Amazon (AMZN 0.87%) is flexing its muscles once again in logistics.
After the e-commerce giant ended $900 million worth of contracts with FedEx (FDX 0.41%) earlier this year, it's found a new way to hammer its logistics rival. According to The Wall Street Journal, Amazon is now blocking its third-party sellers from using FedEx Ground for Prime deliveries, which are generally supposed to arrive within one day.
Amazon's reasoning for the move was that FedEx Ground and Home were not fast enough to get customers their packages reliably on time. In an email to its vendors, Amazon told them they were not allowed to use FedEx Ground or Home "until the delivery performance of these ship methods improves." They can still use FedEx Express.
FedEx played down the move, saying its impact would be "minuscule," but for Amazon it's easy to see the competitive strategy behind the decision, as it's just the latest time the company's pulled business away from partners.
Image source: Amazon.
A familiar playbook
Part of what makes Amazon such a difficult competitor is that it's often a customer and a competitor at the same time. That means that as it builds out its own capacity in a business like logistics, it simultaneously pulls business away from rivals, dealing them a double blow as they lose Amazon's business and must contend with a new fast-growing competitor at the same time.
For example, XPO Logistics (XPO 0.65%) shares plunged earlier this year after the company said that its largest customer, believed to be Amazon, pulled away its business in postal injection and other areas. FedEx shares barely flinched at the earlier break-up with Amazon, but what seems to be unique about Amazon's latest move is that it's leveraging its third-party marketplace to move business away from a rival and toward itself.
Amazon's marketplace now makes up a majority of sales on its e-commerce platform. It has an estimated 5 million sellers generating close to $200 billion in annual sales on its platform. If Amazon can dictate the way those sellers do business, that gives the company an enormous bargaining chip as it builds out its own logistics service and makes one-day delivery a reality.
Over the last four quarters, Amazon spent $34.1 billion on shipping costs, far more than any other U.S. retailer, and that number is set to balloon given the company's new one-day delivery promise.
An unbeatable network
The latest tiff with FedEx shows that Amazon's greatest market power often extends from its stakeholders, namely its customers and vendors. By controlling about half of the country's e-commerce sales, online sellers often need to be on Amazon's website to find customers. If they're not, they're foregoing a huge market for their products.
However, their being on the website only gives Amazon more market power, and it drives internal demand for its shipping services that it can then leverage against competitors like FedEx. Amazon has also squeezed its third-party sellers for its own benefit by copying their products or forcing them to advertise on its site in order to get visibility.
A recent report in The New York Times details how the tech giant has used the same strategy with Amazon Web Services, copying products from suppliers and essentially checkmating them into doing business with it as they can't afford not to be on the cloud-computing platform.
It's easy enough to imagine Amazon employing a similar strategy in new businesses like Amazon Care, its healthcare pilot, enticing Prime members to sign up for the service or its vendors to give it preferential treatment.
This network of powerful stakeholder relationships is part of what gives the company such a strong competitive advantage, but it also puts it at risk of antitrust concerns and calls for a breakup.
Either way, expect to see Amazon make similar moves in logistics and beyond as the company builds out new businesses to complement its dominant positions in e-commerce and cloud computing.
