News / Amazon rejigs logistics set-up as pressure grows from US and Chinese rivals

© Clare Jackson

Amazon has been a relentless driver of change in the ecommerce arena, forcing competitors to try to catch up in a robust push for faster deliveries.

But in a twist of the plot, losing ground to Walmart and low-cost Chinese players Temu and Shein, the behemoth has been forced to change strategy.

In the past two years, Amazon rented out its unused warehouse capacity as the pace of ecommerce growth slowed, leveraging its network to accelerate the pace of deliveries. But today the company is gobbling up warehouse space with a voracious appetite, and this year it has taken on over 16 million sq ft of new warehouse space in North America, adding to its already massive 413 million sq ft footprint.

And speed is still a huge factor in the strategy; and Amazon plans to double its same-day fulfilment centres.

At the same time, though, it is adding larger distribution facilities, of 600,000-1 million sq ft. These herald a shift from leveraging a centralised network to a structure with nine regions, all having a large degree of autonomy.

They are meant to store goods in closer proximity to markets, in order to speed up delivery. At the same time, Amazon is striving to cut transport costs, where the final mile is usually the most expensive segment.

Amazon’s about-face on storage space is the result of increased competitive pressure, led by arch-rival Walmart, which over the 12 months ending in April, delivered 4.4 billion items through same-day or next-day delivery, overtaking Amazon’s 4bn shipments.

Walmart’s magic wand has been its footprint of more than 4,600 stores across the US. Shipments from these accounted for nearly all of the retailer’s same-day deliveries, and allowed Walmart to deliver 20% of those same- and next-day shipments in less than three hours.

Moreover, net delivery cost per order improved nearly 40% in the US, according to EVP and CFO David Rainey.

Walmart is also on the offensive outside its home market. In the first quarter, same-day orders in India were up over 150% and one-hour delivery in China soared to 55m orders.

Amazon is embroiled in a price war with Walmart and Target, which is also leveraging its retail footprint for deliveries, noted John Haber, chief strategy officer of Transportation Insight. While Walmart has dropped prices on 3,000 SKUs, Target is slashing prices on 5,000 items, he added. So for once, Amazon finds itself on the back foot.

“Amazon is usually setting the trend, but this move is somewhat reactionary. It’s being pushed, not pushing,” said Mr Haber.

And there is more pressure from Temu and Shein, which have unleashed a tidal wave of low-price apparel into the US. This business caters for a customer segment that seeks the lowest possible cost rather than speed, driving Amazon to reduce its cost structure, he added.

The shift to a regional structure does involve some additional costs, he pointed out. To begin with, inventory-carrying cost and warehouse expenditure rise, as do transport costs to those distribution centres. In some cases, vendors that used to send truckload shipments to Amazon may only require LTL to feed its regional DCs.

“The cost of inbound transport of inventory rises if you move to more locations. It’s a big difference if you have three or four large DCs versus nine or 10,” he said.

Overhead also rises with the establishment of a regional management tier to take care of the heightened responsibilities at this level. But, on the plus side, this should translate into improved service, added Mr Haber.

The regionalisation strategy also increases complexity.

“You need more connectivity, you need more people talking with each other. If you don’t have inventory in your region, where do you get it from? Who is responsible?” asked Mr Haber.

The cost pressure and the shift to a greater regional focus are bound to take a toll on Amazon’s use of airfreight, he predicted.

“An air network is much more expensive to run,” he said. “We will see some shrinkage in the air network. You try to avoid flying what goes to the consumer.”