Amazon's earnings highlight expanding logistics network (AMZN)

BI Intelligence

This story was delivered to BI Intelligence "E-Commerce Briefing" subscribers. To learn more and subscribe, please click here.

Amazon reported revenue of $43.7 billion in Q4 2016, up from $35.7 billion in Q4 2015, but below Wall Street expectations of $44.6 billion.

Although lighter than anticipated, the company's fourth-quarter performance helped drive strong growth for the year — revenue topped $136 billion in 2016, up from $107 billion in 2015.

Meanwhile, Amazon’s global retail sales were $32.1 billion in Q4, up from $25.8 billion in the comparable 2015 period. 

The company delivered a far greater number of orders itself, and plans to further invest in its expanding logistics network:

• Orders fulfilled by Amazon — both Amazon’s own and marketplace orders delivered through Fulfillment by Amazon (FBA) — grew 40% year-over-year (YoY) in 2016. Amazon previously reported that it delivered 2 billion orders in 2016 on behalf of marketplace sellers.
• To meet this growing fulfillment demand, Amazon invested heavily in expanding its logistics network last year. It opened 23 new fulfillment centers in the second half of 2016 — most of them in North America — compared with only three new fulfillment centers opened in the first half of the year. Those new fulfillment centers helped drive Amazon’s total square footage at its warehouses up by 30% for the year, versus a 20% increase in square footage in 2015.
• The company plans to continue investing heavily in expanding fulfillment centers and other logistics capabilities. Driving further growth in the number of sellers and packages going through FBA is a key focus, and Amazon will invest in further warehouse and logistics capacity to handle that volume, with that investment being more balanced between North America and other geographies, company executives said.

The company also pointed to the costly and complex “last mile” of delivery as a key area of focus for its logistics network. Company executives said that controlling this last mile helps Amazon eliminate order cutoff times and avoid split shipments. To increase its ability to handle the last mile, Amazon launched Prime Now deliveries in new 18 cities last year, allowing Prime customers to get one- or two-hour delivery on select items. The company also had its first successful drone delivery test in the UK, and is now testing drone delivery with select customers in the country.

Taking control over more steps of the delivery journey, particularly the last mile, gives Amazon more ways to cut costs and speed up delivery times. The company acknowledged that it is still figuring out ways to accomplish those two goals. If it can make deliveries faster and more efficient, then Amazon could possibly compete as a logistics service provider against UPS and FedEx.

The parcel delivery industry — a segment of the shipping sector that deals with the transportation of packages to consumers — is booming thanks to e-commerce growth, and players outside the industry want a piece of the pie. 

BI Intelligence, Business Insider's premium research service, has compiled a detailed report on the future of shipping that looks at efforts by Amazon, Alibaba, and Walmart to handle more of their own shipping and concludes that big retailers are well positioned to disrupt the parcel industry.

Here are some of the key points from the report: 

• Transportation and logistics could be the next billion dollar opportunity for e-commerce companies. The global shipping market, including ocean, air, and truck freight, is a $2.1 trillion market, according to World Bank, Boeing, and Golden Valley Co.
• There is much at stake for legacy shipping companies, which have seen a boom in parcel delivery as e-commerce spending has risen. Twenty different partners currently share the duties of shipping Amazon's 600 million packages a year, with FedEx, USPS, and UPS moving the most.
• Amazon, Alibaba, and Walmart have so far focused on building out their last-mile delivery and logistics services but are increasingly going after the middle- and first-mile of the shipping chain. 
• Amazon has already made major moves across each stage of the shipping journey. It launched same-day delivery service, which it handles through its own fleet of carriers, cutting out any third-party shippers. The company also recently began establishing shipping routes between China and North America.
• Walmart's interest in expanding its transportation and logistics operations is almost purely related to cost-savings. It's begun leasing shipping containers to transport manufactured goods from China and is making greater use of lockers and in-store pickup options to cut down on delivery costs.
• Alibaba has begun leasing containers on ships, similar to Amazon's Dragon Boat initiative. This means that Alibaba Logistics can now facilitate first-mile shipping for third-party merchants on its marketplace.

In full, the report:

• Sizes the market for the shipping industry.
• Explains how the industry operates in broad terms.
• Suggests why major e-commerce retailers should disrupt the space.
• Outlines the shipping initiatives of Amazon, Walmart, and Alibaba.
• Concludes how these moves might impact traditional carriers.

Interested in getting the full report? Here are two ways to access it:

1. Subscribe to an All-Access pass to BI Intelligence and gain immediate access to this report and over 100 other expertly researched reports. As an added bonus, you'll also gain access to all future reports and daily newsletters to ensure you stay ahead of the curve and benefit personally and professionally. » START A MEMBERSHIP
2. Purchase & download the full report from our research store. » BUY THE REPORT

The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of the future of shipping.