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businessinsider - 19 days ago

Amazon s in-house delivery network is about to face the ultimate test this holiday season as the retail giant doubles down on competing with UPS and FedEx (AMZN)

Amazon is set to spend more than $3 billion this year on its burgeoning transportation network of planes, ocean freighters, vans, trucks, and more. Now, investors are waiting to see if that network can face the ultimate test: an ultra-short holiday shopping season of just 26 days. That s six days fewer than 2018 s holiday season. There s going to be more volume through a shorter pipe, Amit Mehrotra, Deutsche Bank s lead transportation and shipping analyst, told Business Insider. Amazon will still rely on UPS, USPS, and other third-party carriers to fulfill less than half of its deliveries. FedEx ended its air and ground relationships in the US with Amazon during the summer a move that put more pressure on Amazon s transportation network. We deliver for our customers every day and are confident in our ability to serve customers this holiday season, an Amazon spokesperson said in a statement to Business Insider. Visit Business Insider s homepage for more stories. Christmas 2013 is a black mark in Amazon s history. That was the year the company s third-party delivery partners, namely UPS and FedEx, failed to deliver packages on time for Dec. 25. Amazon had to sheepishly issue $20 gift cards and apologies to customers. The failure to meet customer expectations is especially damning for a company whose core tenant is customer obsession. (T)he No. 1 thing that has made us successful by far is obsessive compulsive focus on the customer as opposed to obsession over the competitor, Amazon founder Jeff Bezos said in a talk at the Economic Club of Washington last fall. Now, one of the factors that made 2013 such a damning holiday season for Amazon is back: an especially late Thanksgiving. There are just 26 days between Black Friday and Christmas Day this year six days fewer than last year and the shortest holiday shopping season we ve seen since 2013. That doesn t mean customers will be buying less, according to the National Retail Foundation. But it does mean that the pressure is on for online retailers to fulfill orders. And e-commerce analysts are hunkering down to see if Amazon will be able to deliver, avoiding another customer service fiasco. There s no question that capacity is going to be very tight, given the compressed time period, said Mike Howell, CEO and cofounder of Seattle-based delivery marketplace startup Dolly. Every retailer is understanding that the window is going to be very compressed. Amazon, for its part, is confident in its abilities. We deliver for our customers every day and are confident in our ability to serve customers this holiday season, a spokesperson said in a statement to Business Insider. And, while it relies on third parties like UPS and the US Postal Service for much of its fulfillment, Amazon emphasized its network in its communication. We re adding new transportation capacity and putting more selection in fulfillment centers closer to customers, which is possible because of the sophisticated and innovative network we ve been building for over twenty years, the spokesperson added. We regularly balance capacity to ensure we are able to meet our delivery promises even during the busiest of times. Amazon has been moving its delivery network in-house Another twist to the 26-day peak season, as retailers and transport experts call the time between Black Friday and Christmas Day, is that Amazon isn t relying on UPS, FedEx, or other third-parties as much as it once did. It s going to throw things into chaos, Kevin Sterling, Seaport Global Securities managing director, told Business Insider about the shrunken peak season. Around the 2013 holiday season that Amazon fumbled, UPS and FedEx told Amazon they were not interested in scaling their operations to keep up with Amazon s skyrocketing delivery demands, Sterling said. UPS alone was tasked with 7.75 million parcels in that 2013 holiday season. Amazon is a complicated customer. They can inject a company s bottom line with a windfall of volume and revenue, but margins on each parcel are relatively low. That s why UPS and FedEx chose not to devote more volumes yet to Amazon. Amazon packages are very small, and they don t take up a whole lot of space, but at the same time there s not a whole lot of money to be made by moving them, Cathy Roberson, an analyst with Logistics Trends Insights, told Business Insider. Now, Amazon is building a one-day shipping machine that some experts say could eventually challenge UPS and FedEx at its own game. According to Rakuten Intelligence data, Amazon is delivering the majority of its packages in the last mile. The e-commerce behemoth has the capacity for 100 planes in its air hub and about 10,000 branded truck trailers for middle-mile freight moves, along with a slew of tractors. It recently placed an order for 100,000 electric delivery vans. It s even pushing into ocean freight so it can move its goods from China to the US without any outside interaction. That s all aimed at fulfilling Amazon s one-day delivery promise for Prime subscribers, who ordered more than 1 billion items during the 2018 holiday season. Read more: Amazon took over the $176 billion market for cloud computing. Now it s using the same playbook in logistics. UPS, FedEx, and USPS did not provide comment to Business Insider about their relationships with Amazon. The delivery network, ostensibly, was built out to avoid another debacle like 2013. But some industry watchers say Amazon is actually keen on becoming a delivery company itself after all, the company already has declared itself a transportation company in public filings. Both UPS and FedEx have called Amazon a competitor, but some analyses suggest that the package giants don t have too much to worry about. For Amazon just to catch up to UPS and FedEx, the company would need to invest a staggering $122 billion into its network, according to a July Goldman Sachs report. Amazon has 215 principal and additional operating facilities compared with FedEx s 1,214 and UPS s 1,038 facilities. Matching the logistics giants might in that area would cost Amazon $46.6 billion. There s also a variety of specialized services that FedEx and UPS provide that Amazon lacks. UPS, for instance, has logistics solutions for a slew of complex industries: high-security defense, complicated automotive manufacturing, and healthcare even processes like liquid-nitrogen-dry-vapor shipping of medicine. Now Amazon s network is about to face the ultimate test Amazon is slated to spend more than $3 billion on developing its one-day delivery network, said Youssef Squali, the managing director and global head of internet and media-equity research at SunTrust. That number alone is forcing industry watchers to closely monitor whether Amazon can justify that massive investment during its most hectic time of the year. We re crossing our fingers and hopeful that this peak season will be seamless due to this investment, Amit Mehrotra, Deutsche Bank s lead transportation and shipping analyst, told Business Insider. There s going to be more volume through a shorter pipe. Many, including Squali and Mehrotra, are optimistic that Amazon will avoid a 2013-like debacle. They ve been at it now for much longer, Squali told Business Insider. They have dramatically expanded their logistics network, plus partnering with others. Another benefit for Amazon, outside of its own logistics capacity, is the fact that UPS has invested so much in its own sortation. This year alone, UPS has added 11 new cargo planes and 20 new or retrofitted automated facilities to manage what it expects to be record package shipments. (FedEx, while it won t be moving Prime boxes, is also expecting to move a record amount of packages on Cyber Monday.) As for whether Amazon will be able to fulfill its one-day Prime delivery promise, Squali is bearish. A growing percentage of their shipments deliveries will be one day, but the vast majority will still be two day, Squali said. But that still puts them ahead of many of its competitors. Few large retailers have the capacity to promise two-day shipping. And even fewer, besides Target, Walmart and Best Buy, have the ability to ship nationwide in one day. The rubber is gonna hit the road next week when things start heating up again, Squali said. It has always been crunch time for the company. This year is even more difficult because the holiday window has shortened by several days. While it is going to be difficult for Amazon to deliver on the promise of one-day, even two-day delivery, imagine how much more difficult it is for competitors to try to do it competitors who don t even have two-day. SEE ALSO: FedEx no longer will fly your Amazon packages — and now pressure is mounting on the company as it gears up its in-house air-freight network Join the conversation about this story NOW WATCH: Here s why in-flight WiFi is so slow and expensive


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