How wary should truck brokers be of Amazon?

How wary should truck brokers be of Amazon?

Amazon's foray into domestic truck brokerage might not be a threat to established brokers, but the largest publicly traded company in the world entering the market is bound to turn heads. Photo credit: Shutterstock.com.

Amazon’s move into brokerage isn’t likely to panic established truck freight brokers such as C.H. Robinson Worldwide, Echo Global Logistics, or XPO Logistics. But it puts those companies, along with thousands of small freight brokerages, on notice that a new logistics era is here, and perhaps, eventually, another big freight broker with domestic and international reach.

That deepens the need for companies to examine what effect Amazon has on their business, whether as a competitor, a service provider, a channel partner, or a mix of all three.

Amazon is launching its brokerage as it upgrades its Amazon Prime free-shipping offering from two days to one. That faster velocity will demand greater control over distribution capabilities, both its growing internal transportation network and its portfolio of partner companies.

If Amazon expands its US brokerage service rapidly, it could put more pressure on truckload contract rates and spot pricing this year. Truckload spot rates are down by double digits from a year ago on industry load boards, and Amazon, with its scale, could drive them even lower.

Competitor or collaborator?

Questions remain, however, as to whether beneficial cargo owners (BCOs) and domestic shippers will want to work with Amazon as a freight broker, given that the company could be seen as a direct competitor in its capacity as a shipper. They may not have a choice.

A number of publicly traded US freight companies have stated in early 2018 that they have lost business, or expect to, as a result of Amazon taking management of its own freight in-house. But at the end of the day, it’s difficult for anyone to avoid doing business with Amazon.

The market access Amazon offers companies that import and ship goods domestically, as well as the freight volume it offers carriers and brokers, make turning away from Amazon a tough call, even though the pricing Amazon allegedly demands can cut deep into margins.

“No doubt it will become a big business for them,” Cory Margand, CEO of the international freight marketplace SimpliShip and a former logistics executive with Adidas, wrote in a LinkedIn post Sunday. “But, this industry is very different than the others they have entered.

“Why would any large BCO in their right mind ingrain themselves further into Amazon's claws, especially when they are likely to become competition?” Margand said. “Maybe it's an SMB [small-to-midsize business] solution for the most part.” It’s also a domestic solution.

Amazon Logistics is focusing on US truckload freight, regardless of whether a shipment originated overseas and arrived at a US port in a container. Amazon already operates as a non-vessel-operating common carrier (NVO) and has global freight-forwarding authority.

Launched last week with no fanfare, freight.amazon.com builds on that domestic authority and complements fulfillment and warehousing services that have already catapulted Amazon to the top of the list of the world’s largest third-party logistics providers (3PL).

“Tap into the scale of Amazon as we extend our carrier network to give you best-in-class service at great rates,” the company says on its website. Its language clarifies that the full truckload services are offered by Amazon Logistics, “a freight broker licensed under MC826094.”

The service today is limited to truckload freight originating in Connecticut, New York, New Jersey, Pennsylvania, and Maryland, which could include imports from the ports of New York and New Jersey, Philadelphia, and Baltimore, once that freight enters domestic networks.

It’s likely many of the shippers initially using the service will be Amazon vendors shipping goods directly to the e-commerce retailer’s distribution centers, a middle-mile move. Amazon is likely using the service to pump goods into its final-mile delivery network more quickly.

A long time coming

Amazon first gave indications it might one day aspire to greater supply chain ambitions back in early 2016, when a little-known courier service it owns in China registered as a foreign-owned NVO with the US Federal Maritime Commission.

An NVO contracts ocean freight on behalf of its customers, and the thinking at the time was that Amazon would use this designation to move cargo for sellers on its marketplace.

The same was the case when the company started leasing its own cargo planes while purchasing trailers and leasing trucks. Those steps seemed to put Amazon in direct competition with some of its biggest partners, global parcel and freight expeditors FedEx, UPS, and DHL.

While the industry attempted to read the tea leaves, Amazon CEO Jeff Bezos continually told anyone who would listen the company planned only to supplement the capacity of traditional parcel integrators, not compete with them. And those integrators and carriers agreed.

