This is an excerpt from Monday’s (4/19) Point of Sale retail supply chain newsletter sponsored by ArcBest.
To create a world in which customers wonder: “How did I ever live without Coupang?”
Sounds corny, right? That’s the mission statement of rising South Korean e-commerce company Coupang. Its idealism in a form rarely seen outside of Silicon Valley, but that mission has driven Coupang to build what pre-buff and bald Bezos dreamt of: a complete end-to-end e-commerce platform designed to manage the full customer journey from screen to doorstep.
If this is the first you’re hearing of Coupang, you probably won’t believe the logistics network this company has built in the last few years. For its efforts, it’s been dubbed (against founder Bom Kim’s wishes) the Amazon of South Korea. Coupang once looked at Amazon and its logistics network for inspiration, but now the professor is chasing the prodigy.
Coupang delivers each of its packages via South Korea’s largest delivery fleet, Rocket Delivery. Owning the delivery fleet allows Coupang to offer free, unboxed/unpackaged returns to be left at customer doorsteps. Oh, and its in-house delivery fleet happens to deliver 99.3% of all orders within 24 hours. Order from millions of SKUs before midnight and it’s on the doorstep before 7 a.m. In a 2019 CNBC piece, when speaking about the overnight delivery service founder Bom Kim said, “It’s magical”. Over the past 12 months, Amazon has been investing to bring that same magic to Americans. And if it keeps up the pace, same-day delivery of millions of items is closer than you might think.
I know what you’re thinking. South Korea is the size of South Carolina. I’m aware, but setting aside the geographical and population density disparities, how is Coupang already able to achieve the speed of delivery Amazon is aiming at? Indeed, it’s much easier and cheaper to build a warehouse and fulfillment center network in the second most densely populated country in the world with roughly half living in greater Seoul. But even given that geography, the fact that 75% of South Koreans live within 7 miles of a Coupang logistics center is still impressive. Coupang’s product is simply closer to the population.
The other difference is Amazon’s reliance on third-party logistics providers. With Rocket Delivery, favorable contract-labor laws and a society known for working crazy hours, Coupang makes deliveries 24/7/365. E-commerce delivery drivers in Korea have paid the price over the past year, with more than a dozen dying from “kwarosa” — a Korean term referring to sudden death that is often due to heart failure or a stroke as a result of arduous work. Read more here.
I’m not here to write about overworked South Korean delivery drivers, although it’s an issue American e-commerce companies should be keeping in mind in this delivery arms race. I’m here to write about how Amazon is well on its way to matching Coupang’s delivery times and crowding out third-party delivery providers.
If you’ve seen the fantastic investigative reporting film “Spotlight,” you may recall the scene in which Billy Crudup’s character bursts at Michael Keaton: “Check your [expletive] clips, Robbie!” when referring to an old lede that was buried pages into the paper. That was the ’80s, well before the constant stream of internet “news” we know today that naturally buries ledes.
The day Amazon announced it was rolling out same-day delivery of up to 3 million items within as little as five hours FOR FREE on orders over $35 in Philadelphia, Phoenix, Orlando and Dallas — that was March 3, 2020. The announcement garnered little attention, dwarfed by 24/7 COVID coverage. This may have come as a relief to Amazon, which early in the pandemic was overwhelmed by the surge of demand while battling workplace COVID outbreaks.
During the Q1 2020 earnings call, in response to a question on fulfillment efficiency, CFO Brian Olsavsky said, “We had to take the step to focus on essential items, extend the shipping period from one to four days and then further on nonessential items. [We] had to restrict things that were coming into the warehouses and focus on essential products.”
But Amazon has the most mature e-commerce logistics operation in the country. Through shrewd product placement and SKU selection, the company was back to pre-COVID late delivery rates by late summer. Then Amazon cranked up its beastly onboarding machine. “Last year we hired 500,000 employees and now directly employ 1.3 million people around the world,” Jeff Bezos wrote early in his final letter to shareholders as CEO.
