Why Amazon’s threat (should) matter to 3PLs

Pricing Threat

The Benchmark

The initial interest of most industry participants is around the pricing impact of Amazon. After all, it’s retail arm is renown for offering continuously low pricing, sometimes below operating margins.

Much has been made of a much-read FreightWaves analysis that Amazon’s prices are indeed lower than the industry average. Now is debatable whether the correct comparison basis for Amazon’s pricing is the DAT contract rate or the spot rate. The article argues for the former, I would argue for the latter.

Irrespective of the basis for comparison, the conclusion stands that Amazon is offering competitive prices. Enough so to speculate that the company is aggressively foregoing an industry standard gross margin for brokered loads.

Does it Matter

Amazon is not the first company operating on thin or even negative gross margin. Convoy and UberFreight have aggressively pursued market share growth using similar tactics and backed by venture capital. I’m sure other smaller venture-backed brokerages have done so too.

Thus, competitors with very aggressive pricing aren’t something new to the industry. Does Amazon then have a better capability to sustain such a price fight? It is, after all, better capitalized than most 3PLs, traditional or venture-backed. However, looking at the growth paths Convoy and UberFreight have taken, I remain skeptical that the difference in funding ability matters. Both are at a roughly $500m a year revenue clip, so even subsidizing margins by up to 20% is certainly within reach of their current investor base.

From a pricing perspective then, Amazon isn’t much different from the competitive threat posed by Convoy or UberFreight.

Carrier Threat

Why should 3PLs care then? Because Amazon is a threat to their carrier relationships.

Captive Relationship

Amazon itself is a significant customer of transport services. Thus, their volume should serve as a strong anchor for the new 3PL. However, examples of similar situations (Pepsico, Coca-Cola) show that having a sizeable captive customer backing a 3PL isn’t a recipe for success.

First, it limits the appeal of the 3PL to direct competitors of their captive customer. It’s tough to imagine Kroger or some other grocery chain using Amazon’s services at any meaningful scale.

Second, there will always be inherent conflicts between the demands of the captive customer and everyone else, and every non-captive customer is aware that those conflicts won’t be resolved in their favour.

Carrier First Mentalities

One advantage that Amazon has is that it has spent a lot of time and resources thinking through the relationship between itself and a large carrier base. If they know how to do one thing well, it is turning such internal tooling into a service.

Doing that well then opens a new axis to compete on for all the new entrants, and the larger traditional brokerages: the carrier relationship. Anyone who has ever worked with carrier portals and all the technologies that 3PLs deploy to manage their carrier relationships knows that there is a lot to improve.

If Amazon can capitalize on this weakness and its competitors don’t improve their approaches, then it will be a big threat for the industry.