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Supply Chain News: Lots of eFulfillment News Last Week


Walmart Ends Prime Copycat; UPS Earnings Hit by Too Much eCommerce Business; Amazon Building Hug Air Hub; Amazon Continues to See Fast Revenue Growth

Feb. 6, 2017

There was even more news that usual in the efulfillment wars last week.

First, Walmart announced it was going to go after Amazon's hugely successful Prime program – in which customers receive free two - shipping on most orders and other benefits for a $99 annual fee – by dropping its copycat subscription service called Shipping Pass.


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"Amazon is going to become a full-fledged competitor to UPS," agrees Marc Wulfraat, CEO of consulting firm MWPVL International.


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Instead, customers will receive free two-day shipping on most order of at least $35.00. At $49 annually, the Shipping Pass program was priced at half Amazon's subscription rate, but did little to halt Amazon's momentum, as it continues to grow on-line sales much faster than Walmart.

Next, UPS announced lower Q4 earnings week – because it had too much ecommerce business in the quarter. Go figure.

UPS makes a lot less profit on ecommerce deliveries, with lots of stops and travel time for usually just a parcel or two, versus its more lucrative B2B business. And ecommerce deliveries were way up in the quarter, hurting UPS profit margins even as revenues were higher.

UPS said 55% of shipments in the quarter were to residential addresses, including 63% of all deliveries in December, figures well up from 2015. The company said it will now spend $4 billion next year to improve its network, up from $3 billion in 2016.

"We experienced a significant shift in mix toward lower revenue products. This, combined with the cost of facility investments yet to come online, weighed on our Q4 results," UPS CEO David Abney told analysts during the earnings call.

UPS is in the middle of an approximately five-year plan to further automate its sorting centers and other facilities, and much of that automation capacity comes online next year and through 2020, said Myron Gray, president of U.S. operations.

"Thus far, it seems like ecommerce has generated problems equal to benefits," Logan Purk, an analyst at Edward Jones, said. "This has been a ghost that has been haunting UPS for a few years, and that's how to move all this volume profitably."

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Third, Amazon announced plans for a major new Prime Air hub outside the Cincinnati airport, its first true air freight operation.

Amazon said it will spend some $1.5 billion on several buildings, automated material-handling equipment and a space to park airplanes. Amazon didn't say when the air hub will open.

Details from Amazon on its plans for the air hub were sparse, but the on-line giant did say it expects to schedule more than 200 flight departures and landings per day from the site.

The Wall Street Journal reported that whatever Amazon's ultimate plans are, it appears - for now - that it is more concerned with shoring up its own volumes to ensure it has enough capacity during busy times like the holidays rather than competing with UPS and FedEx. Key qualifier – "for now."

It seems unlikely Amazon would spend all that money just for surge capacity in December.

"They're going to become a full-fledged competitor to UPS," agrees Marc Wulfraat, CEO of consulting firm MWPVL International, which has followed Amazon's network moves in detail for many years now.

To date, Amazon only has disclosed leasing 40 Boeing 767 planes, 16 of which are in operation out of the old DHL air hub in Wilmington, OH, not far from Cincinnati. It has been building operations at smaller airports across the country to feed the hub.

Amazon will lease 919 acres from the airport, which is actually in Northern Kentucky, not Ohio. The south lot it plans to build out first will have more than 100 parking spaces for planes, said Cincinnati airport CEO Candace McGraw.

Finally, Amazon released its Q4 and full year 2016 earnings last week. While the revenue number was below analyst expectations, and the company guided down some of its projects for Q1, for the full year revenues grew a healthy 27% in 2016 to $136 billion.

Amazon also continued to expand its fulfilment by Amazon (FBA) service, which allows third party sellers to send inventory to Amazon's fulfillment centers, and take advantage of its pick, pack and ship service for a fee. The number of active sellers using FBA grew 70% year-over-year, while FBA units accounted for more than 55% of total third-party unit sales.

We will have more details on Amazon's Q4 and full year 2016 results later this week.

Any reaction to this week's efulfillment news? Let us know your thoughts at the Fee? dback section below or the link above to send an email.


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