouses to Amazon’s distribution centers, and from there — use the Amazon Logistics fleet for the final mile delivery.

Ship-with-Amazon allows the retail giant to completely cut out FedEx and UPS from the delivery of its sellers’ packages. It also means that Amazon could soon skip its own distribution centers, and deliver directly from its sellers’ facilities to customer homes. Now, that sounds a lot like direct competition with transportation companies, doesn’t it?

The end of the shipping duopoly?

As the news about Amazon’s latest moves hit Wall Street, UPS and FedEx’s stocks immediately changed direction, and dropped 25% and 16% respectively between January-March. A sign for up-and-coming disruption? Most likely. But that’s just part of the story.

The bigger story here is that shipping — once a slow moving industry — is finally waking up to a technology-focused future. Perhaps bad news for FedEx, UPS and their regional competitors, who for years have been operating on legacy technology systems, and whose infrastructure is primarily designed for a B2B focused shipping world. Yet these are exciting news for a new generation of logistics companies, ones who are keeping pace with Amazon’s innovations. These new entrants are the ones likely to capitalize on the growing demand from Amazon’s retail rivals, who are all in dire need for more customer-centric shipping solutions.

Like it or not, Amazon entering the parcel delivery market is the end of shipping as we know it.

Illustration of Amazon’s end-to-end logistics solutions, taken from Amazon China’s website. “Supplementing capacity”?

The Analysis: Amazon has 7 main reasons to build its own delivery network

All too often, Wall Street analysts explain Amazon’s move to build its own delivery network as an attempt to save big dollars on shipping. This explanation has merit, yet the explanation itself is rather simplistic. It fails to take into account the major competitive advantages that Amazon gains over its retail competitors by owning its own network; the potential to substantially increase customer lifetime value; and perhaps more importantly — the rare opportunity that Amazon has to turn its already existing network into the world’s next generation delivery company for the age of e-commerce, in an $800 billion industry. Amazon’s moves should therefore be analyzed from a much broader perspective.

Reason #1: Save over $1 Billion per year by ‘replacing the middleman’

Amazon’s shipping costs are steadily rising in correlation to its massive growth — and have almost doubled between 2015 ($11.5B) to 2017 ($21.7B). In 2016 the company’s net shipping costs suppressed the $7 billion mark. That is — even when accounting for all revenues collected from customers for shipping, including Prime membership fees, Amazon still spends an astronomic amount on getting packages to its customer doors.

Amazon’s net shipping costs have gone up five-fold between 2010 to 2016 (in million U.S. dollars); Source: Statista 2017

It would be a mistake to assume that Amazon could save all that money by ‘cutting the middleman’ and insourcing the entire delivery operation. In fact, in the delivery business, the middleman cannot be cut, but can only be replaced: to deliver its own packages, Amazon clearly needs to invest heavily in infrastructure and operations — the same way that UPS and FedEx have. Yet, Amazon can indeed save billions by insourcing its own delivery operation, primarily by leveraging three key strategies:

1.a. Skimming the profit from delivery

First, as FedEx’s Fred Smith noted above, “Amazon is a retailer, we are a transportation company”. Amazon therefore does not need to present a profit on its delivery operation, and can simply skim the 11% EBIT line (earnings before interest and taxes) that UPS and FedEx generated in 2016. According to some analysts, this can translate into $1 billion in annual savings for Amazon — a number that will continue to grow along with the company’s online sales. Of course, these are all rough numbers, but the example is nonetheless demonstrative.

1.b. Keeping out the union

Second, unlike UPS — Amazon has so far managed to keep the labor unions out the door, and thus has lower labor costs (quite an achievement from Amazon’s perspective, considering that the company employed 566,000 employees in 2017, about 100,000 than UPS). In the absence of a strong union, Amazon is free to leverage programs like Amazon Flex — in which Amazon pays crowdsourced delivery drivers $18–$25 per hour, all inclusive, compared with UPS employees who are paid up to $35 along with benefits. (For a deeper analysis of final mile crowdsourcing, see my article: “The Next Game Changer: How Crowdsourcing is Changing the Face of Final Mile delivery”).

1.c. Leveraging next-generation technology

Third, and most important, is the technology opportunity. UPS, FedEx and their regional competitors still all use legacy technology systems and practices — some of which date to the 1990s.

Most delivery companies still expect their drivers to rely on memory and experience when determining how to complete a route, rather than using route optimization software to maximize productivity. Similarly, most delivery drivers are still required by their employers to carry old handheld GPS devices, which cost $2000–$3000, instead of using a mobile app to complete delivery tasks. These present major savings opportunities for Amazon, who is developing its own software infrastructure from scratch, instead of relying on legacy systems.

