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Report says Amazon to test last-mile delivery in three U.S. markets

By Jeff Berman, Group News Editor
May 06, 2014

When most people think of Amazon, they think this: e-commerce behemoth. But on the future, there may be another thing associated with the company: provider of same-day deliveries.

That was made clear in a recent Wall Street Journal (WSJ) article, which noted that Amazon is testing its own delivery network for “last-mile” services in San Francisco, with plans to do the same in Los Angeles and New York.

If its delivery efforts are eventually a success and are brought in house, the WSJ said that it would provide Amazon with “more control over the shopping experience,” which it would welcome, given the challenges e-commerce retailers dealt with due to a spate a late deliveries last December during the holiday season. 

Another significant benefit, according to the WSJ report, is that delivery of goods on the actual day they are purchased offers consumers one less reason to go to stores, while Amazon with its own asset-based network could make deliveries in the evening or at certain specific times.

Not surprisingly, this effort could deal a blow to the duopoly of FedEx and UPS, as well as the United States Postal Service, whom collectively move most of Amazon’s deliveries. But there is more that comes with that, too, as the article pointed out that “Ultimately, a delivery network could transform Amazon from an online retailer into a full-service logistics company that delivers packages for others, according to former Amazon executives. They caution that any such effort likely is years away.”

Other significant points related to Amazon’s efforts on this front pointed out in the article include:
-how if Amazon expands its delivery network it would initially reply on lower cost, regional carrier like LaserShip on the East Coast and OnTrac on the West Coast, as well as the USPS, which could negatively impact UPS and FedEx package volumes;
-of the 608 million packages shipped by Amazon in the U.S. in 2013, USPS handled 35 percent, UPS 30 percent, regional carriers 18 percent, and FedEx 17 percent, based on data from Sanford C. Bernstein & Co.; and
-UPS and FedEx average ground rates have risen 3 percent-to-5 percent annually over the last five years, representing an incentive for Amazon to develop an internal delivery service, and Amazon pays between $2 and $8 on average for shipping per package

How Amazon fares in its delivery attempts remains to be seen, industry analysts say.

“Amazon is going to attempt delivery in three markets that have high density delivery zip codes with its current book of business),” said Jerry Hempstead, president of Hempstead Consulting. “Of course this is the most profitable business for whomever is their current service provider(s) to Amazon. So Amazon will skim off the best and leave the lower density zip codes to someone else to deliver. This is a slippery slope. Will Amazon alienate their current delivery partners? Will those current delivery partners be forced to increase its pricing on the business it will continue to handle so that they maintain their yield? Will their delivery partners walk away from them because for all intents they are enabling Amazon to become their competitor? Once you have constructed a delivery network, there is no logical reason to think that Amazon will not offer delivery service to other shippers (not just its own packages) to continue to build out delivery density.”

Building a delivery business is very expensive and labor intensive business and requires drivers and equipment and terminals and scanning devices, which Hempstead explained is the core competency that is inherent in the USPS who has been at it since 1776, the competency of UPS who has been at it since 1907, and the core competency of FedEx who has been at it since 1973.

“Delivery is not at the core of Amazon, and this diversion may not be the best long term strategy for them, but I am sure the Teamsters see this as a great future opportunity for them,” Hempstead said.

Rob Martinez, president & CEO, Shipware Systems Corp, a San Diego-based parcel consultancy, said that he has heard Amazon intends to address the market based on population centers. 

“At some point in the future (and I predict DISTANT future), it will handle the top 40 markets themselves that represents about half the population,” he said. “Regional carriers will handle the next 60 markets (17% of the population), and the USPS would handle the rest (33% of the population). How do you make a million dollars in the shipping business?  Start with $2 million.  Parcel delivery is a very difficult business.  And it relies on three things, each of which has a tendency not to work perfectly every time:  people, vehicles, and technology.  A casual Internet search of consumer feedback on Amazon-handled deliveries in San Francisco and the UK revealed a lot of customer dissatisfaction with the delivery end of the transaction.

What’s more, Martinez observed that UPS has more than a century’s experience delivering parcels, spent billions of dollars developing a system of efficiencies and continues to invest in smarter package and driver routing, sorting expansion, vertical industry integration, customer automation, delivery transit upgrades, and brand awareness. 

“It would be difficult for any company to compete with UPS (and FedEx) on any significant scale,” he said.

Amazon shipped 608 million packages in 2013, and UPS shipped 4.3 billion.  Martinez said his firm estimates that UPS handled about 200 million packages for Amazon, which of course, is as much as 4-5 percent of the overall total for the package delivery giant, and he explained a total loss of Amazon’s business would certainly impact UPS volumes and revenues, but might actually improve yield per shipment since the Amazon pricing is very low margin.

“I appreciate Amazon’s entrepreneurial ethos,” he said. “They categorically have already and will continue to change the game for multiple industries including shipping.  I’m quite confident that Amazon has the management team, finances, and infrastructure to handle a percentage of its parcel deliveries.  But it will take years, if ever, for Amazon’s logistics unit to supplant parcel delivery companies like UPS.  Rather, it is likely that Amazon handled deliveries will be limited to only a few densely populated markets.  And it will be more expensive and difficult than perhaps Amazon is currently envisioning.”

He added that consumer demand for Same Day delivery service, which is one of the key drivers in Amazon’s plan to handle deliveries, is not apparent. 

“All the research we’ve seen points to the conclusion that same day deliveries are not being fueled by consumer demand (outside of specialty products and perhaps some electronics),” noted Martinez.

About the Author

Jeff Berman headshot
Jeff Berman
Group News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. .(JavaScript must be enabled to view this email address).

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