Amazon (AMZN 1.40%) gave investors a phenomenal update last week that was chock-full of good news and exciting announcements. Investors breathed a sigh of relief after several quarters of pressure, and Amazon stock has jumped 7% since the report.
Among the many positives that management discussed, there was one new initiative that stood out: Supply Chain by Amazon. Could this be the company's next big thing?
What is Supply Chain by Amazon?
Supply Chain by Amazon is exactly what it sounds like. It's a service for third-party sellers on the Amazon platform to pick up merchandise directly from global suppliers and ship straight to customers, bypassing middlemen and simplifying the delivery process.
Up until the service was launched in September, third-party sellers had the option of using fulfillment by Amazon, which takes care of the second leg of the process, getting products from sellers to buyers. Fulfillment by Amazon allows sellers to use Amazon's warehouse and delivery network, which can make shipping products easier and is also often the cheapest way to do it. Amazon says that, on average, it's 70% cheaper to go with fulfillment by Amazon than other fulfillment services.
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This new service takes this a step further, taking care of the first leg, too. It's meant to be a less expensive way for sellers to get items, and it also frees up time for sellers to focus on other areas of their business that could result in higher sales.
Amazon is offering various packages across the supply chain, from the complete end-to-end service to sourcing, freight shipping, and more. One service is called Amazon warehouse distribution (AWD), which brings in and stores bulk products within the Amazon warehouse network. Amazon says that AWD is 80% cheaper than storing items using fulfillment by Amazon.
How it benefits Amazon
From Amazon's perspective, this is a no-brainer. It's already using its powerful global logistics network to source and ship products for itself. Adding sellers' merchandise adds incrementally lower costs and makes it cheaper, and possibly faster, for third-party sellers.
Amazon's e-commerce dominance stems from making Prime members reliant on Amazon's unmatched delivery capabilities. The faster it can get, the more it can grow sales. 60% of Amazon's e-commerce sales come from third-party sellers, and engaging these small businesses with more competitive services could add substantial value to the entire ecosystem.
It also competes on price, and if third-party sellers can offer more competitive pricing because they're cutting their own costs using Amazon's networks, Amazon will benefit from higher third-party sales that it counts toward its total sales figures, as well as its own cut of those sales.
It's not hard to imagine that Amazon will take this even further at some point and offer its global logistics systems for other companies as well. It's done this with other services, such as marketing its just-walk-out cashier-less technology to retailer stores. The recently launched Buy With Prime venture is another way it's allowing other companies to use its services, ultimately benefiting Amazon.
It recently partnered with Shopify for Shopify's millions of merchants to offer Buy With Prime on their own web sites. Shopify just shut down its own efforts to develop an internal fulfillment and delivery network, and if Shopify's merchants can sign up for Amazon's instead, that's another source that could add significant revenue to Amazon's total.
Just out of the starting gate
Supply Chain by Amazon was launched at Amazon Accelerate, its annual seller's conference that just took place in September. CEO Andy Jassy already said that "we're seeing very positive early response."
It's too early to tell if it's meaningfully impactful. However, we can glean what the opportunity could be from Fulfillment by Amazon, which is very popular. 64% of merchants use it entirely, and another 22% use it in conjunction with other services.
Supply Chain by Amazon is an exciting addition to the Amazon logistics network. Stay tuned for updates about how it's growing and contributing to the Amazon machine.
