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Amid a pandemic, Amazon pivots — and profits

“Everybody in the last-mile delivery business better watch out, because Amazon can make them unnecessary.”

What’s been bad for the country over the past couple of months appears to have been good for Amazon (NASDAQ:AMZN).

As the coronavirus forces hundreds of millions of Americans to hunker down at home, the e-giant’s stock market valuation has increased by billions of dollars, riding a surge in business demand. Consumer spending on Amazon is up 35% from the same period last year, according to estimates from Facteus, a provider of financial data business intelligence.

To be sure, the e-commerce and technology juggernaut has not escaped COVID-19 unscathed. Cracks in the company’s prized supply chain emerged early on, as Amazon was overwhelmed by orders tied to the pandemic, forcing executives to hire more than 100,000 new workers while simultaneously imposing limits on what marketplace sellers could sell and buyers could buy.

Labor protests have added to the company’s challenges, as reports of unsafe working conditions in Amazon warehouses grab the spotlight, attracting new scrutiny from consumers and government regulators. 

FreightWaves chatted with supply chain analysts and consultants about the Seattle-based company’s e-commerce and logistics divisions and how they have responded to the pandemic, the impact on retail and last-mile competition, and how a trifecta of shareholders, workers and regulators might one day bring about a change to Amazon’s corporate structure as we know it.

Fueling the retail apocalypse

Summing up the general consensus, James Thomson, partner at Buy Box Experts, an agency that helps brands sell online, said Amazon is “going to come out of [the pandemic] stronger than ever, while traditional retailers are almost certainly going to come out of this much much weaker.”

Typically the biggest challenge retailers face is how to get consumers to try out new products, explained Thomson, whose previous professional experience includes running Amazon Services, the division responsible for recruiting tens of thousands of sellers.

“The coronavirus has forced consumers to try a lot of things on Amazon that they may not have considered top of mind. Here we are, and Amazon is the retail channel of choice in almost all categories right now.”

The data points tell the story. Nearly 1 million retail workers were furloughed in a single week recently, according to The Washington Post, and more than 250,000 stores have shut down, GlobalData Retail reports. Meanwhile, Amazon customers are spending almost $11,000 a second on its products and services, according to the Guardian. As of Tuesday, Amazon stock was trading at $2,315, up from $1,689 one month ago.

“Quite frankly, it’s scary if you think about it,” Thomson said. “If you’re a brick-and-mortar retailer, you’re closer to being bankrupt than you ever were, and if you’re not bankrupt, you had to furlough or lay off your employees, and it’s going to take months to hire them back. All of this is more time for Amazon to continue to scale; to continue to find ways to get more and more share of wallets from consumers.”

Making good on a Prime promise

Brittain Ladd, a former Amazon executive who runs his own consultancy, agrees the e-retailer will cement its dominant position after the pandemic — but he zeroed in on the gaps COVID-19 has uncovered in the company’s logistics business, namely, that a surge in deliveries forced Amazon to do the unthinkable and temporarily suspend its two-day Prime shipping guarantee.

“Coronavirus proved that Amazon’s much vaunted supply chain and logistics capability can more easily be disrupted than even Amazon imagined,” said Ladd in an email to FreightWaves.

Ladd expects the e-retailer to conduct “a thorough review of every aspect of their operations across people, process and technology,” triggering changes that will “greatly improve their ability to sense and respond to internal and external signals across their supply chain.”

Will Amazon be able to do this on its own? “I’m not convinced they can,” Ladd said.

By way of explanation he pointed to the recent suspension of Amazon Shipping, a pilot program offering parcel deliveries to businesses outside its own retail and fulfillment sphere. Add to that the disruptions Amazon has encountered during the pandemic, “and it indicates to me that they lack the required assets — drivers and vehicles —  as well as facilities to truly meet customer demand.”

AWS, but for logistics

To ensure reliable inventory in the future, Ladd floated what he said was a “plausible” move by Amazon: that the company will eventually buy FedEx, whose fortunes were declining even before COVID-19 was first detected, in part because it lost Amazon’s U.S. air and ground business in 2019.

Amazon’s logistics arsenal already includes planes, vans, drones, sidewalk robots and more.  But if acquiring FedEx sounds implausible to some, according to Ladd, the acquisition would better position Amazon to create a contract logistics business unit — and to sell its services on the open market, just as Amazon Web Services sells its cloud services.

Thomson has a slightly different take. He thinks Amazon’s actions during COVID-19 have proved it can go it alone — and that it now poses an existential threat to last-mile logistics competitors.

Amazon’s ability to successfully hire 100,000 workers at the height of the pandemic, not only in warehouses but in last-mile delivery through its own transportation system, is “good news for Amazon, and scary news for any last-mile delivery company out there,” he said.

