Two years ago we were analyzing on this blog the rise of a new logistics giant : Amazon. Amazon was successfully testing new delivery experiences with DHL and Audi. We also predicted Amazon was ready to compete directly with the DHL, Fedex and UPS of this world.
The announcement made by Amazon to open parcel locker network across Europe, is a logical first step before entering the battle.
As you may remember from our market research series on postal innovations, parcel lockers are becoming increasingly popular in Europe as they cope with the market demand for more flexibility to retrieve e-commerce purchases. Deutsche Post / DHL has the most extensive network of parcel lockers in Europe and it has proved to be a great success. It is therefore not a surprise that Germany is the first country where Amazon will deploy its network.
2 reasons why Amazon wants to deploy its own parcel lockers network
We see two reasons for this that drive the Amazon’s willingness to further integrate their supply-chain and get nearer to the end customer.
The first reason is that Amazon wants to gain more independence in terms of last-mile delivery. Delivering goods is a costly business. Given that Amazon doesn’t charge for delivery, it represents a huge cost for them that they probably want to get better under control. In that sense, a vertical integration makes sense (especially given Amazon’s situation of flat near-zero net income since the 90’s).
The second reason is that Amazon wants to revolutionize the delivery experience and in Jeff Bezos’ minds, this can only be done through dramatically cutting into delivery times. Despite advances in supply-chain management, remember that the average delivery time is still greater than one day. Actually a recent study by FEVAD, French logistics institute for logistics and e-commerce, shows that the average delivery time is 1.6 day and the click-to-possession time is 5.4 days ! This is far more than Amazon’s 1-hour delivery time services proposed in USA with PrimeNow. Although postal operators may be ready to speed up their delivery process (e.g. Post.lu declared itself ready for same-day delivery), going beyond that mark will require even more integration and a total control over the complete supply chain.
From a financial perspective the announcement of Amazon makes sense. As the above graph shows, net income stayed marginal despite growing revenues. Cutting logistics costs is at first sight a good idea.
Yet, such a move is highly risky. Fixed costs are high (especially for a large network of parcel lockers) and managing the complete supply-chain is a difficult business. Such a vertical integration can only pay on the long-run (look for instance at the vertical integration started by Swatch more than 20 years and today’s group valuation).
Posted in Innovation, Marketing.