Happy New Year! Are you still digging your way out of a pile of cardboard boxes? It’s not just you — over 2.75 billion packages were delivered in the United States over the holiday season, a staggering number. Remember, there are only 330 million Americans! Watching all these boxes being delivered, it made me wonder: why did Amazon choose to start shipping its own boxes?
If you haven’t been tracking this, you may not know that Amazon now delivers over half of its packages itself. The company delivered roughly 3.5 billion packages last year (UPS, which was founded in 1907, delivered 5.2 billion packages in 2018). Jeff Bezos is building his own shipping operation that is on pace to surpass the annual volumes of both FedEx and UPS in a few years.
But first, a quick background: the modern shipping logistics industry was famously invented by FedEx CEO Fred Smith in an undergraduate paper he wrote at Yale in the mid-60s. The concept was simple but ambitious: in a modern economy driven by Moore’s Law, businesses needed overnight shipping in order to compete. It was a pretty audacious idea at the time. The U.S. air cargo system back then was a heavily regulated patchwork of competing services. Consignments wound their way through several different carriers, shipments were impossible to track, took a long time, and were unpredictable.
Instead, Smith suggested a vertically integrated operation that owned the entire operation, from pick-up to drop-off. What happens when a law firm in New York absotively, posilutely needs to get a contract signed in LA the next morning? They used FedEx. Fred Smith’s company would eventually become the night shift manager of the modern economy.
Today, FedEx continues to thrive. Last year they delivered 50 million packages a day, and by 2026 they expect that number to increase to 100 million. They own one of the world’s largest airlines. So why did Amazon recently decide to start their own logistics shipping company from scratch? After all, don’t the business schools teach us to stick to our core competencies, and outsource everything else to the experts?
I think the answer can be found in Bezos’ famous shareholder statement from 1997:
“There are many ways to center a business. You can be competitor focused, you can be product focused, you can be technology focused, you can be business model focused, and there are more. But in my view, obsessive customer focus is by far the most protective of Day 1 vitality.”
I sum up this dynamic in my book Subscribed. In the old model, companies used to focus on “getting a product to market” and selling as many units of that product as possible. They did this by getting their products into as many sales and distribution channels as they could. The focus was on the channels, the supply chains, the processes.
In the new model, successful companies start with the customer. They recognize that customers spend their time across many channels, and wherever those customers are, that’s where they should be meeting their customers’ needs. The processes are secondary. They are a means to an end! The focus is on the customer.
I believe that with this kind of mindset, it was inevitable that Amazon was going to build its own packaging operation. I imagine that when the folks at Amazon looked at the FedEx logistics system, they saw a system optimized for business-t0-business deliveries: generally between large downtown locations and office buildings, during business hours, and mostly paper products. Amazon’s needs are different: its delivery destinations are scattered far and wide, and its primary customer is someone who is going to want their Baby Yoda doll delivered in under four hours (they come out in May; you can pre-order one here).
Given Amazon’s goal to continue to deliver an ever-improving e-commerce customer experience, they have no choice but to build their own logistical apparatus. They didn’t plan on becoming a shipping logistics company; that’s just a byproduct of a broader corporate mandate. It was always about the customer.
For more insights from Zuora CEO Tien Tzuo, sign up to receive the Subscribed Weekly here. The opinions expressed in the Subscribed Weekly are his own, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.
And check out his book SUBSCRIBED: Why the Subscription Model Will be Your Company’s Future – and What to Do About It.