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
[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
