Share
February 21, 2019 5:00 PM, EST

Amazon.com 'Insourcing' Roils Freight Industry, Analysts Say

Amazon Prime truck Amazon.com

Amazon.com Inc.’s role in the shuttering of New England Motor Freight and the “body blow” dealt to XPO Logistics Inc. is raising alarms for trucking and logistics firms that do business with, or compete against, the popular online retailer.

“Amazon’s freight will put you out of business if you are not prepared to handle it,” declared Brian Fielkow, CEO of Jetco Delivery in Houston, after hearing about the bankruptcy filed Feb. 11 by New England Motor Freight, an Elizabeth, N.J.-based regional less-than-truckload carrier that did a lot of business with Amazon and other big-box retailers.

OPINION: Amazon innovations force supply chain change

“It’s the bright shiny object that makes headlines,” Fielkow said about Amazon shipments. “That type of work does not fit our business model. We would never, ever touch it.”

Bradley Jacobs

Bradley Jacobs called the loss of XPO's largest customer a "body blow." (Christopher Goodney/Bloomberg News)

Then, Bradley Jacobs, CEO of XPO, disclosed that the company’s largest customer — identified by industry analysts as Amazon — was curtailing two-thirds of its business with XPO, resulting in a loss of $600 million in revenue in the coming year.

“That’s a body blow, no question about it,” Jacobs commented in a conference call with investment analysts on Feb. 15.

No one from Amazon or XPO would confirm the identity of the customer. But transportation and logistics industry experts said the type of business and volume affected could only have come from Amazon.

And for most observers, the decision to terminate that much business simply confirms the long-held expectation that Amazon is ready to go head-to-head with for-hire freight carriers and third-party logistics companies and to handle more of its shipping needs in house.

Amazon chart

“I have argued since 2013 that Amazon was going to become a 3PL,” said Brittain Ladd, a veteran logistics industry consultant who worked at Amazon from April 2016 to March 2017.

“When I joined Amazon, my focus was on creating capabilities for Amazon to become a 3PL,” Ladd said. “Fast-forward to 2019 and I believe it should be clear to everyone that Amazon has created a new service offering: global logistics.”

Brian Olsavsky, Amazon’s chief financial officer, provided some insight about the company’s strategy during a recent earnings call with investment analysts.

“We continue to expand our Amazon logistics and delivery capability,” he said in response to a question about the use of third parties in 2019. “We have great third-party partners in the transportation space. What we like about our ability to participate in transportation is that a lot of times we can do it at the same cost or better.

“We can also invest selectively because we have more perfect information,” Olsavsky said. “We know where we’re moving things between warehouses and sort centers and by not involving third parties all the time, we can find that we extend our order cutoffs.”

New England Motor Freight truck

New England Motor Freight is seeking Chapter 11 bankruptcy protection and will shut down all of its trucking operations. (Timmy Shigley via YouTube)

Ladd said it is clear that Amazon intends to compete directly with parcel carriers and logistics companies.

“I am incredulous that FedEx, UPS, Ryder and other logistics companies believe Amazon can’t do what they do,” Ladd stated. “Based on my global experience in logistics and my inside experience of Amazon’s future strategy, Amazon is not only a 3PL, Amazon is on a trajectory to become a dominant 3PL within five years.”

Marc Wulfraat, president of MWPVL International, a Montreal-based research firm, said he expects Amazon to bring more of its transportation services in house.

“Amazon has been working hard at developing its own capabilities to eliminate transportation brokers and middlemen whenever possible,” he said. “This comes as no surprise.”

With respect to XPO, Wulfraat said the company stands to lose about $200 million in revenue from delivering pallets of parcels to postal sort centers for final delivery by the U.S. Postal Service.

“Most likely Amazon has figured out ways to reduce freight spend by leveraging their own assets and drivers so that they can replace XPO with a lower cost alternative solution provider,” Wulfraat said.

A bigger piece of XPO’s Amazon business, roughly $400 million, involves handling items that are too heavy or bulky for parcel delivery at three contract warehouses.

“They are large facilities in Rialto, Calif., Aberdeen, Md., and Gardner, Kan.,” Wulfraat said. “They opened in 2016 when Amazon was in a huge rush to expand its nonsortable distribution network to get closer to metro markets so as to reduce outbound shipping expense. In the passage of time, Amazon has been able to develop its own facilities to handle nonsortable [items] so we can undoubtedly expect that they will start to shut down more of these facilities.”

Evan Armstrong, president of Armstrong & Associates Inc., a logistics industry research and consulting firm based in West Allis, Wis., said he agrees with the proposition that Amazon is in the business of providing logistics services, but he stops short of calling it a bona fide 3PL.

“For 3PLs working with Amazon, the message is loud and clear,” he said. “Be careful as the business you are handling today may be ‘insourced.’ ”