The Case for Amazon as a 3PL

As I wrote yesterday, Amazon is acting like a third-party logistics provider (3PL) for 1 in 8 B2C e-commerce shipments in the United States. The company provides warehouse and transportation management to its marketplace sellers through its Fulfillment by Amazon (FBA) service. That ticks three of the four big 3PL service boxes (leaving just dedicated contract carriage on the table).

Today, I’d planned to write about our predictions for Amazon’s 3PL (or “3PL-like”) services. Then I realized I should first address a more fundamental question: Does Amazon have designs on becoming a 3PL? I’ll save the predictions for later this week, and today I’ll share with you observations leading us to believe Amazon’s expanding service portfolio hints at grander logistics ambitions.

Yesterday, Matt Barr from GEODIS made a great observation in the comments section: “With the growth of programs like Seller-fulfilled Prime and Flex though, it seems their primary intent isn't to be a 3PL.”

That’s a good point. The company leaves plenty of space for sellers and 3PLs alike to manage logistics outside of Amazon’s purview. And Amazon has never publicly stated any intention to be 3PL.

But something’s changing

Amazon’s reached a tipping point: in 2017, the company announced that more units were sold by third-party sellers than by Amazon itself. Within the company, the Marketplace teams have been growing more important while Amazon’s own retail teams lost resources, which shows which way the wind’s blowing.

Amazon... announced that more units were sold by third-party sellers than by Amazon itself

If Amazon keeps raising the bar, as it has a tendency to do (the rapid normalization of two-day, next-day, and same-day shipping comes to mind), its sellers may need a hand catching up. That’ll mean sellers increasingly rely on 3PLs or FBA.

A Customer Obsession

If CEO Jeff Bezos is talking about customers, the word “obsession” is likely to follow. A happy customer is one that gets her orders in a timely, reliable, and inexpensive way.

For Amazon, logistics is inseparable from brand.

Amazon’s largely been able to deliver that experience on its own inventory. Now that marketplace sales actually exceed Amazon’s own, the company has its sights set on improving third-party seller fulfillment. After all, consumers tend to think of anything purchased on Amazon as being “from Amazon,” not a third-party seller. Amazon has a coveted brand to protect. For Amazon, logistics is inseparable from brand. Amazon has every incentive to help sellers provide a top-notch delivery.

Enough Efficiency to Go Around

Customers aren’t the only thing Amazon’s obsessed with. I’d argue that it’s also an “efficiency-first” company. Amazon's logistics endeavors aren’t driven by an abstract urge for dominance in the logistics industry. Instead, Amazon tends to pursue logistics activities where it believes it can drive efficiencies the market isn’t offering up.

Amazon’s been able to invest heavily in automated warehouses, prime (of both the lowercase and uppercase variety) fulfillment center locations, negotiated shipping rates, and warehouse/transportation/inventory management technology, to name a few.

Amazon tends to pursue logistics activities where it believes it can drive efficiencies that the market isn’t offering up.

These efficiencies are a win for Amazon itself, but it seems a shame not to pass those efficiencies on to its sellers. Sure, they’re technically competitors, but it’s more like “coopetition.” Considering marketplace operating profit margins are said to be twice that of Amazon’s own, that coopetition is certainly palatable for Amazon.

When Someone Shows You Who They Are, Believe Them the First Time

In many ways, Amazon is already acting like a 3PL for half the units sold by third-party sellers. Through FBA, it’s offered warehousing and transportation management for years. For a while, it seemed that Amazon was satisfied to leave it at that. But a couple of recent developments have indicated that it’s tentatively toeing deeper into 3PL-like territory.

A quarter of all third-party sales are now cross-border, and the international FBA sales saw 80% year-over-year growth in 2016.

First, Amazon’s international expansion has provided a big opportunity to bolster its international transportation management services, as well as general 3PL services abroad. A quarter of all third-party sales are now cross-border, and international FBA sales saw 80% year-over-year growth in 2016. Amazon has FBA fulfillment centers across North America, Europe, Asia, and Australia. Third-party sellers can ship products to either domestic or international fulfillment centers, and Amazon will provide value-added warehousing, transportation management, and customs handling.

For the first time, Amazon will take on management activities in non-Amazon warehouses.

Second, Amazon’s taken a big step into 3PL territory, at least in theory, with “FBA Onsite.” For the first time, Amazon will take on management activities in non-Amazon warehouses. Amazon, which is a licensed freight broker, will manage transportation of products from the warehouses of third-party sellers to consumers. Third-party sellers will assign Amazon-specific inventory within their warehouses, and manage that inventory through Amazon’s warehouse management system (WMS), which will be installed on the seller’s servers. The service was piloted on the West Coast with reports of nationwide rollout in 2018.

Will FBA Onsite appeal to the 23% of third-party sellers who aren’t working with Amazon for their logistics? One of the big seller gripes is that FBA is too expensive. FBA Onsite could remove that barrier: one estimate puts FBA Onsite rates “as much as 70% less than merchants would pay themselves.”

Does Amazon have designs on becoming a 3PL?

To get back to my original question: Does Amazon have designs on becoming a 3PL? Well, no one outside of Amazon knows the answer to that, really. But I’ll let these observations sum up our thoughts:

• I think Amazon’s reached a tipping point in the number of third-party sellers on its marketplace, and in order to satisfy customers and protect its brand, it will be absolutely essential to make sure marketplace fulfillment runs as smoothly as its own.
• I think it’s developed its own logistics capabilities to an extent that can scale to third-party sellers in a mutually beneficial way.
• I think Amazon’s already performing quite a few services that we see at 3PLs, and recent developments only show it scaling up FBA services, both here and internationally.
• I think there’s (much) more to come.

The question of Amazon as a 3PL is a tricky one, and an important one to ponder in our industry. I’d love to hear your thoughts in the comments section.

Later this week, I’ll be back with predictions for “Amazon as a 3PL.” There’s a lot to discuss-- reports of further 3PL services, international expansion, new product categories, the last mile…

In case you missed it, you can read yesterday’s post here: Amazon's Acting Like a 3PL for 1 in 8 B2C E-Commerce Shipments in the U.S.

You can also read more about Amazon logistics, and much more, in our new report, “E-Commerce Logistics in the United States.” We’ve also added an E-Commerce Logistics panel to our 3PL Value Creation North America Summit, held in Chicago on October 16­–18. Learn more about the Summit here.