Forget having your Amazon parcels delivered by low-flying drone. At least for a while. Right now, the revolutionary technology transforming the 172 billion euro ecommerce delivery business is the bicycle. And the white van.
Amazon has announced that it was trialling parcel delivery by bicycle in New York. More significantly, however, in both the US and UK, the ecommerce group has set up its own delivery van network, with its own vehicles and drivers.
Although the vast majority of its parcels are still delivered by established postal operators — including FedEx, UPS, TNT and DPD — analysts say that Amazon’s decision to deliver some of its own packages will shake-up an overcrowded postal market and drive consolidation.
Joel Ray, an analyst at Transport Intelligence, a consultancy, says the delivery market — which it expects to grow by 9.8 per cent a year until 2017 — is already being polarised between high-value, next-day guaranteed services and companies offering an economy option. “It’s this latter group that is likely to struggle,” he warns.
Amazon says the rollout of its Amazon Logistics business since 2012 has created more than 170 jobs at its 11 delivery stations in the UK, as well as 2,000 jobs indirectly. “We needed more capacity to deliver on time and in excellent condition and to complement our existing carrier partners,” an Amazon spokeswoman explains. She declines to say what share of its packages it delivers itself, but the rollout has already hurt Royal Mail.
In November, Britain’s privatised mail operator blamed a 21 per cent drop in first-half operating profits, from 353 million pounds to 279 million pounds, on competition from Amazon’s van network. UK Mail also reported a sharp fall in group pre-tax profit for the six months to September 30, to 4.9 million pounds, as group revenue slipped from 243.4 million pounds to 241.4 million pounds.
Royal Mail says Amazon’s decision to deliver its own packages could cut revenue growth in the parcels market — estimated at 4 per cent — by half over the next two years. But Ray says it is “likely to lose even more [market share] as Amazon ramps up its delivery capabilities”. Royal Mail’s own parcel revenues fell 1 per cent in the six months to September 28, even though volumes grew slightly.
Delivering its own packages gives also Amazon greater control over costs and service quality, which can come under strain at third-party contractors in the pre-Christmas period.
This month, Yodel, the UK postal operator, admitted to a three-day backlog and temporarily stopped collecting parcels. Similarly, presents ordered through Amazon piled up at United Parcel Service and FedEx in the US last year, when the two companies became overwhelmed by a surge in online shopping.
UPS was forced to issue a profit warning in January after a failure to deliver thousands of parcels knocked nearly 14 per cent from UPS’s fourth-quarter 2013 earnings per share: cutting them to $1.25 from a previous forecast of $1.32 -$1.52. FedEx performed better than its rival but attributed the narrowing of margins in its $12 billion a year Ground division to investment it had to make to cope with the pre-Christmas peak season.
At a 9.8 per cent annual growth rate, these demand peaks are likely to become even more exaggerated, warns Alan Braithwaite, chairman of LCP Consulting, which advises a number of retailers. Black Friday, the post-Thanksgiving shopping promotions day now adopted by other countries, is already squeezing postal operators’ margins.
“A lot of companies cut their prices to be in the game on Black Friday,” says Braithwaite. “The couriers can burn money in the peaks to keep customers happy but it’s the retailers that are actually making the profits.”
Some of these margins are already under pressure. In September, Dutch logistics group TNT Express warned that it would fall short of its forecast 8 per cent adjusted operating margin in Europe and the US.
Postal operators also face competition from retailers’ “click and collect” services, which allow customers to order online but visit either a store or local locker to pick up their purchases. It is a market that is expected to grow, to the parcel companies’ detriment. According to Planet Retail, 35 per cent of online shoppers in the UK already use click and collect, and the figure will rise to 76 per cent in three years.
Similarly, Amazon has launched a UK same-day delivery service in partnership with the newspaper distribution company Connect, which allows customers to collect from local newsagent shops. Britain’s Post Office network has also allowed Amazon to use its offices for click-and-collect. Ray warns that this development may cut parcel volumes for Royal Mail and other delivery services.
Where Amazon leads, other etailers have started to follow. Alibaba Group has already set up its own delivery network in China. Braithwaite predicts that more will do the same.
“Retailers are looking at how they can leverage their resources,” he says. “They are concerned that their own reputations are at risk. If Tesco is already delivering its own food, there’s no reason it couldn’t deliver other goods for a third-party as well,” he says. “They already have the delivery network.”
Ray says it is inevitable that Amazon will transform the parcels market. “Some companies are starting to ask whether Amazon is now an eretailer or a logistics company,” he says.
Financial Times