Amazon tries to capture $53B in defense procurement

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E-commerce leviathan keeps swallowing logistics capacity

Amazon Business, launched in 2015, has already surpassed 1 million customers and $1B in sales; last week the company launched Amazon Business Prime, a $499 membership that opens up its business-to-business (B2B) products to free two-day shipping. FreightWaves has already covered Amazon’s supply-chain cold war with Walmart and how its acquisition of Whole Foods will help it conquer last-mile delivery.

Now Amazon has an opportunity to dramatically expand its hold on the logistics space: an obscure amendment buried deep in Section 801 of the House’s National Defense Authorization Act (NDAA) essentially privatizes the Department of Defense’s procuring processes. The provision allows the Pentagon and other government agencies to make many of their purchases directly from commercial online marketplaces instead of channeling them through the highly regulated purchasing procedures overseen by the General Services Administration. 

But the way that ‘online marketplaces’ are defined in the bill’s language, which requires eligible platforms to offer multiple suppliers for the same product, seems tailor-made for Amazon. “Every reference implies we’re talking about a platform where third parties are selling. If that’s the case, we’re talking about Amazon, Walmart, and not really anybody else,” said Stacy Mitchell, from the Institute for Local Self-Reliance.

The NDAA version passed by the Senate does not contain the so-called “Amazon Amendment”, and members from House and Senate are now negotiating in a conference committee to determine what the final language that goes to President Trump’s desk will look like. 

Federal News Radio reported on this discrepancy in September: “The fact that the Senate didn’t put anything in their version of the NDAA means they have grave reservations, and it means they are also at complete opposite ends of the negotiation spectrum,” said one industry expert, who requested anonymity, in order to talk about the controversial provision.

The near-simultaneous timing of Amazon Business’s ramp up and the favorable provision inserted into the NDAA might be a coincidence. Then again, it might not be: Amazon Business just hired Anne Rung to head up their public sector division. Rung ran the federal government’s Office of Management and Budget’s Office of Federal Procurement Policy until fall 2016. 

The biggest booster of the Section 801 provision was its author, Rep. Mac Thornberry (R-TX), who represents the Texas Panhandle. Rep. Thornberry is the chairman of the Armed Services Committee, whose staff reportedly worked closely with Amazon while the bill was being drafted. In announcing the bill in May, Thornberry explicitly designated Amazon: “if you’re buying office supplies, you ought to be able to go on Amazon and do it.” Amazon and Deloitte had to postpone their fundraiser for Thornberry set for Sept. 27 when scrutiny of the ‘Amazon Amendment’ intensified. 

The Coalition for Government Procurement has urged caution on Thornberry’s ‘Amazon Amendment’, writing in a widely-circulated memo that “as it stands, Section 801 of the FY18 NDAA embodies the most consequential procurement policy changes in a generation.”

If Amazon is successful in securing a significant share of the volume, it will have a tremendous impact on the density of their freight networks. The more volume that flows through their system, the lower their operating costs are per variable weight shipped. This will result in more buying power and more control over their purchased transportation- and thus less volume to be put on alternative carriers. Any density that is added to the Amazon network is likely to result in more net truckloads in the market and less density in the LTL or parcel carriers. 

Meanwhile, the stock prices of Amazon Business’s B2B competitors are falling: W. W. Grainger is down 25% since March; Fastenel is down about 10% over the same period; MSC Industrial Direct is down more than 20% over the same period. 

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