One striking example of how Amazon leverages technology to save big bucks in the final mile lies in the notoriously failed delivery attempts: At UPS and FedEx, it is not uncommon for a driver to complete three failed delivery attempts before dropping the package at some pick-up location (say, the UPS or FedEx store). This practice is mostly common in large metropolitan areas where it is unsafe to leave a package by one’s doorstep, and it can cost delivery companies tens of millions of dollars every year.

Amazon, on the other hand, is already testing a mobile interface that allows customers to follow the delivery driver on a live map (similar to Uber) and leave specific drop-off instructions; It also recently acquired startup Ring-maker of video doorbells — which allows drivers to complete in-home deliveries even when the customer is away (more on that later); and has been rolling-out a new service in which Amazon drivers can now leave a package in your car’s trunk.

All these solutions, aimed at eliminating the costly failed delivery attempts and increasing customer satisfaction, are enabled by Amazon’s constant investment in new technologies, which UPS, FedEx and their smaller competitors have been slow to adopt.

Replacing the old GPS device with a smart mobile app is just one of many ways in which Amazon leverages technology to cuts costs in the final (credit: Matt Edge for The New York Times).

The “pockets of density” strategy, explained

Despite these massive savings opportunities, it would be naive to assume that Amazon will cut out FedEx and UPS overnight, as it still heavily relies on their capacity. Instead, Amazon is playing a long-term strategic game to increasingly squeeze margins out of FedEx and UPS, and slowly take over some of the more profitable pieces of their business. Perhaps the best example of this is the ‘pockets of density’ strategy:

As a retailer, Amazon is especially popular among middle to upper-class populations who tend to reside in metropolitan areas. FedEx and UPS love those metropolitan areas since they are denser and hence more profitable: for the same hourly cost of driver and vehicle, UPS delivers many more packages in the city than in suburban or rural areas. Large apartment buildings are especially attractive since they allow delivery companies to drop multiple packages in one stop but charge separately for each package.

It should come as no surprise, therefore, that when Amazon began building its internal delivery network, it initially focused on these “pockets of density” who presented an immediate cost-saving opportunity.

To illustrate, assume that Amazon ships 20 packages to one block of buildings in Boston, and that it takes a driver exactly one hour to deliver them all. Now assume that UPS charges $4 per every package it delivers. If shipping with UPS, Amazon would pay 20 X $4 = $80 for that 1 hour. But by insourcing the delivery, Amazon can now pay its Flex driver $18 for that same 1 hour. Big savings.

How much would Amazon pay to deliver 20 packages to a building block? It depends on whether it outsources to UPS or pays its own driver.

In other words by insourcing “pockets of density”, Amazon is effectively taking over the more profitable home deliveries, and leaving the less attractive ones — those in lower density areas — to UPS and FedEx. This is another effective way to squeeze margins out of its “delivery partners.”

But Amazon doesn’t stop there. Rather, it has been gradually scaling its delivery operation to encompass suburban areas with lower density, and further replace FedEx, UPS and even the postal service where it makes economic sense to do so.

Reason #2: subsidize its own packages by building delivery density.

So far we explained how Amazon can save over $1 billion by insourcing its delivery operation. But that’s just the beginning. Here comes the more interesting part:

Once Amazon has sent out a delivery driver with its own packages, what prevents it from allowing other sellers to add their packages to the vehicle? This is not only attractive to Amazon as a new revenue stream, but also as a strategy to subsidize the delivery cost of its own packages: the more packages delivered to the same building block or neighborhood, the higher the delivery density, and the less it costs Amazon to deliver each package.

In fact, even if Amazon made 0$ profit on packages from other retailers, building delivery density is still an effective way to save money on its own packages. And for a company that ships over 1 billion packages annually, well…that’s a lot of money.

the more packages an Amazon driver delivers on a given hour, the less Amazon pays per package.

The Competitive Reasons: increase top-line revenue in Amazon.com and gain an unbeatable advantage over any other retailer

Amazon is often praised for being a powerhouse for innovative products and services. Take a closer look into most of these innovations and you will find that they are intended to directly or indirectly drive more sales in its core retail business. Alexa, Kindle and Amazon Dash Buttons are all designed to remove friction from buying process; Prime Video, Prime Music and Prime Reading — all of which are likely loss leaders — are intended to attract more customers to the Amazon Prime Membership, in which members spend 4.6 times more on Amazon.com than non-members.

‘Delivery by Amazon’ ties perfectly into this overall strategy, as we explain in reasons 3–6.

