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Faced with excess capacity and weaker results, Amazon is moving to generate more money from its fulfilment network.
The company’s ‘Buy with Prime’ offering allows merchants not selling on the Amazon platform to use Prime free next-day deliveries and returns.
“Prime members will the see Prime logo and delivery promise on eligible products in merchants’ online stores, which signals the item is available for free delivery, as fast as next day, with free returns,” said Amazon.
According to the e-commerce giant, “merchants simply pay for what they use”. Pricing is based on a service fee, a payment processing fee and fulfilment and storage fees calculated per unit.
No fixed subscription fee or long-term contact is required, and all fees except storage charges are levied only after a merchant makes a sale.
While this may sound appealing to online sellers, John Haber, chief strategy officer at Transportation Insights, does not view Buy with Prime as a game-changer.
“I don’t see any dramatic changes in the next six months, with huge volumes transiting to Amazon,” he said.
The main reason for this is that Amazon has launched the offering with the handbrake still on, he explained. Initially the service is available by invitation to merchants already using the Fulfilment by Amazon (FBA) service, but Amazon has said it intends to extend this to non-FBA clients before the end of the year.
Thus, the new offering does not signal an all-out push to attract traffic from sellers that are not Amazon customers at this point. Buy with Prime is little more than dipping a toe in the water towards becoming a carrier for non-aligned sellers, Mr Haber said.
He views the launch as a move to utilise more of Amazon’s warehousing footprint, which has grown exponentially over the past two years, essentially doubling the size of the network. Amazon accounted for some 15% of the industrial space in the US taken up last year, he pointed out.
“They have too much warehouse capacity now, so they want more inventory,” he said.
Amazon CEO Andy Jassy said the company had managed to meet its warehousing capacity and staffing needs, but now had work to do to improve productivity.
And the pressure to do so is increasing, as costs are on the rise. Amazon’s shipping costs rose 14% in the first quarter – according to CFO Brian Olsavsky, about $6bn higher than a year earlier, including $2bn due to inflation.
Amazon reported a $3.8bn net loss for the quarter. Most of this was due to a $7.6bn pre-tax loss in its stake in electric-truck maker Rivian, but the e-commerce business also suffered. While sales in North America, its biggest market, rose 8%, operating expenses climbed 16%, to $71bn.
And Amazon’s shares dipped 9% in value after the first-quarter results announcement. But UPS also saw its shares drop after it reported higher profits but a decline in volume for Q1.
“E-commerce is slowing down, and so is package delivery,” said Mr Haber. “There are a lot of headwinds.”
Against this backdrop, the move to Buy with Prime augurs more steps by Amazon to grab fulfilment business to leverage and optimise its network. This raises questions for its relationship with UPS, which derived 11.7% of its revenue in the last quarter from the e-commerce giant.
UPS CEO Carol Tome believes her company’s competitive position is not threatened by Amazon’s latest move. The pair have arrived at a mutually beneficial agreement, she said.
Still, in the long term, the writing is on the wall and UPS is well aware of it, believes Mr Haber. For now, the integrator is generating a lot of business from Amazon, and this may actually climb further in the near term, even as the share of Amazon traffic UPS handles may decline, he added.
Meanwhile, Amazon is indicating its ambition to leverage the logistics aspect of its parcel business more. It has informed merchants that, by the end of this month, they will be required to provide more information about the dimensions of more than 250 product types.
Mr Haber reckons this is meant to give Amazon a better idea of the size of shipments and a lever to charge for parcels that exceed standard sizes. FedEx and UPS are using a multitude of criteria that trigger surcharges for out-of-size shipments, he noted. Charging by dimensional criteria is on the advance, involving LTL carriers as well as regional players, he pointed out.
“FedEx and UPS lead the charge, because they have technology in their facilities. They’re using dimensional scanners,” he said.
With its penchant for technology, Amazon looks likely to follow suit. Rising costs are adding to the allure of this. They also caused the company to introduce a fuel surcharge for the first time, added Mr Haber.
For more information on the importance of warehousing to e-commerce success, listen to this podcast clip of Cathy Roberson, President of Logistics Trends & Insights