Last June, Amazon announced plans to build its own network of last-mile delivery providers, rivaling services offered by FedEx Ground, UPS, and the US Postal Service. Again, the given reason was executing customer fulfillment demands as e-commerce volumes soared.

“Amazon doesn’t have enough people to absorb the new volume, leave aside shift anything away from the big three,” Satish Jindel, president of SJ Consulting Group, said at the time. However, the “big three” would lose a percentage of the Amazon volume they handled.

FedEx, UPS, and DHL can’t ignore Amazon’s competitive challenge, Jindel said. “They’re a competitor from the perspective that they’ve got a value proposition that is more attractive to the business-to-consumer retailer.”

The same warning applies to freight brokers, forwarders, and 3PLs.

The company’s 2018 10-K annual report filed with the US Securities and Exchange Commission left no doubt that Amazon not only considers transportation and logistics companies to be competitors, but that it had carved transportation out into a core operating unit as well.

Amazon’s shipping costs, including the operation of sortation and delivery centers and transportation costs, were $16.2 billion, $21.7 billion, and $27.7 billion in 2016, 2017, and 2018, respectively. That 71 percent increase is driving Amazon’s transportation expansion.

“We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing our fulfillment network, negotiating better terms with our suppliers, and achieving better operating efficiencies,” Amazon said in the annual report.

But that doesn’t mean Amazon has to be an asset-based transportation provider. Operating as a broker would be far less costly than going head to head with asset-based carriers.

The implications of Amazon operating as a freight broker are potentially massive, given the scale of its financial backing, the network of small and midsize businesses already selling on its marketplace (potential freight customers shipping to Amazon distribution centers), and its growing array of physical assets, from delivery vans to 53-foot trucks to leased aircraft.

San Francisco-based freight forwarder Flexport made waves when it received a record $1 billion funding injection from SoftBank’s Vision Fund earlier this year, primarily because that kind of financial backing gives it the ability to undercut on price to gain market share. But for Amazon, which took in nearly $233 billion in revenue in 2018, $1 billion is a drop in the bucket.

Amazon also appears to be taking a much more metered approach to the logistics market than the no-holds-barred, disruption-at-all-costs tactics some may have expected from the most valuable publicly traded company on the planet. Although US trucking is a much more fragmented market than that of ocean freight or air cargo, building an effective domestic brokerage will be superficially easier for Amazon than building an international forwarder.

What’s more, Amazon already has a blueprint for building huge market share in businesses outside its core e-commerce retail operations. It has a dominant share of web-hosting through its Amazon Web Services (AWS) business, a division that, like logistics services, was born from its own need to supplement the offerings of its vendors at the time.

If brokers and forwarders aren’t scared yet, perhaps they will be once they see how the stock market has reacted to the news. According to investment analyst Seeking Alpha, major forwarders have already seen shares take a hit on Monday, including C.H. Robinson (down 5 percent), XPO Logistics (down 2.3 percent), J.B. Hunt Transport Services (down 2.7 percent), Landstar Systems (down 2.9 percent), USA Truck (down 2.2 percent), Old Dominion Freight Line (down 2.1 percent), Werner Enterprises (down 2.6 percent), Hub Group (down 1.4 percent), Schneider National (down 2.3 percent), and YRC Worldwide (down 1.2 percent).

The largest brokers have been watching Amazon’s expansion toward their markets for years. And they believe there’s still plenty of room for them to grow, and for Amazon.

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy. Contact Eric Johnson at eric.johnson@ihsmarkit.com and follow him on Twitter: @LogTechEric.

Comments

Great article providing reality to what is really happening.

To me, the key here is the comment about the B2C space. Amazon has neither the time nor desire to play the role of trusted partner to entities in the B2B space (and, most likely, not to many of the S&MEs in the B2C space, either). I get irked a bit at the constant talk of Amazon being "innovative," because so much of what they do has been done before, just not on the scale that they're doing it. But, where I will give them credit is that they're being more open-minded about the idea of "letting" others use their resources... for a fee, of course. They're not letting internal functions put the kibosh on what are really good ideas but introduce elements of risk that certain functional areas consider inviolable rules (e.g. co-loading with, effectively, competitors' products). That I love. Perhaps Amazon will be a good relief valve for capacity constraints, but they probably won't be a core partner to larger enterprises (who, not so coincidentally, have the most freight).