The following is part of JOC.com’s The Industry Speaks series, highlighting new perspectives within the cargo shipping industry.
Amazon’s one-day delivery plans aren’t only shaking the retail sector. The trucking shipment volumes required to support nationwide one-day delivery are essentially jet fuel for Amazon’s new freight brokerage business. Combined, the two are just further indicators of Amazon’s inevitable supply chain creep.
Two decades in, Amazon’s modus operandi is clear. The company builds platforms for internal use, perfects them, and then sells the platforms as a service. A few years ago, it was cloud computing via Amazon Web Services (AWS). Today, it’s trucking.
The domestic brokerage platform will at first be used to improve shipments to Amazon distribution centers, keeping end customers happier with faster delivery. Since it’s not a separate profit center yet, Amazon appears to be offering extremely competitive pricing that provides shippers all-in rates that are below the median of DAT's industry data.
This is an ominous sign for competitors in both domestic and global freight transportation. If Amazon’s warehouse footprint, non-vessel-operating common carrier (NVO) license, or SEC filings flagging forwarders as competition weren’t enough, this is yet another proof point that Amazon is coming for global freight.
Why regulators need to pay attention
Sen. Elizabeth Warren (D-Mass.) recently called for the regulation of Amazon, along with Google and Facebook, in order to preserve and promote competition in the technology sector. The would-be Democratic presidential nominee pointed to Microsoft as a past example of a tech firm that needed to be regulated to prevent it from forming a monopoly and stifling competition and innovation.
When it comes to Amazon, this is certainly true, at least in terms of its logistics business. And it’s not because Amazon is a bad company; on the contrary, it’s precisely because they’re so exceptionally great.
Amazon delivers amazing value to customers and outstanding returns to shareholders, doing everything a company should do to dominate a given market. But time and time again, it uses that market dominance as a leg up in the next market. E-commerce success drove third-party marketplace sales, which drove fulfillment services, which...you see where this is going. And it’s in this flywheel of success that things begin to get murky.
In delivering value to its customers, Amazon is becoming dominant in more key markets than any one company should be, which in turn, gives it an unfair advantage in the next market, edging closer and closer to an anti-competitive practice known as “tying.”
Amazon has avoided running afoul of the traditional definitions of a monopoly. The company accounts for “only” 5 percent of US retail and less than that in most other countries, and it’s only the third-largest retailer in the US. Hardly the stuff of antitrust suits.
But in terms of market value and penetration, Amazon alone is larger than every other US retail giant combined and reaches an estimated 62 percent of all US households. What’s more, Amazon grew nearly 2,000 percent in value between 2006 and 2016, while traditional brick-and-mortar retailers stagnated and in most cases lost value.
The logistics of dominance
Amazon’s online sales helped it to build up a huge customer base. This then spurred the creation of the Amazon Marketplace, attracting millions of sellers that now account for over 50 percent of all items sold on Amazon.com. Of course, to do so, sellers must pay Amazon between 6 percent and 51 percent of the associated revenue. And they have no other choice, if they want to reach the majority of US houses in one, easy channel. After all, nearly half of all online retail shopping in the US takes place on Amazon.
This success has paved the way for Amazon’s logistics offerings. Having opened its virtual shelves to third parties, Amazon then opened its warehouses, allowing retailers to outsource storage, pick-and-pack, and last-mile delivery services through a program called Fulfillment by Amazon (FBA).
FBA is expensive but retailers are forced to use it to reach buyers. The fees associated with the program are somewhat complicated, but as an indication, FBA storage costs $0.48 to $2.40 per cubic foot per month while FedEx charges $0.19 for a similar service. Customers pay for Amazon Prime, and no longer want to pay retailers to ship products to their homes. As a result, FBA, whatever the cost, becomes inevitable as the only really viable way to sell to Prime subscribers.
For retailers, the process of getting Amazon products from suppliers in China to the Amazon fulfillment center is increasingly being handled by Amazon. And once cargo arrives in the US, using Amazon Global Logistics of course, shippers can now book a truck using Amazon Freight. At every step, the seller is getting more affordable prices thanks to Amazon’s vast volumes and the leverage they provide in negotiations with transportation providers, or better access, while customers are getting more products, faster.
Amazon is doing everything right. They are brilliantly leveraging their near-monopoly of e-commerce buyers to create a monopoly for e-commerce sellers, and now to become a dominant provider of logistics from storage to ships, planes, and trucks.
But this market dominance, along with the tendency for that dominance to creep outward into other sectors, and the challenges this poses for any competition, create a force that should be addressed.
As both a consumer and the leader of a freight marketplace provider, I welcome Amazon. I have a Prime subscription, and a good 20 percent or more of companies buying freight services via Freightos.com are Amazon sellers. But even as a company and individual that benefits, I firmly believe that regulation of Amazon is critical to ensure fair competition in the logistics space.
Zvi Schreiber is the founder and chief executive officer of Freightos, a freight marketplace and rate management software provider. Contact him at firstname.lastname@example.org.