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How Amazon's E-Commerce Dominance Enables Its Fledgling Logistics Business

By Adam Levy - Jan 22, 2020 at 11:47AM

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It has over 110 U.S. fulfillment centers, but not because it's trying to speed up shipping.

Amazon (AMZN -1.98%) is starting to look more and more like a logistics company.

With planes, air hubs, and dozens of warehouses and fulfillment centers scattered about the United States, it's starting to become a real threat to other shipping and logistics providers.

"They're competing with a player that has almost zero cost of capital,"  NYU Stern professor Scott Galloway said earlier this month. Indeed, Amazon's retail business has enabled it to build out a fulfillment network because it has a massive customer built in: itself.

Amazon boxes lined up in front of an Amazon Air cargo plane.

Image source: Amazon

So many warehouses

Amazon's advantage is especially evident in its warehouse and fulfillment center buildout. Amazon says it has over 110 active fulfillment centers in the U.S., and is planning to open 33 more in short order.

Amazon isn't opening these warehouses just to get items to customers' doors faster, though. It actually needs the physical space to support its massive retail operations, as Walmart's (WMT 0.11%) head of e-commerce Marc Lore points out. 

"People think the more warehouses you have, means the faster things are going to be. That's not necessarily the case. From seven warehouses we have now, we reach 75% of the country overnight," he said at the Code Commerce conference in September. "The reason why Amazon has so many warehouses is because you actually physically run out of space in a warehouse as you get more volume."

And nobody "gets more volume" than Amazon. The online retail giant had estimated retail sales totaling over $221 billion last year, according to eMarketer.

That's over eight times the online sales volume the eMarketer analysts estimate for Walmart. And with no physical stores to ship from, Amazon easily needs 15 times as many warehouses.

A smart approach to where it opens new warehouses

As long as Amazon needs the physical capacity of new warehouses, it might as well place them in strategic locations.

The company is currently concentrating many of its locations in the Southeast United States. It already has lots of warehouses in states with big populations like California, Texas, and New Jersey (to serve New York City). But opening new locations in the southern U.S. allows it to take advantage of its air hub in Hebron, Kentucky. Amazon also operates a regional hub in Fort Worth, Texas.

Amazon's warehouse locations, combined with its Amazon Air routes, have made it more efficient for Amazon to ship its own packages most of the time. The company delivered about 3.5 billion of its own packages last year -- about half of its orders.

It's only going to get more efficient as it grows

Amazon made investors reel when they saw how much its push into one-day delivery for its Prime members is actually costing the company. CFO Brian Olsavsky said the company spent an additional $800 million in the second quarter last year, and that number only climbed higher in the second half of the year. In Amazon's third quarter earnings call, he said the fourth quarter numbers would see a $1.5 billion "penalty" for the cost of shipping.

But the push to one-day shipping is helping grow retail sales, which accelerated in both the second and third quarters. And as retail sales climb, Amazon will need more warehouses to store all the stuff it and the third-party merchants on its marketplace sell. Amazon can be selective where it opens those warehouses and fulfillment centers to capitalize on its existing infrastructure, making its current operations more efficient.

While competitors can expect e-commerce sales to keep climbing, they don't have the option to determine where exactly they'll be shipping from, or to design air routes and fulfillment centers to maximize efficiency. Certainly not to the degree of Amazon, at least. 

What's more, Amazon would be building out its fulfillment centers regardless of its retail business. So, as Galloway says, it's practically zero cost of capital. It's impossible to compete with that.

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