#5 Logistics: the engine behind the Amazon flywheel

As the marketplace has become the essential building block for Amazon’s fabled flywheel, logistics has become a vital part of the marketplace and services Amazon offers. This core element of the flywheel is also expensive.

The costs associated with logistics, i.e. fulfilling and delivering the orders to customers, have increased rapidly to more than $150 billion.

For years, logistics was seen as a cost that should be minimised. The company tried to reduce logistics’ revenue share throughout the early 2000s. This changed around the 2008 financial crisis, and logistics became something to be invested in. Currently, logistics costs represent around one-third of the company’s revenues.

Fulfilment by Amazon (FBA) is the logistics service Amazon offers its marketplace sellers. FBA is tied to Prime (covered in a later post). If the seller wants to provide customers with Prime-eligible delivery, they must be FBA members. Most Amazon customers use Prime, and thus most sellers want to be involved in Prime and, subsequently, FBA.

Besides costs, logistics is also a revenue source for Amazon. With $103 billion in revenues, FBA (3rd party services) is the biggest service Amazon offers.

With the growing importance of logistics, Amazon has invested heavily in building new fulfilment centres. During the pandemic, the company almost doubled its fulfilment capacity.

Capital expenditures and finances are the topic of the next post.

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