Amazon also spent last year building. Either its warehouses had been underutilized in the past or Amazon is going to need more space simply to have room for all the new hires. The workforce has doubled in just two years, and I think it’s the latter. Dave Fildes, director of investor relations, on the Q4 earnings call said, “2020 was a big build year for us. Our [Amazon Logistics — AMZL] footprint grew around 50%.”
Fildes shared that more than half of the space added in 2020 was “middle-mile delivery stations and the last mile,” which was a “higher mix than what you’ve seen of any incremental add in a year.” He said the reason for the shift was the continuation of the company’s pre-COVID mission to expand one-day (then same-day) delivery for Prime members, but he also gave a pointed statement that expansion also gave the company “much more certainty on being able to get items from point A to point B.”
Amazon has historically moved freight through owner-operators and small trucking companies, but as Insider’s Rachel Premack reported in September, it had to source capacity from major trucking companies to handle the e-commerce tsunami. That wasn’t cheap for Amazon, and frankly I don’t think it enjoyed it very much. One solution Amazon is testing has the goal of more than doubling the size of its trucking fleet by the end of the year. According to an internal document first reported on by The Information, Amazon plans to increase the number of small trucking companies dedicated to hauling goods for Amazon in the U.S. from ~100 currently to ~285 by year’s end.
Amazon is running an incubation program aiming to train hundreds of people to launch their own trucking businesses to haul exclusively for Amazon. The program has been dubbed Amazon Freight Partners, and if successful, Amazon could have between 2,280 and 5,700 Amazon-branded tractors on U.S. roads and between 8,550 and 14,250 truck drivers explicitly dedicated to hauling Amazon freight by the year’s end, according to the proposal.
It may not seem like much, but Fildes’ statement on A to B is a gem. Amazon wants what Coupang has and that’s control. Control over more of the experience for the customer and over the supply chain from its providers. And it’s making some serious headway. AMZL handled more than half of Amazon’s packages both in the U.S. and worldwide at the end of 2020.
In 2020, Amazon nearly doubled: its workforce, its number of facilities and its logistics square footage. In 2021, it plans to double its truckload fleet.
What’s the endgame?
Amazon is in the process of rolling out more than a dozen mini fulfillment centers (MFCs) capable of delivering more than 100,000 SKUs of both fresh and dry goods within a 45-minute drive of several (and eventually all) major metropolitan areas. Upstart food tech media outlet (and new friend of Point of Sale) HNGRY founder Matt Newberg first uncovered a report commissioned by Jeffries from grocery supply chain logistics expert Marc Wulfraat that shined light on about 13 Amazon MFCs co-located next to larger distribution hubs. Wulfraat estimates the MFCs can stock ~100,000 high-velocity product SKUs and are located within a 45-minute drive time of city centers.
What the final product looks like and how it fits into Amazon’s rapidly growing network of ~30 Fresh grocery stores is anyone’s guess. I’d reckon Amazon doesn’t quite know yet. From an outsider’s perspective, the process looks like a startup iterating quickly and leaving gaps and overlaps. With all the different services Amazon is offering in various regions, it can be overwhelming sifting through. Products are often offered for both Prime and Fresh delivery options. Then it’s common that orders end up being divided because certain products are available only via Fresh and others only Same Day. Not to belabor it, but it’s hard for me to tell whether the products are being fulfilled from an Amazon grocery center or Whole Foods.
It’s a mess. But unless Bezos somehow takes everything he’s learned and implemented with him when he hands the reins over to Andy Jassy, then it won’t be long before the madness makes perfect sense. Amazon is, as any other retailer that wants to succeed post-COVID should be, experimenting. We’re in the early innings, but Amazon is investing for a multi-decade game.
