Operations
22 May
Amazon's regional reorg is about more than faster delivery
At Amazon, logistics is a customer-facing function.

(Photo courtesy of Amazon)
At Amazon, logistics is a customer-facing function.
(Photo courtesy of Amazon)
Welcome to Opportunity Fulfilled. This week, The Current is digging into the logistics transformation taking place at major retailers in 2023, and offering commentary on what these developments mean for the future of ecommerce.
The ecommerce expansion of the pandemic years led to massive growth of digital capabilities. Now, within online shopping poised to continue steadily gain share, retailers are reassessing what they built, and optimizing for profitability.
That’s playing out in logistics, where investments by the major retailers are seeking to create more efficiency in fulfillment and delivery.
The ecommerce market leader offers a primary case study. After nearly doubling the footprint of the shipping operation during the pandemic, Amazon reorganized its newly-expanded fulfillment network from a national to regional approach.
It’s ushering in a big change in the way the company moves packages, the Wall Street Journal reported this month:
Previously, if a package wasn’t available at a local fulfillment center, it would have to be shipped across the country.
Now, it has eight interconnected regions in smaller geographic areas. Each region has a broad selection of items, and can operate largely self-sufficiently.
It’s already leading to improvements in the form of faster deliveries and reduced costs. More than 76% of the products customers now order are from fulfillment centers in their region, up from 62% last year. On average, Items also have 12.5% less touchpoints before being delivered. Plus, the number of miles between the location where a product is fulfilled and the customer has been reduced by more than 15%.
It is also changing the front-end of the shopping experience. The WSJ reported that items that are closer to a customer may appear higher on search results.
As Amazon goes, so often goes ecommerce. The delivery network reorganization has big implications for the industry. Here are key takeaways:
It reorients the network around proximity. Amazon wants to continue to deliver items faster, which in turn increases customer satisfaction. Amazon VP of Transportation Udit Madan told the WSJ that increased speed leads to more likelihood that customers will buy an item, and return for more.
Behind the scenes, that often requires moving goods into place before they’re sold. Along with the facilities-level reorganization, Amazon is also improving advanced machine learning algorithms to predict what customers in various parts of the country will need. That guides inventory placement for specific regions.
As Nake Skiver of parcel and ecommerce delivery consulting firm LPF Spend Management put it at last year’s Home Delivery World conference, “It comes down to being able to accurately distribute inventory close to demand.”
It will help third-party sellers, too. The optimization of the transportation network also has a compounding effect across the business. Services provided to third-party sellers are one of the fastest growing areas of Amazon’s business, as the first quarter brought a 20% increase in revenue in this area. This category includes Fulfillment by Amazon (FBA), in which the company provides storage, fulfillment and delivery for sellers. So any improvements to the transportation network that bring better margins for Amazon as a whole also stand to lead to expanded profits in the services it provides seller services that represent their own business in addition to selling goods. Third-party sellers accounted for 59% of Amazon’s sales in the first quarter, so the company has every incentive to keep making improvements in this area.
It indicates Amazon still wants to get faster. The reorganization shows how Amazon is continuing to prioritize delivery speeds. Its sprawling logistics network has already ushered in two-day, one-day and same-day delivery, reshaping consumer expectations in the process. It’s a good bet that the latest transformation effort will once again change what consumers believe is possible in delivery across ecommerce.
It underscores that logistics is a customer-facing function. Amazon’s continued investment in transportation also highlights how important delivery is to Amazon’s value proposition. While the company went through multiple rounds of cost-cutting (and layoffs) over the last year, it is not compromising on the often-pricy proposition of moving goods to customer doors quickly. That’s because Amazon is not only focused on providing customers with products they want to buy, but offering an easy experience that is convenient. With a logistics network that has been expanded and now optimized after the pandemic build, Amazon is poised to keep delivering on the latter.
The figure underscores the importance of the marketplace to Amazon's business.
When it comes to selling physical goods through online channels, the Amazon model is dominant.
The company’s commerce business has four distinct components: A marketplace with a constantly expanding assortment of goods driven by third-party sellers, an advertising network that helps sellers stand out, a fulfillment network that delivers items quickly and conveniently, and a membership program that builds loyalty, while connecting shoppers to the other parts of Amazon’s consumer ecosystem.
Each of these elements are mutually-reinforcing. At this point, it would be difficult to grow one without another. A third-party seller on the marketplace likely buys advertising to stand out in a sea of brands, and uses Fulfillment by Amazon to store and ship inventory in part because it’s the most convenient way to access Prime customers.
Yet these parts also exist as their own lines of business that have helped Amazon unlock new avenues for growth beyond the rote sale of goods. Services provided to third-party sellers, Amazon Ads, FBA and Prime all generate their own revenue, and most of these are growing rapidly.
Just how important are they to Amazon?
The company offered some details on one of these areas in a new report this week: Third-party sellers. These independent sellers that list, manage and ship their own products are distinct from first-party sellers, which effectively sell items to Amazon and leave the ecommerce company responsible for the sale to the consumer. As Amazon points out, most third-party sellers are small and medium-sized businesses. First-party sellers tend to be the larger name brands.
As it turns out, third party sellers are very important to Amazon. Key stats from the report:
Independent sellers account for 60% of sales in Amazon’s store.
U.S. sellers sold more than 4.1 billion products—an average of 7,800 every minute. These sellers averaged more than $230,000 in sales in Amazon’s store.
Brand owners in the U.S. grew sales over 20% year over year in Amazon’s store.
Amazon sellers are based in all 50 states.
Over 260 million products were exported globally by U.S.-based sellers.
The results in part underscore how much energy Amazon has put toward growing the marketplace, and the uptake in sellers that has arrived as a result.
“Amazon invests billions of dollars annually to provide entrepreneurs with a constantly improving set of valuable tools and resources to help them gain access to capital, quickly launch in our store, build their brands, and rapidly scale and reach more customers,” said Dharmesh Mehta, vice president of Worldwide Selling Partner Services at Amazon, in a statement. “Amazon is committed to the success of small businesses, and we are excited to continue innovating on their behalf and help them grow into thriving success stories.”
Make no mistake: There is also a massive benefit to Amazon’s business. In the first quarter of 2023, third-party seller services generated $30 billion, and grew 20%. Compare that to AWS, which is typically seen as Amazon’s big profit driver, and you’ll find that the cloud division generated about $21 billion while realizing 16% growth.
While third-party seller services aren’t always running ahead of AWS, the fact that they are growing in areas close to each other is a sign of how much opportunity lies in the marketplace for Amazon. Factor in that Amazon’s $9.5 billion (Q1) advertising business is also tied in part to the marketplace, and it’s clear that the impact extends beyond a single budget line.
Amazon’s success with third-party sellers is a big part of the reason why the marketplace model is being widely applied across commerce. Walmart is doubling down on growing third-party sellers on its marketplace as it follows an ecommerce playbook that has similar components of Amazon, and Macy’s opened its ecommerce business to third-party sellers last year. Shein recently brought its own marketplace to the U.S., and the fast fashion platform is using it as a means to expand the number of categories.
While Amazon will likely to continue to couch its communications about third-party sellers in the language of support for small businesses, it is a major reason that the company has been able to grow to the giant it has become, and remain there. With the growth of ecommerce and the rise of retail media, plenty of others in commerce will continue to apply the model, as well.
For a bit more info on Amazon, the company also shared the below rankings in the report on third-party sellers:
The most-shopped categories from third-party sellers:
The five states with the most third-party sellers: