Q&A: Rick Watson, Founder and CEO of RMW Commerce Consulting

Logistics Management Group News Editor Jeff Berman recently spoke with Rick Watson, Founder and CEO of New York-based RMW Commerce Consulting. Watson founded his firm after spending more than 20 years as a technology entrepreneur and operator exclusively in the e-commerce industry with companies like ChannelAdvisor, BarnesandNoble.com, Merchantry, and Pitney Bowes. Watson provided Berman with an overview of his views on the highly-competitive e-commerce logistics sector, how Amazon is standing out compared to the duopoly of UPS and FedEx and what shippers may be in store for in regards to the 2021 Peak Season. Their conversation follows below.    

Logistics Management (LM): How do you view the ongoing emergence of Amazon as a competitive threat to the parcel duopoly of UPS and FedEx, at a time when e-commerce’s percentage of total retail sales continues to head up?

Rick Watson: For other companies, it is hard to look at it and not understand what it means for them, given that they are investing at such different rates, with, UPS, for example, predicting they will invest $4B in capex in 2021 after investing $4.4B in 2020, whereas Amazon invested $40B in capex in 2020, over half of that to logistics. It is really unbelievable.

LM: Regarding capex, it really seems like Amazon’s investment is sending a strong message to the market. How do you view that?

Watson: Everyone was talking about “Shipageddon” last year and getting ready for this big crunch, with everyone ordering goods online. Amazon knew this was coming five years ago, and this is something that has been on its agenda for a number of years. It was somewhat easy for Amazon as a company, as it was the only one that knew its projected growth rate. And as they grow faster than anyone else, it can easily see it will have its own capacity issue. Which is why they kind of invested ahead of it. It is really phenomenal what it has done, just in the areas they are able to invest in, and do it well. There are very, very few companies that work like Amazon.

LM: Looking at what Amazon is doing, as it relates to the competitive landscape, how should an e-commerce shipper be looking at decision making drivers, in terms of whether to use Amazon, FedEx, or UPS, in terms of rates and contracts, as well as service level?

Watson: In the U.S., Amazon has not yet begun offering its own third-party service. And it is unclear of what the reaction of the average retailer, especially the bigger ones. would be if they did do, given the competitive situation. The people that would benefit are the ones that have some type of vested interest. To me, the lowest-hanging fruit for Amazon are the non-FBA (Fulfillment by Amazon) merchants, the people that are not already using Amazon facilities but still have inventory to ship as part of Amazon’s ecosystem. So, Amazon could offer greatly reduced rates, as they have 100% into the consumer, the types of goods being sold…and all of this data, which is something I know a lot of people underestimate. Amazon has perfect knowledge of the customer and the goods, something that no personal carrier could ever hope to have.   

LM: When UPS announced first quarter earnings, it talked a lot about its SMB business and the gains they are seeing on that front. Is this a sign of things to come, as opposed to its work with large retailers?

Watson: The highest-margin shippers for UPS are small business shippers, and they are growing the fastest. Those trends are reinforcing themselves a little bit. They are growing the fastest in America. Finding and selling to small shippers is not easy. Although the revenue per unit is higher, the cost of sales has to be somewhat higher, with the strategy being trying to find all of these facilities that small shippers are shipping out of and hoping they are consolidating into a number of 3PLs…so they don’t have to sell over and over.

LM: How do you view the current state of the Amazon Delivery Service Partner (DSP) program? Is it building momentum, in your opinion?

Wilson: I have not tracked the data points for DSP along the journey. But one data point I picked up on the most recent Amazon earnings call is that it has more than 100,000 drivers as part of that program. That sounds like a significant number, in some ways, but also seems like it could get even bigger in the future. It sounds like it has been very successful to them, and I think it is material and it is more cost-effective than almost any other way Amazon can do it and on the most legally-safe ground, in terms of the federal government coming back and reclassifying the workers and the costs, because otherwise you would need to change franchise laws in the U.S.

LM: How does the DSP program match up with the USPS?

Wilson: The USPS is the number one small package shipper and has the best rates for shippers moving the occasional parcel, due to flat rates. The problem is how to scale it for a business. The tracking is terrible, and the reliability is not anywhere near Amazon metrics, which usually demand to within a half percent of accuracy. It is like comparing college baseball to the AAA and the majors. If Amazon and UPS are in the majors, I think USPS is in college.

LM: Going back to March 2020, when the pandemic really kicked in hard, there was a surge in e-commerce sales, with almost 25% annual growth, with 2021 pegged at about half of that. For a large or midsize shipper, there are many options, it seems. What does the rise in e-commerce sales mean from a logistics sourcing perspective?

Watson: If you look at the FedEx Ground network, it is not really in the same league as UPS even today still. So, if you have any kind of serious ground network, UPS is a fantastic network and keep improving its service a great deal every year…even if it is not investing at Amazon levels. So, you have to be fair to them, they are great at what they do. You really cannot do everything with one carrier, because ultimately you have to hit the pockets of where the consumers are. For example, look at shipping in Toronto. You cannot afford to use direct carrier express shipping into Toronto. Let’s say Canada makes up 20% of a shipper’s total sales, with half of that going into Ontario. You have to be more surgical if you are going to be able to manage your costs and service levels to that area. The competition is just too great to use one carrier. There is too much specialization, I think, and that is part of it.         

LM: Even though UPS and FedEx both recently partially reinstated some service guarantees, their collective pricing power remains intact, it seems. Is that how you see it?

Wilson: Yes, it is, and I think I would expect to see their margins to slowly expand. It is akin to the airline industry with Southwest entering a new hub. Whenever that happened, all costs would drop by 30% the next weekend. I expect something like that will happen.

LM: What do you think about Amazon making heavy investments into capacity, instead of investing heavily in capacity, places where there is margin to steal from competition, and places where the consumer experience is light?

Watson: At this point, Amazon is just worried about its own capacity, in that does it have enough capacity to handle the volume for itself? Amazon is not pinching pennies by any stretch of the imagination right now.

LM: Looking back to March 2020, at the outset of the pandemic, things are clearly trending in the right direction now. How so you view the lessons learned from the last several months?

Watson: I think having options and backups is super important. Forecasting and modeling is more important and understanding where your providers are good and where they could use improvement and go with a specialized regional player to shave costs and offer better service sometimes at the same time. I think that is just going to get more important for shippers.  

LM: How do you view the 2021 Peak Season, given the strong e-commerce projections out there?

Watson: A close eye will need to be placed on volume caps, which are based on what shippers are telling their logistics providers. Those are their own numbers coming back to bite them. If it was not clear last year, it is important what you are promising in order to have a relief valve, in case something goes wrong. That is always number one, to me, as you think about peak, and to the extent that the relief valve does not cost an arm and a leg, too. In a different realm, you saw what Peloton had to do, when it had global supply chain issues.