“In a very short period Amazon has been able to scale up last-mile delivery very quickly.” Everybody else in the last-mile delivery business “better watch out,” Thomson advised, “because Amazon can make them unnecessary.”

Amazon does face challenges in the long-haul trucking space, Thomson believes. “They own some 18 wheelers, some transport trucks, but I don’t know that they are going to scale that up quite as much. So there will certainly be trucking demand out there where Amazon is looking for support as they grow the number of orders.”

The grocery wars

Thomas O’Connor, an analyst with Gartner’s Supply Chain Industries and Programs team, pegs the $830 billion dollar grocery industry as one of the most interesting e-commerce segments to watch, as a profound paradigm shift takes place in the volume of consumers purchasing online coming out of the pandemic.

It is also one of the areas that may pose a challenge for Amazon, already locked in a fierce logistics and delivery capacity battle with archnemesis Walmart (NYSE: WMT), with the latter narrowly leading in grocery market share.

Thirty-seven percent of digital shoppers in the U.S. most recently purchased groceries from Walmart, compared with 29% who used Amazon, according to a September 2019 survey conducted by The Retail Feedback Group. The edge may have widened over the past month, when Amazon was forced to temporarily shutter its Prime Pantry delivery service due to overwhelming demand from the coronavirus. 

Walmart’s “sheer network and scale gives them really strong advantages,” explained O’Connor. Although Amazon is investing in innovative grocery delivery services, around Whole Foods in particular, the fact remains that “competitors are accelerating faster than they have,” O’Connor said, “when historically it’s always been Amazon who has accelerated faster than their competitors.”

Staring down regulators and activists, but breaking up anyway

Even before the pandemic, Amazon, like Google, Facebook and other tech conglomerates, was facing down a widening chorus of critics who called the company to task for what they consider its anti-competitive business tactics and exploitative working conditions.

And while COVID-19 may have boosted Amazon’s fortunes — it has also amplified the voice of its critics. Most recently, a  French court ruled that Amazon had failed to adequately protect workers, forcing the company to suspend operations at its warehouses in the country. On Monday, Amazon warehouse workers across the U.S. staged a walkout for the third time, protesting what they call the company’s lack of safety protocols during the pandemic.

Despite mounting pressures, neither regulatory actions nor labor unrest poses a meaningful threat to the Amazon enterprise, according to Brad Gastwirth, chief technology strategist with Wedbush Securities.

“Large companies will always be scrutinized,” he told FreightWaves. “They are easy targets given the influence they have on the general population.” Apart from “some noise” about the conditions, “I don’t see it having major impacts.”

That said, taking the long view, Amazon is likely to look much different 10 years from now than it does today, Gastwirth said.

Amazon Web Services alone could reach a half a trillion or even a trillion-dollar valuation, according to Gastwirth. The logistics division “could easily be its own business.” So could grocery and “even” the streaming segments.

“Each one of their separate businesses can likely be spun out,” he said, adding that the breakup of big companies historically results in even better returns for shareholders.

“I think it’s a matter of when, not if — whether they are forced (by regulators) to or do it on their own.”

Echoing his peers, Gastwirth said Amazon is the “defacto standard” for their marketplace when it comes purchasing any type of product. “That is only going to get stronger post-pandemic,” he said.

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Linda Baker, Senior Environment and Technology Reporter

Linda Baker is a FreightWaves senior reporter based in Portland, Oregon. Her beat includes autonomous vehicles, the startup scene, clean trucking, and emissions regulations. Please send tips and story ideas to lbaker@freightwaves.com.

5 Comments

  1. I understand people ran to Amazon to get much needed items but yet the affiliates that drive a big part of their sales had their commissions CUT by over 62%. Why? Obviously Amazon hasnt lost money in paying out these advertising fees to their affiliates as they call it.

  2. Brandon Ladd?
    And what “executive position” did Ladd hold at AMAZON? And for how long, exactly? Why is he no longer there?
    He’s an easy source it appears. And a fool to bet against AMAZON! In my humble opinion, of course.

  3. In Brampton Ontario Canada Amazon is hiring many people at wages to low to pay rent in the G T A. Amazon has a very high accident rate among last mile subcontractors and employees at warehouses. Costco treatment of employee health is much better. Amazon is a very cheap company when health care and safety is involved. It could still profitable and cost the taxpayers of Ontario Canada less money. Amazon is making huge amounts of money at this time.

  4. I really like your article. It’s evident that you have a lot knowledge on this topic. Your points are well made and relatable. Thanks for writing engaging and interesting material.

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