Amazon and its last mile shipping challenges - Impact of shipping costs on retailers

Three recent developments, all related to Amazon, are of great interest to retail industry and supply chain professionals. These developments are related to Amazon’s shipping costs and its attempts to reduce those costs.

In October 2-13 Amazon raised its free shipping minimum to $35[1]. Subsequently in January 2014 Amazon reported considering $40 price hike for its Amazon prime service[2] that provides free 2 days delivery and heavily discounted next day delivery[3]. There was another great buzz created by Amazon Prime Air – a futuristic delivery system using drones[4].

When we analyze these developments in light of data available from Amazon’s and industry sources, few observations can be made

1. Amazon’s shipping rate hikes were inevitable. In 2013 Amazon’s net income per sales dollar was only 0.368 cents[5]. Amazon’s shipping costs in 2013 were almost 8.9 cents per sales dollar. After accounting for shipping revenue from customers, Amazon funded 4.8 cents per sales dollar to shipping. In order to stay profitable, Amazon has to find a way to increase its shipping revenue and reduce its shipping costs.

 

2. Amazon Prime Air is an attempt to reduce cost of delivery. Amazon’s press releases show this drone delivering to home of a customer. Amazon is hoping to get it operational by 2015. In my opinion that release target is unrealistic. Amazon will need to resolve privacy, safety and legal concerns. Drone will require open and safe air corridors and landing areas. It will struggle delivering to densely populated areas and high rise buildings. I think that it will be successful if Amazon uses it to deliver it to small distribution centers or hubs from where delivery is made by traditional methods.

3. For several years Amazon has long been bane of brick and mortar (B&M) retailers. Its primary advantages have been convenience of ordering, wide selection, low prices and home delivery. It negated advantages of immediacy (immediate availability) and ease of returns enjoyed by traditional retailers by offering reduced price fast delivery and return services. As Amazon starts charging more for shipping and returns, its comparative price advantage over B&M retailers will start to disappear.

4. Another price advantage Amazon and other e-retailers enjoyed was no sales tax. As more states are paying attention to sales tax revenue from web business. This advantage is also disappearing.

5. These developments present an opportunity to B&M retailers such as Target and Walmart. They can leverage their warehouse and physical presence to their advantages.

6. A possible distribution model for future may be

a. Ship from large major warehouses to regional hubs

b. Ship from regional hubs to city wide hubs

c. Delivery via drones or small vehicles to smaller community wide hubs which can possibly be USPS post offices, grocery stores, gas stations or roofs of tall buildings

d. Delivery to end customers via USPS or small non-traditional mom and pop carriers

e. Or, customers picking it from community wide hubs

 

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[1] Amazon raises free shipping minimum to $35

[2] Amazon considers $40 Prime price hike

[3] Amazon Prime Was Too Good to Be True After All

[4] Amazon Prime Air - Amazon.com

[5] Amazon Form 10-K Year ending Dec 31, 2013, Page 24

Google’s sale of Motorola Mobility to Lenovo–Who lost?

A colleague forwarded me a link to “Google sells Motorola unit to Lenovo for $2.9B”[1], with an additional comment “That's $9.5B less than what they paid for it.”.

Did someone lose on this deal? If yes, who?

· Google purchased Motorola mobility for $12.5B[2]. (Motorola mobility was a spin-off of Motorola’s consumer business units that included cable modem, set-top box and consumer mobile devices[3]).

· On Dec 19, 2012, Google sold cable modem and set-top box business to Arris Group for $2.35B.

· On Jan 29, 2014, Google announced sales of Motorola mobility to Lenovo for $2.91B.

· Motorola Mobility, when it was acquired by Google, had 17,000 patents, with 7,500 more patents pending. Only 2000 of these patents will go to Lenovo and rest will be retained by Google.  Google had valued these patents at $5.5B. In order to put this valuation in perspective, consider July 2011 winning bid of $4.5 billion for 6000+ patents of Nortel[4]. That bid was won by a consortium of Apple, Microsoft and RIM. Google needs Motorola portfolio to counter patents acquired by Microsoft etc[5].

· Google is also retaining Advanced Technologies and projects unit[6]. This unit deals with cutting edge technologies such as ingestible technologies.

Looking at this data, Google appears to have lost nothing. Most probably, Google will use this transaction as a paper loss, adjust against its profits and reduce its taxes. So it will actually gain from this transaction.

In hindsight, it appears that Google’s primary interest in Motorola mobility was its patent portfolio. Google already has several cellphone manufactures on board with its Android operating system. Google would not have seen much value in owning its own mobile device business. Advanced technologies and projects unit was additional gravy Google got from that deal.

Lenovo also comes out as a winner. It had no presence in cell-phone market. Now it gets a reputed brand name and a reputed web property. It also gets 2000 patents and an established (though small) customer base.

I think actual loser is US economy. Motorola mobility had 19,000 employees[7] when it was created. In Q4 2013, employee count was down to 3,894. How many of these jobs will remain in US after Lenovo’s acquisition is anyone’s guess.

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[1] Google sells Motorola unit to Lenovo for $2.9B

[2] Google agrees to acquire Motorola Mobility

[3] Motorola Mobility Launches as Independent Company

[4] Big bidding: Apple, Microsoft, RIM nab Nortel patents for $4.5 billion

[5] When patents attack Android

[6] Google Keeps Motorola’s Advanced Technology Group

[7] Motorola Mobility Form 10K Dec 31, 2010