Is Amazon suffering from a logistics cost crisis?

In the 20 years since Amazon.com launched, retail has been transformed by eCommerce. But the forces behind these changes have not stopped. Mobile commerce and click-and-collect are combining with in-store and online purchases to force difficult choices in retail supply chain management. Until relatively recently, perceived wisdom in multi / omni-channel retailing was that the customer is continually chasing a ‘faster / freer’ delivery with the ultimate manifestation being free next day delivery.

Many retailers today are now waking up to the fact that their customers do not want next day delivery, they want convenience, consistency and assurances that they will receive their delivery at a time and a place of their choosing.

Has this change in consumer expectations around delivery service standards taken Amazon by surprise?

Recently we have seen some very telling changes introduced by Amazon that hint at problems within. As a pure play retailer, the cost of home delivery is finally stacking up. Pushing the charges back onto the customer appears to signify that the retailer is struggling with its Supply Chain in an ever more competitive marketplace.

In Amazon’s case, the question is: have they shot themselves in the foot with the Prime offer?

The Prime offer provides every customer with a ‘free’ next day delivery for an annual fee. This means that the customer is no longer placing a value judgement on whether they need the goods next day or not. Amazon has lost the ability to manage next day volumes and the associated pressures that this imparts on the logistics operations. They no longer have a means of adjusting the flow of orders that require immediate, short notice pick, pack and dispatch from the fulfilment centre as by default every Prime customer will be offered next day delivery.

The impact is simple: short term operational pressures on service levels and a dramatic increase in operational costs.

Amazon appear to be countering with some pretty dramatic changes in their customer proposition:

1.         Next day order cut offs are getting earlier and earlier

Cut offs for ‘next day’ delivery are slowly creeping earlier and earlier; with times ranging from around 5pm (black Friday) to around 7:30pm. Amazon manages their cut-off times based on capacity available – meaning that customers cannot be assured of a stable cut off time and increasingly failing to deliver a competitive offer, especially when compared to retailers such as Next who offer an 11:00pm cut off for next day delivery.

2.         Delivery charges are creeping up – especially the threshold for free delivery

Before July 2013, standard delivery from Amazon was free for all categories. This was initially changed with introduction of a minimum spend of £10 for ‘un-postable’ items. However, 6 months later, ‘postable’ items were also required a minimum spend in order to qualify for free delivery. Recently, the thresholds have been upped again to £10 minimum spend for books and £20 for all other merchandise. With standard class delivery usually costing between £1.19 and £4.28 per parcel, this can add significantly to the cost of a sub £20 order.

3.         Prime costs are increasing

Prime is Amazon’s USP in the market providing free next day delivery for an annual fee. However, the cost of the service has increased dramatically, up from £49 to £79 since February 2014, which Amazon say is due to the additional services it has added to Prime (VOD, free kindle books).

4.         Prime now features a ‘No Rush’ option

Amazon is now offering Prime customers a "No-rush” option – perhaps the biggest hint that they have got their numbers wrong on next day volumes and costs. Amazon is now offering a future discount voucher in return for not accepting a next day delivery. Essentially, trying to influence existing Prime customers away from the promised next day service onto a longer lead time option in order to lessen the impact on the fulfilment centres.

Conclusion

In today’s retail environment, differentiation is about a suite of service offers, not just speed. While markets seem to be shifting towards faster and freer, it is by no means certain that speed is the name of the game. It is true that pure-play retailers, including Amazon, are pursuing this as a means of differentiation in the marketplace. However, the rapid growth of click-and-collect suggests that customers are placing convenience over speed in the majority of instances.

For their part, retailers must provide a suite of service offerings to cater for what customers want. This, in turn, drives back-end complexity and challenges existing systems and physical infrastructures that must then be adapted or fundamentally redesigned and re-implemented.

Handling & Storage Solutions approached Amazon for a response to LCP's analysis and we have not yet received a reply.

You can read a longer version of this article here.