Amazon Wants All SMB Logistics Business, By Any Means Necessary

It is no secret that Amazon.com, Inc. AMZN seeks to corner the market for the marketing, fulfillment and delivery needs of small to midsize businesses. What is lesser-known are some of the steps the e-tailing giant is taking to accomplish that goal.

It all goes through Amazon's "Prime" delivery service, where for a fee of $12.99 a month or $119 a year, users receive one- and two-day deliveries with money-back guarantees on more than 100 million items ordered on Amazon's site. Prime has been a huge success, with 102 million worldwide users, among them 63 million U.S. households as of the end of June, according to data from investment firm Cowen & Co. Millions more were expected to have signed up for the service before, during and after Amazon's two-day Prime Day extravaganza in mid-July. 

Businesses that allow Amazon to fulfill their "Prime" orders are not liable for any late deliveries. Alternatively, companies can enroll in an Amazon program called "Seller-Fulfilled Prime" (SFP) that enables them to manage their own distribution while retaining "Prime Merchant" status. The condition for staying in the program is that they hit the one- to two-day delivery targets at least 98.5 percent of the time. The SFP service appeals to companies that want to sell Prime-branded products and have the flexibility to use other logistics partners besides Amazon Logistics, the e-tailer's logistics unit, which currently operates in New York, Chicago, Los Angeles, Atlanta and Dallas. 

However, according to consultancy iDrive Logistics, which works with Amazon users in the retail, manufacturing and third-party logistics (3PL) space – the latter being businesses handling multiple supply chain functions for shippers – Amazon has an endgame with SFP – to force small merchants to cede end-to-end control of their supply chain even if they don't want to.

One of these merchants – an iDrive client – is a smaller Chicago-based apparel retailer that  relied on a 3PL (neither company was identified) to originate all of its shipments, which were then delivered by the U.S. Postal Service (USPS). Of the total shipments, 80 percent were ordered from the retailer's website and shipped direct to consumers from its warehouse in Chicago. The remaining 20 percent of shipments were ordered on Amazon through the SFP program.

Earlier this year, Amazon notified the retailer it would revoke its Prime merchant status because USPS failed to hit – albeit by a small percentage – the delivery targets on the SFP traffic. The issue was traced to an isolated problem within a specific USPS facility, iDrive said.

Faced with the potential loss of millions of dollars in business, the retailer asked Amazon if it could handle the 20 percent of the traffic at issue so it would not lose the designation. Amazon Logistics proposed a contract that was too expensive, didn't include pick-ups for the shipments, and had no mechanisms for informing the retailer which carrier was hauling its orders, according to Matthew White, an iDrive strategist. 

The absence of a pick-up service, which could complicate the retailer's ability to hit its SFP delivery targets, would be a non-starter for any company receiving such a proposal. In addition, Amazon's offer would have been cost-prohibitive to the retailer because USPS would have been forced to raise its prices to compensate for the lost business, White said. 

The retailer's saga was first reported on industry publication Supply Chain Dive. Amazon did not respond to a request for comment on this article.

The objective, White said, was to make it so onerous for the retailer to do business outside of Amazon that it would throw up its hands and let Amazon manage everything. Ironically, if Amazon had agreed to offer pickups, matched the retailer's current cost on price or even came in somewhat higher, and waived the 98.5 percent on-time delivery requirement because it would have end-to-end control of the business at issue, the retailer might have turned over all its traffic to Amazon, thus ending a long and deep relationship with its 3PL, White said. Instead, the retailer continued its relationships with the 3PL and USPS, and for a period of time used a local courier to deliver packages to a more centralized USPS distribution center in order to avoid the problems at the local hub. 

The retailer has retained its Prime Merchant status, although it has been a herculean battle with Amazon to keep it, White said. The status could be revoked at any time, he added.

iDrive executives said that other small to midsize multichannel retailers with 10 percent or more of their sales on Amazon face the same pressure tactics designed to bring all their logistics business under the e-tailing giant's umbrella. Amazon's strategy also represents a threat to 3PLs that have built long-standing relationships with smaller retailers, many of whom run boutique businesses with customized needs, White said. Many retailers are "terrified" to relinquish these proven alliances in lieu of entering into an unfamiliar relationship with an enormous operation that may not provide such high levels of individualized attention, he said.

At the core is Amazon's threat to pull the Prime merchant status should SFP deliveries drop below the 98.5 percent target. It is no small matter, White said. Consumers are incentivized to buy Prime-labeled products because of the shipping guarantee and because they are paying for the service and feel compelled to use it. "`Prime' status is more important than who is actually selling the product, and many consumers will spend more on the same product if it has the `Prime' guarantee," White said.

The experience of the retailer, and others like it, has convinced iDrive executives that Amazon has no ambition to seriously compete with USPS, FedEx Corp. FDX, UPS Inc. UPS and DHL Express, a unit of German company Deutsche Post DHL, for parcel shipments outside the Amazon ecosystem. Amazon's "half-baked" contract proposal to its client indicates that it is too busy trying to swallow up the fulfillment business of every small merchant in sight to bother with non-Amazon traffic, White said.

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