DHL Challenge

Who's Afraid of Amazon?

  • Why it matters

    Why it matters

    While there may be capacity, Amazon could become a problem for global leader Deutsche Post DHL and competitors if it pushes prices down too far.

  • Facts

    Facts

    • Amazon spent $16.2 billion on logistics in 2016, six times more than Lufthansa Cargo’s annual revenue.
    • Amazon is expected to ship 12.6 billion packages a year by 2020. In 2015, the number was 5.6 billion
    • UPS says no customer, not even Amazon, contributes more than 10 percent of its total revenue
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    Audio

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Amazon-Zentrum Leipzig
Can the market handle two? Picture source: DPA

Online retail giant Amazon is looking to disrupt yet another industry. Once a boon for the logistics sector, providing a fresh wave of packages to be delivered around the world, the Seattle-based company is now spending tens of billions to cut out the middle-man, essentially starting its own logistics operation. It’s taking on the existing behemoths of the trade – industry leader Deutsche Post DHL and rival US firms UPS and FedEx – to do it.

Yet so far, these more established rivals are taking the move in their stride. That’s partly because business is booming and there’s plenty of capacity to go around. “I don’t worry,” UPS Chairman and CEO David Abney told Handelsblatt in an exclusive interview this week. “The conversations that I have with them is they look at adding supplemental capacity.”

Deutsche Post DHL is also more worried these days about UPS and FedEx than it is about Amazon, with which it actually reached a deal earlier this year to take over fresh grocery deliveries. The head of Deutsche Post’s own parcel service, Jürgen Gerdes, last year in an interview predicted a “long, successful, shared path” between the two companies.

That may be true, but there are still plenty of ways that Amazon can become a headache for the big three. Even if there is enough demand for logistics to go around, Amazon could push down prices by developing more tech-savvy ways of sending packages around the world. That in turn could cut into profits at its rivals.

Amazon is building a logistics firm over the next decade that “will lead to the end of the retail industry” as we know it.

Amazon founder Jeff Bezos was recently asked if he is trying to replace UPS or FedEx by launching its own logistics division. His answer could not have been more concise. “Neither,” he said. It was the follow-up question that told the story. Mr. Bezos was asked if he wants lower shipping prices, to which he replied, “Well, we always like lower prices.”

For the moment, however, logistics is proving more of a cost headache that a boon for Amazon itself. According to its most recent financial statement, Amazon earned $9 billion in revenue from shipping in 2016. But that’s only part of the story. The company’s actual shipping costs were $16.2 billion. This means that Amazon subsidizes its shipping costs by $7 billion. That €16.2-billion figure is six times Lufthansa Cargo’s annual revenue.

In other words, Amazon still has a ways to go to play with the big boys in logistics. Germany’s Deutsche Post DHL is the global industry leader with annual revenue of $57 billion, followed by UPS and FedEx with a little more than $50 billion.

Yet despite those figures, Amazon’s volume of orders from its online retail store is overwhelming all three of them. In 2015, Amazon shipped 5.6 billion packages. This number is growing exponentially. According to investment bank Piper Jaffray it will be 12.6 billion packages by 2020. Amazon is expected to ship more packages by 2019 than FedEx handles on a yearly basis. That’s why there’s room for Amazon to get in the market – the logistics companies don’t really have an interest in their entire business revolving around one player.

UPS doesn’t publish the names of its biggest customers, but Mr. Apney said that no single company makes up more than 10 percent of total revenue. He wants to keep it that way: “What makes UPS special is that we help add value to the Amazons of the world but then we help add value to the mom-and-pop stores all across the world.”

Like Deutsche Post DHL, Mr. Abney insists the relationship still benefits both sides. “Amazon first and foremost is a customer, and they are a good customer of ours,” he said. “That means we value them as much as they value us. We also watch on the decisions that they make.” FedEx CEO Fred Smith similarly downplayed the new challenge in a recent conference call with analysts in which he pointed to the “tremendous” costs of building a global network.

Behind closed doors, logistics executives are less relaxed about Amazon’s potential disruption of the industry, said Robert Lieb, a professor at Northeastern University. Mr. Lieb, who analyzes supply chain management, has been talking to executives for more than 20 years. He says the “fear” has become more acute ever since Amazon leased 20 aircraft last year, securing the option to acquire 20 percent of U.S. cargo airlines Atlas Air Worldwide and Air Transport Services.

A study by Germany’s largest financial institute, Deutsche Bank, stated that Amazon is building a logistics firm over the next decade that “will lead to the end of the retail industry” as we know it.

Amazon could not only demand lower prices from DHL and its competitors but also ship goods for third parties.

One example of the changes in store: Hundreds of mathematicians with doctoral degrees are currently on “preemptive package deliveries,” according to analyst Robert Salmon, as part of Amazon’s plans to ship goods, produced in Asia, to Europe and the U.S. using its own Boeing 767 aircrafts and container ships. “It’s simply a huge mathematical equation,” he said.

Intelligent software is supposed to predict delivery streams in advance. Amazon uses a similar technology at its 383 distribution centers around the globe. In Germany, the company operates 13 such centers. This is where Amazon poses the biggest threat: Once the network is up and running, Amazon could not only demand lower prices from DHL and its competitors but also ship goods for third parties.

“That’s what I expect,” said John Rossman, a former top manager at Amazon, who now works at consulting company Alvarez & Marsal. “Within the next five years? I doubt it. In the next 10 to 15 years? Definitely.”

Logistics is part of Amazon’s DNA. It started with the fast delivery of books, but nowadays it includes furniture and everything else. It’s part of the company’s brand identity. Mr. Bezos and his chief strategists consider logistics “its best line of defense against Facebook or Google,” which are shying away from ecommerce due to the complexity and high costs of the business, Mr. Rossman said.

Combined with other technological advances in the areas of artificial intelligence and drones, along with traditional logistics tools such as trucks and bicycle couriers, Amazon is well on its way to building a logistics empire and changing yet another industry.

 

Thomas Jahn is Handelsblatt’s New York bureau chief. To contact the author: jahn@handelsblatt.com

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