Shipping is a costly affair. There is no denying that. Traditionally, eCommerce followed a fairly straightforward approach in shipping. They signed up with shipping carriers like FedEx and UPS to send their goods to the customers. Now, this was as fast as possible with large organizations and their processes and bottlenecks. Once an order was placed, a pickup was requested. FedEx or UPS sent their guys to pick up the parcel and process the delivery. And of course, they charged according to the distance, time and parcel size. Today, it’s changing rapidly.
Soaring customer expectations
The only con with eCommerce is that it fails to deliver the satisfaction of instant gratification. Or not. The bottleneck that bars instant gratification in eCommerce is that there is logistics and shipping involved. So, how does one bring the logistics issue to a bearable minimum?
Amazon and other big industry players have tried several business models and options to figure out a solution to do this. They have dabbled with drone delivery for the last mile. They have tried 3D printing and assembly before the last mile. Drones are still seen as too futuristic and the 3D printing assembly is not feasible across products and across industries. But customers would still love to see an instant delivery model that somehow gives them both the convenience of online shopping and faster delivery times.
What is Amazon Flex?
The aggregator business model is the newest and most successful business model in the new era. People cannot stop saying that the world’s largest taxi provider does not have any taxi of its own. And the world’s largest eCommerce seller has no inventory of its own. While Amazon has been an aggregator business model in their inventory, they are looking at the aggregator model in delivery also. And that has resulted in Amazon Flex.
Amazon recently launched its new Amazon Flex package delivery. They have studied the Uber model and put that to practice. Amazon Flex enlists everyday drivers to deliver packages in their own cars. Amazon offers $18 to $25 per hour to these drivers. Moreover, these drivers can choose their own schedule. They can opt to work a lot on one day and choose not to handle any deliveries the next day.
End of UPS and FedEx duopoly?
Amazon Flex is still in it very nascent stage. It is also to be noted that DHL has Uber-like operations in the US now. Until now, Amazon enlisted the help of freight carriers like UPS and FedEx to deliver their goods. Today, a part of these deliveries are being carried out by others. So, while there is no doubt that FedEx and UPS lose partly, we cannot say for sure that the loss will be significant.
Let’s see why:
- Enlisting the help of everyday drivers to deliver Amazon parcels is possible only in SOME cases.
- The parcel has to be small enough, in big cities, delivery distance between warehouse (or pickup point) and destination has be small. Amazon cannot send consignments and bigger deliveries through everyday drivers. While a pair of shoes can be gladly delivered by a random Mrs Jones to a random Mr Smith on her way to office, in her everyday route, it would not be a great idea to send a brand new TV set through Mrs Jones. There are such technicalities involved.
- The everyday office car can hold a few things and cannot hold other things. If the package is insured and is valuable, Amazon would think twice about sending it via Flex drivers, despite all the background check.
What percentage of Amazon’s orders constitute small and non-valuable packages that need fast delivery is an important question to answer. We can now safely say that Uber has stolen majority market share in several countries, we cannot say the same for Airbnb which has a similar business model. We do not know which way Amazon Flex will swing: Uber or Airbnb. Airbnb has carved a niche business of its own while the bigger chains of hotels have their own.
Everything said and done, we need to understand that freight carriers like UPS and FedEx have dedicated infrastructure where they can scale up and scale down according to requirements. This is something that private drivers with their hatchbacks and sedans, looking to offset their fuel costs with Amazon Flex runs, cannot aspire to vanquish.
But, UPS and FedEx might look at competing with Amazon Flex rates and offer better rates IF they believe that their business is threatened beyond critical levels. But it is too soon to say much about it now.
Boon or Bane for retailers?
Retailers, especially the smaller players will be interested in this business model. If a small-time eCommerce player sells apparel or groceries, something not very valuable, and within a city, this model works wonderfully for them. Retailers can cut on shipping costs and manage delivery speeds quite well. Even bigger players like Amazon can dedicate Flex to these smaller, not very valuable packages to this model.
“If UPS and FedEx lower their same day rates due to competition, it is a huge benefit to retailers”.
If the aggregator model works, it would mean that in the longer term, most same day deliveries of insignificant monetary value in bigger cities would be handled mostly by this model. However, this would take a long time to come about. Moreover, the Governments might not be willing to experiment with this idea because they lose revenue from FedEx and UPS in the form of service charges. If the change to Amazon Flex ( and similar models) is significant, it might call for an overhaul of shipping costs. As of now, it’s going to be a game of waiting and watching.