Amazon has made a strong move in banning its third-party sellers from using FedEx’s ground delivery service in shipping Prime packages to customers. The blocking of FedEx could result in drastic financial changes to small third-party sellers on the tech giant’s online marketplace.
The new restriction was highlighted in an email set out to Amazon’s third-party merchants on Sunday and was obtained by The Wall Street Journal.
According to The WSJ, the reason for the new move lies in the performance decline in using FedEx in Prime shipments. The ban is expected to take effect this week and last until “until the delivery performance of these ship methods improves.”
Amazon Prime is Amazon’s premium customer subscription service that comes with perks like one-day/two-day shipping, Amazon Prime Video, Amazon Prime Music, and exclusive deals and discounts. The main reason that people subscribe to Prime, however, is usually because of the lightning-fast delivery that Amazon Prime supported products provide. The term “performance decline,” that WSJ associates FedEx’s ground delivery within the email, refers to the inability of FedEx to provide the fast delivery that Amazon Prime subscribers are promised.
Amazon does not use FedEx ground delivery for its shipments, since September of this year. However, third-party merchants on Amazon were still allowed to use FedEx ground delivery for shipments. Since the merchants are delivering under the “Prime promise,” the inability at times of FedEx to provide the fast Prime delivery makes Amazon Prime delivery look bad. This is why Amazon decided to block FedEx ground delivery, probably in order to preserve the Prime delivery brand.
Why does Amazon care so much about Prime delivery?
As mentioned before, one of the main reasons people subscribe to Amazon Prime is for the delivery perks. If you are in one of many regions in the US, you can even get free one-day Prime delivery. Amazon has invested heavily in its logistics infrastructure, most importantly in Prime. Being an online marketplace means the tech giant faces a lot of issues in regards to transportation, delivery, and control of logistics.
Amazon invests heavily in its Prime delivery infrastructure. Last quarter, Amazon spent $800 million just to improve its “one-day free delivery” infrastructure. The expense was one of the main reasons why Amazon’s stock dropped around 5% after hours, on the Thursday after its last earnings call. That was when Amazon announced that it had an increase in sales of about 24%, to $70B, but with net income dropping to $2.1B compared to last quarter’s $2.9B. Bezos even mentioned that net operating income will continue to decrease into the next quarter, even with an increase in sales.
The stock drop even resulted in Amazon CEO, Jeff Bezos, losing his title temporarily as “world’s richest person.” Amazon even announced that Amazon Fresh, its grocery delivery service based on its purchase of Whole Foods, will drop the monthly delivery fee, essentially providing free delivery. This means that Amazon Fresh customers are not required to pay that dreaded $14.99/month grocery delivery fee.
Is Amazon being smart?
In simple words – yes. Though it may seem like Amazon is losing money, they hold an enormous amount of market share. Amazon Fresh alone accounts for 33% of grocery deliveries in the US. More customers are signing up for Amazon Prime. The one-day delivery, or “get it by tomorrow,” invokes an involuntary urge to click on the “buy now” button.
Though Bezos says Amazon will continue to drop in operating income, sales projections are very high. This implies Amazon’s strategy of wanting to dominate the market, rather than make a large profit. This is why Amazon is so focused on its most important product – fast delivery. Remember, Amazon never made a profit for the first 17 quarters after it became a public company.
The tech giant is playing the long-term game. It recognizes the importance of building an outspread, lightning-fast delivery network. With e-commerce becoming one of the world’s fastest-growing markets, Amazon is certainly building itself out for long-term dominance.