Don’t forget that online grocery in America prior to COVID was just not a thing. Other countries are ages ahead of us when it comes to online grocery and delivery. Pre-COVID, only ~3% of all grocery spend was done online. Now that figure is in the 10-12% range, according to Bank of America data and estimates from Cowen. Cowen anticipates online grocery penetration to grow steadily over the next few years to reach ~16%, or ~$190 billion, by 2023.
With regard to infrastructure, Amazon is moving fast in every direction, reducing delivery times on everything, offering fast delivery of fresh and household goods in more areas and doing most of the transportation itself.
The end goal is easy to see: Deliver as many products to as many customers as fast as possible.
While the 100,000-plus-square-foot facilities are currently housing ~35,000 SKUs such as nonperishable groceries, pet supplies, electronics and household basics, they’ll soon stock fresh items. Unlike traditional larger sortation centers that truck items to smaller delivery stations, these new centers are hybrid delivery and fulfillment centers for Amazon Flex drivers to pick up for same-day deliveries. Amazon will attract customers the same way it always has: price, convenience and product breadth.
Instacart recently released a 2020 grocery report that cited 95% of small orders of 15 items or less were delivered in under two hours, while 50% were delivered in under an hour. This is the reason Instacart erupted in 2020 and was taking half of all new online grocery shoppers at one point last year.
Amazon lost market share in the grocery segment in 2020, and with or without Bezos at the helm, it’s not just going to sit back and let that happen. One reason is Amazon believes grocery is fundamentally a different business for it than it is for legacy brick-and-mortar (B&M) grocers. Highly automated grocery fulfillment centers promise to generate better margins than traditional B&M, and Amazon believes where density is created, profits follow.
Pradeep Elankumaran, co-founder and CEO of Farmstead, a San Francisco-based delivery-only grocery startup, believes the answer to ridding grocery of its low single-digit margins is delivery capacity. “There’s about 50,000 stores in the country that can give you 150 delivery slots per day. That’s 7.5 million delivery slots for the entire country, not evenly distributed by geography, and we have 130 million households in the U.S.,” he told HNGRY in a recent interview. “So as of right now, online grocery capacity is super weak. If we can figure out how to increase the delivery slots dramatically in any market, then you have a shot at actually bringing this trillion dollar space online beyond the 7-10% [margins] that currently exists.”
But even if it’s never able to achieve industry-leading grocery margins, the breadth of products will allow Amazon to entice customers with higher margin add-ons. I mean, if it’s going to be there in a couple of hours, how much more likely are you to toss in a bottle of wine, a speaker or a serving platter when ordering for a dinner party? And as I’m sure some of you are aware, Amazon has known for a while what you want before you buy it. That is of course how Amazon created its newest profit engine in ads.
One of Wall Street’s biggest complaints with Coupang is its lack of Amazon-esque profit engines. Coupang has established one of the most impressive logistics networks in the world, but it may never be profitable. Amazon has built ancillary software businesses that generate the majority of the company’s profit and allow it to continue to subsidize market share gains in e-commerce. And these product lines are only getting bigger and better for Amazon. In Q4, Amazon grew ad revenue 64% to reach more than $15 billion for the year, which outpaced subscription revenue for the first time ever and was the fastest-growing revenue segment last year. Amazon is now the third-largest ad publisher in the country with more than 10% share of the U.S. digital advertising market.
And per Bezos’ 2020 shareholder letter, the company now has more than 200 million Prime members. Amazon has been willing to run e-commerce expansion operations at a (near) deficit for some time, and now it has built a balance sheet to fight this battle for as long as it takes. But if Amazon continues to invest and grow its workforce, logistics networks and ancillary profit engines as it did last year, it won’t be long before roles are reversed and Amazon becomes the Coupang of the U.S., delivering millions of SKUs same day in most major cities.
Want more stories about Amazon vs. the field, or how retailers are adapting to meet and influence consumer behavior and the impact to supply chains? Try Point of Sale, my twice-weekly newsletter covering retailers, their supply chains, and the data they use to make decisions: freightwaves.com/pos
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