Robotics & Warehouse Automation 11th November 2020

Parcel Distribution: The Race To Own The Delivery Network

Rueben Scriven
Rueben Scriven

Rueben is one of the warehouse automation industry’s leading analysts and is a regular speaker at leading industry events. He has moderated several panel discussions on the topic of commercial vehicle electrification and has also appeared on CNBC, providing insight on the global electric bus market.

Interact Analysis is producing a series of insights on e-commerce warehousing. These insights are drawn from the company’s latest in-depth report on the sector. This week, lead analyst on warehouse automation, Rueben Scriven, updates us on an important trend affecting all warehouse companies: the race to own the delivery network. To check out last week’s article, on apparel, click here.

Amazon: smoothing out the customer experience

Warehouse automation companies should sit up and take notice of the fact that major on-line retailers such as Amazon are responding to the boom in online shopping by bringing in-house more and more aspects of an item’s journey from purchase to delivery. Amazon is a customer-centric company, always ready to reconfigure operations in order to provide the best customer experience – even if it results in a short-term fall in profits. Ultimately, Amazon now wants to own every touch-point with the customer, and it is this that is leading them to bypass express delivery companies. The reason for this desire to own the delivery network is that, if an express delivery company messes up an order, it reflects poorly on Amazon. And, in the judgement of Amazon’s management, many incumbents simply don’t have the technological capabilities to meet Amazon’s exacting standards – such as forecasting delivery times to the minute.

Shipping: seizing the baton from independent carriers

Amazon started circumventing independent parcel and express delivery providers in 2018, when it launched its ‘Delivery Service Partner’ programme, dedicated to exclusively handling Amazon shipments at a cost well below what it had been paying independent delivery services. In the first phase of the programme, the e-commerce world leader recruited new business owners to operate local delivery fleets as independent contractors. The company then sharpened its focus on the programme by encouraging Amazon employees to start up their own delivery businesses, offering $10,000 and the equivalent of three months’ salary to enable them to set up their delivery fleets.

The company claims these initiatives have created hundreds of new small businesses, all dedicated to Amazon deliveries. It’s a massive project. The concept of ‘free shipping’ offered through Amazon Prime membership has seen an exponential rise in online orders, but Amazon has still managed to pull in-house 50% of parcel shipments, or about 6 million shipments a day, formerly handled by major independent logistics companies such as FedEx and UPS.

Amazon isn’t the only online retailer to bring parcel shipment and express delivery in-house. The Chinese multinational company Alibaba, the world’s largest retail and e-commerce company, recognised early that express delivery and logistics companies are crucial to the success of online retailers, and the best way to ensure that success is to have a major stake in those companies, if not to own them outright. Consequently, the logistics and distribution company Cainiao was co-founded with eight other companies by Alibaba in 2013, and last year Alibaba raised its equity in the company from 51% to 63%, pumping in an additional $3.3 billion. Alibaba also has major stakes in STO Express, YTO (which Alibaba recently doubled its stake in), ZTO Express and Best Inc; four of the six major logistics companies in China.

The response of the independent carriers: go digital; go cloud

Independent logistics companies such as FedEx and UPS now find themselves in direct competition with big online retailers. In 2019 FedEx announced it was terminating its delivery contract with Amazon. Companies like FedEx are increasingly turning towards technology companies in order to compete with the digital prowess of Amazon and provide customers, notably industrial customers, with better insights into their supply chains. To this end, FedEx announced a partnership with Microsoft and its Azure services to provide “new commerce experiences that transform logistics”. FedEx Surround is the first solution resulting from this collusion with Microsoft. It gives enhanced visibility to a business’s supply chain by providing data which describe shipment movements in near real time. Vital information in this fast-moving world.

Is there room for all of these movers in the world of distribution? Will they all be able to remain competitive, or are we likely to see a growing level of consolidation in the industry to increase economies of scale? Only time will tell.

Stay tuned for Interact Analysis’s next warehouse automation report, which will be on the Food and Beverage industry.