Reason #3: establish a low cost-structure that even Walmart can’t achieve

From choosing Seattle as its home-state in order to avoid sales tax­, through disintermediating book publishers with its own publishing business, to constantly scraping the web with computer algorithms that identify and undercut competitor prices — Amazon’s core strategy from day 1 has been to offer the lowest prices in e-commerce (see Brad Stone’s highly recommended book The Everything Store: Jeff Bezos and the Age of Amazon”). At their core, these relentless efforts are all based on a simple notion: Different than brick-and-mortar shoppers — online shoppers can easily compare multiple sites and shop for the lowest price offering. And when the price is often the key differentiator — the retailer with the lowest-cost structure usually wins.

Therefore, Amazon’s intense focus on logistics costs should come as no surprise. E-commerce delivery costs in the US account for roughly 10% of the overall operating cost, and 12% in Amazon’s case. If Amazon can save even 5% of those costs by owning its own delivery network (and in practice it can save much more), it can further establish its position as the lowest cost structure in e-commerce — to the point that it becomes almost impossible to beat. Or as Jeff Bezos likes to call it: “ pass on the savings to the customer.”

The image comes straight from Amazon — originally it was a napkin sketch by Jeff Bezos.

Clearly, Amazon is not the only retailer championing this low cost-structure strategy. Walmart has built one of the most successful businesses in history by leveraging this exact strategy, just as e-commerce entrepreneur Mark Lore promised to do when he raised some $570 million for his Jet.com on the promise to build an alternative to Amazon. But even Lore — now CEO of Walmart eCommerce — knows that with all its massive buying power even Walmart cannot achieve a comparable low-cost structure to Amazon’s without insourcing its delivery operation.

Reason #4: Drive competitors into a delivery “catch 22”

Amazon’s push for ever-faster deliveries has completely transformed consumer expectations. Long gone are the days when 8– 10-day shipping was the standard. Instead, free 2-day shipping is the new king, and for an increasing number of product categories — next day and same day will soon become the norm. The problem is, that these ever-shrinking transit times (especially same-day) are extremely costly for carriers like UPS and FedEx, since their networks were not primarily designed for home delivery of such massive volume at such a short time. These carriers, in turn, must pass on the excess cost to their shippers (usually retailers), whose slim margins put them in a difficult dilemma:

Amazon is pushing its retailer competitors to a “catch 22”: if they offer same day or two-hour delivery — they are damned for losing money on the product; if they avoid offering such delivery options — they are damned for losing the customer to Amazon.

By designing its own delivery network around fast transit times, Amazon is not only better positioned than any other retailer to capitalize on the demand for faster delivery times — ­­ but it is also better positioned than any other carrier to offer a fast and affordable delivery service to shippers who want to capitalize on this trend. This is a win-win for Amazon, and an ongoing headache for companies like Walmart and Target, who have been spending a fortune in an attempt to catch up with Amazon same day and two-hour delivery offerings.

Reason #5: gain complete control over the customer experience.

Perhaps the most overlooked piece in this puzzle — and likely the most important one to Amazon — is customer experience.

There is an abundant amount of data showing that online shoppers reward retailers who guarantee on-time delivery, provide accurate transit times and remove unnecessary friction for the customer when receiving a package (I recently wrote about it in “Why Doorman failed, and what delivery startups should learn from it”). The more Amazon owns the delivery of its packages, the more it can control the factors that make or break a relationship with a customer. This, in fact, was the core reason behind Amazon’s decision in early 2014 to launch Amazon Logistics and reduce its reliance on UPS and FedEx.

How do FedEx and UPS fare when it comes to customer experience?

Google the words “UPS (or FedEx) Customer Reviews” and you will find thousands of complaints from angry customers and an average rating of merely 1.9/5 and 2.1/5 stars respectively. Sure, customers are ungrateful, and often unaware of the massive operation required to ship a package across the country in 2–3 days. But truth be told, for the most part both FedEx and UPS have justifiably earned this image: poor communications with end-customers (have you ever received the ‘sorry we missed you note’?); lack of price transparency; frequent rate increases; poor digital user interfaces and frequent delivery delays especially during the holiday season — are all prime contributors to this negative brand perception.

Customer satisfaction ratings aggregated from ConsumerAffairs.com, TrustPilot.com and ResellerRating.com on May 16th, 2018.

This should be the biggest warning sign for UPS, FedEx and the retailers who rely on them, and an obvious opportunity for Amazon.

