It’s been a month since the last post, I have desisted from posting my Covid notes, as the days grew grim and the world is inundated with desperation. Stay well, Dear reader.
I wanted to write about shipping. The pressure of online orders during the pandemic finally got to the more efficient e-commerce firm in the US: Amazon.
WSJ reports that Amazon will be suspending its delivery service, Amazon Shipping, which was created as a competitor to FedEx and UPS to ship items from third party businesses to their customers.
In the brighter, sunnier days of September of 2019, I had commented on the escalating shipping cost challenge for Amazon in an interview with Wharton Radio. (See transcript here). Amazon and Fedex after a fraught relationship that lasted increasingly competitive landscape, had called off their contractual relationship. That left Amazon to handle a significant proportion of their package with USPS. In the interview, I had noted that
…Amazon has for long been a big transportation and logistics operator as part of its e-commerce delivery platform. In 2018, shipping costs consumed nearly 12% ($27.7 billion) of Amazon’s revenues of $233 billion, according to its annual report filing. Amazon said it expected those shipping costs “to continue to increase” to the extent its consumers choose its discounted shipping offers or if it uses more expensive shipping methods. Third-party sellers account for about half of Amazon’s revenues, and they rely on Amazon to deliver their products, Veeraraghavan pointed out.
In fact, the goods sold by small firms from China has a been prominent part of Amazon’s revenues in the US last year. (I expect things to change this year).
Amazon feels the pressure to bolster its last-mile delivery infrastructure also because about a quarter of the third-party sellers on its platform are from China, said Veeraraghavan. “If you’re a seller in China and you want to sell to a customer in the U.S., there’s no way for you to set up a logistical arrangement with UPS or USPS or, any transportation company as easily as with Amazon,” he noted.
From the halcyon days of last 2019, the COVID pandemic challenge has forced Amazon to focus only on delivering household items (throwing Prime guarantees out of the window). In my view, this is perhaps the first big fraying of the customer obsession model that was a religion of Amazon.
First, the “non-essential” items were de-prioritized. As Jason Del Ray reported that these shipments are are now delayed for more than a month. In late March, Amazon refused accepting third party sellers’ shipments of non-essential goods. Now, all the resources are being directed towards shipments of only essential items.
I anticipated these issues in my comments to Vox last month, arguing how
“…the demand is going to go up everywhere and it’s going to go up at scales that are much higher than the holiday season demand, so we’re going to have the same problem but multiplied by an order of magnitude.”
Usually, demands for products across different households are not highly correlated. Our household schedules are varied. However, summing across time and geographies, the overall demand is fairly smooth and predictable. This helps many firms run fairly straightforward order and delivery models.
In the times of pandemic, this breaks down and the household demands become almost perfectly positively correlated, i.e., the demand for household products go up everywhere at the same time. To meet demand, “local reshuffling and pooling” won’t help. The demand spike can only be met by (1) storing more inventory acquired through more supply (2) more logistical labor capacity and (3) increased delivery capacity.
So, the suspension of Amazon Shipping is very much along expected lines. They have managed to keep the supply lines afloat, but they need to scale up to do (2) and (3). To boost labor capacity, they are now hiring more than 100,000 workers across all warehouses.
But, that’s still not enough, as they need an increased capacity for delivery, as they have wiggled out of the contract with FedEx. So, who loses out? Out go the small businesses who use Amazon Shipping for their non-essential shipments.
It is all hands on the (shipping) deck for Amazon — they need every one affiliated with Amazon making Amazon shipments.
PS: Of course, there is always the old reliable USPS. I have previously commented (See: Go it Alone on the Last Mile?) on how Amazon cannot go alone without USPS. Often maligned and blamed USPS absorbs all the inefficiencies of last mile delivery.