Unlike FedEx and UPS, Amazon does not treat ‘delivery’ as merely the action of bringing a package to the customer doorstep; rather, Amazon sees ‘delivery’ as “the new moment of truth”: the moment when the customer “meets” Amazon in real life, interacts with its product, and continues to develop deep customer loyalty. This completes a ‘customer journey loop’ in which a great delivery experience reinforces the purchase decision and leads to increased future engagement. In essence, Amazon sees delivery as the physical extension of its online shopping experience and treats it as such — with the utmost importance. And just like Alexa, Dash Buttons, Prime Video and Amazon Music — it is a novel innovation that further drivers sales on its platform and customer lifetime value.

This also explains why Amazon just spent over $1 billion on acquiring startup Ring. Ring allows Amazon to scale its “in-home delivery” service, which — in addition to saving money for Amazon — also greatly benefits its customers, who can now receive grocery delivery straight into their refrigerator without needing to be home. As you are probably guessing, Amazon is not likely to share this innovation with UPS or FedEx drivers…

Reason #6: further grow its seller marketplace and increase network effects

When a great delivery experience leads to increased engagement and higher customer spending on Amazon.com, then clearly Amazon.com becomes an even more attractive marketplace for sellers. And if more sellers use Amazon for faster and cheaper shipping — then Amazon.com becomes even more attractive to customers. And the cycle goes on and on.

Delivery, in essence, is a mechanism to create network effects between sellers and buyers on Amazon’s marketplace: the more each party engages with it, the more everyone (and Amazon itself) benefits.

This is not just a business school theory. Amazon’s recent introduction of Project Seller Flex (explained earlier), and Ship-with-Amazon are clear steps in that direction. These are very bad news for FedEx and UPS. Not only will Amazon use the increased package volume from its sellers to further scale its own delivery network, but it will also gain more bargaining power when negotiating rates with FedEx and UPS for the less attractive deliveries (typically those that are shipped to non-dense areas).

Reason #7: the 800 billion dollar opportunity

Finally, we are arriving at the 800 billion dollar question: will Amazon ultimately open up its massive delivery network to other shippers and disrupt FedEx, UPS, DHL and their likes?

UPS and FedEx publicly dismiss this concern: “Amazon is a retailer; we are a delivery company.” But is it?

What UPS and FedEx forget to mention is that Amazon is far more than just a retailer. It is also a technology company that develops tablets, phones and home connected devices like Echo with AI-powered operating systems that compete with Apple and Google; it is a TV content producer that competes with Netflix; it is the world’s most dominant cloud infrastructure company whose revenues surpass those of competing services at Microsoft, IBM and Google combined; It is developing technology for drones and autonomous vehicles; It is rolling out brick-and-mortar stores that compete with traditional retailers in their home court; it now also owns one of the largest grocery chains in the US; and most recently — it is making moves in the gigantic healthcare market. Would you be bet your money that Amazon will stay out of the $800 billion shipping industry?

But there’s also a more nuanced answer, one that takes into account Amazon’s expansion strategy from its very early days, and in particular three key principles:

1. Partner first, disrupt later.

As journalist Brad Stone describes in The Everything Store: Jeff Bezos and the Age of Amazon” — Amazon has been notorious in exploiting business partnerships that allow it to build its own infrastructure on someone else’s dime, only to ditch that partner and compete with it directly as soon as the partnership no longer serves Amazon’s interests.

Such was the case with bankrupted retailer Toys R Us, who in 2000 agreed to a 10-year contract in which it became the exclusive vendor of toys on Amazon.com. Toys R Us also made the terrible mistake of agreeing to redirect any web traffic from ToysRUs.com to Amazon.com, and effectively forewent the opportunity to build its own e-commerce infrastructure. It took Amazon only three years to infringe the agreement and allow other sellers to offer toys on Amazon.com. By then, it had already established itself as the online go-to-store for toys and had attracted a large customer base from Toys R Us — which may have signaled the beginning of the toy giant’s demise.

Borders Group — once the country’s second-largest bookstore — experienced a similar fate 10 years after it had turned over its online business to Amazon. The company filed for bankruptcy in 2011. Amazon, on the other hand, became the world’s most dominant bookseller.

Even retail giant Target made the mistake of outsourcing its e-commerce fulfillment and operation to Amazon between 2003–2011, just to wake up before it was too late.

Can you see the pattern?

It would be naïve to assume that Amazon — who has been piggybacking for years on its “delivery partners” UPS and FedEx while building its own delivery infrastructure under their nose, will ever think twice when it is finally ready to transition from a “partner” to a disruptor.

2. Maximize asset utilization, create network effects.

Time and again, Amazon has proven that it will take advantage of any opportunity to maximize revenue from its assets. That’s how AWS (Amazon Web Services) came to be. It started as an internal system to deal with the company’s hyper-growth in its e-commerce business. But once Amazon realized the full potential of letting others run their technology on the AWS infrastructure, the platform took off and became a $17B cash cow that still grows 43% a year (2017 figures).

The Amazon.com marketplace, and more recently AI-powered voice assistant Alexa — are other striking examples of this strategy. By positioning these assets as an open platform — one that anyone can sell items on (in the case of Amazon.com), or develop applications for (in the case of Alexa) Amazon is not only scaling its revenue, but it is also creating network effects that make Amazon as a company a whole lot more valuable.

Again, can you see the pattern?

Delivery is no exception. The more shippers use Amazon’s for delivery, the more Amazon’s delivery density increases, and the better the economics become. Moreover, parcel delivery is one of the world’s most defensible industries — as evident by UPS, DHL and FedEx — who have been around for 121 years, 49 years and 47 years respectively. Once Amazon reaches that critical scale, it can likely assure itself another 50 years of defensibility.

3. Think VERY long term.

Developing a widespread logistics infrastructure — one that can take on behemoths like UPS and FedEx, can take years to accomplish. That, by itself, could be enough to deter almost any Fortune 500 CEO from even entertaining the thought.

But not Jeff Bezos.

While most CEOs think in terms of quarters, Mr. Bezos thinks in terms of decades. The businessman, who recently announced the construction of a 10,000-year clock, made it clear right from the beginning that “[Amazon] will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.” (see the famous Amazon 1997 Letter to Shareholders). This has been the key thought process behind Amazon’s massive investment in e-commerce and fulfillment infrastructure for over 24 years, which have made it the world’s most valuable retailer (Amazon’s market cap is now 3X that of Walmart!)

Why then should FedEx and UPS assume that Amazon will cease to make such investments today, if it can become the world’s most dominant player in logistics ten years into the future? Back in the early 2000s, Walmart executives made the same mistake of disregarding Amazon’ long-term vision to take over retail.

Can you see the pattern?

Jeff Bezos and the 10,000-year clock. “Think long-term” is an understatement. (Image may be subject to copyrights)

Second, as Professor Scott Galloway explains in his book “The Four: The hidden DNA of Amazon, Apple, Facebook and Google”, Bezos’ consistent communications about Amazon’s pursuit of long-term value creation has enabled Amazon to raise and spend staggering amounts of capital — much more than FedEx and UPS could ever dream of. In other words, for 24 years Amazon has been enjoying a historically low cost of capital. So, unlike FedEx and UPS, Amazon can continue to pour capital into logistical expansion without being too concerned about the short-term impact on its bottom line and resulting implications.

But the third and final point is perhaps the most important of all: when FedEx executives point out the “scale, infrastructure and complexity involved in running a global transportation network”, they ignore Amazon’s ability to scale its delivery network without needing to develop all the infrastructure itself. Amazon doesn’t have to own freight ships to become the dominant player in ocean freight forwarding, just as it doesn’t have to own hundreds of thousands of vehicles to scale its final mile operation — as proven by the Amazon Flex crowdsourcing program. There are enough 3rd party assets in the market that Amazon can leverage without owning.

What Amazon has is far more valuable than the sum of these commoditized physical assets: Amazon owns the world’s most robust logistics software infrastructure that enables every ship, airplane, warehouse and vehicle in its network to work together like a Swiss clock, and which will get infinitely better over time. And that…well, is not something that FedEx or UPS are ever likely to build.

In yesterday’s logistics world, he who owned the physical assets owned the market. That has always been UPS’s philosophy; in tomorrow’s world, he who owns the software infrastructure owns the market. That, in essence, is Amazon’s philosophy. And That is exactly why Amazon is on its way to becoming the world’s most dominant logistics company of the future.

Conclusion: a new dawn for shipping

UPS, FedEx and their regional competitors should all take a close look in the mirror. The world is changing rapidly and they have not kept up with the trends. What used to be considered the world’s most advanced delivery networks are now increasingly becoming a commodity, while value continues to shift to smarter and more flexible technology infrastructures.

Moreover, Amazon — which still calls itself “a partner” of these delivery companies — is playing a long-term strategic game in which it is developing a full-fledged delivery network under UPS and FedEx’s nose, and will ultimately emerge as a direct competitor. Perhaps not next year, perhaps not in three years, but the signs and analysis presented in this article leave little doubts. The writing is on the wall. Other retailers are looking at this changing landscape and understand that they need better shipping partners who can keep pace with Amazon. Yet solutions are not likely to emerge from industry incumbents.

What’s left is to acknowledge, and respond. What can delivery companies and Amazon’s retail competitors do to best prepare for this next big disruption? We will try to answer this question in Part 2 of this article.

Stay tuned.

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