The news that Amazon is entering the shipping market and potentially becoming a competitor to its long-time partners, United Parcel Service Inc. (UPS) and FedEx Corp, should come as no surprise to anyone. Amazon has been gearing up for this ever since Christmas 2013, when thousands of packages did not arrive before Christmas, and in a “good faith” gesture, offered refunds on any missed guaranteed shipping dates.
Over the past year, online shopping has grown by 34% and as more and more people shop online, the logistical strain of moving millions of packages every day is staggering on the delivery networks of UPS, FedEx, U.S Postal Service (USPS), and smaller third-party companies.
With a focus on the reduction of the cost of overstocking and the log-jamming of products in their warehouses, Amazon is experimenting with a new delivery system called “Shipping with Amazon.” The focus is designed to make more products available for free two-day delivery.
Amazon will send drivers to retrieve orders from merchant warehouses and businesses and deliver directly to customers whenever possible. For destinations outside of the Amazon delivery area, the driver will take the package to USPS, or another carrier, who will be asked to complete the last miles of the journey. The main idea is that Amazon will have flexibility and control of who delivers the package to the customer’s door.
Experimental services were tested in India last year as a preparation for a roll out here in the United States, which will begin with a small group of merchants in the Los Angeles area in the upcoming weeks, with a more widespread national rollout in 2018 if the experiment proves a success.
Many speculate that this is merely a continuation of Amazon’s desire to take over and eliminate the need for services provided by UPS and FedEx. No one underestimates the power of what Amazon is capable of when it sets something in its sights; however, for the time being, it appears the primary focus of these experiments may be to cut the ever-increasing operating costs that drag down the profits
Amazon’s annual 10K filing shows that shipping costs last year rose 34% to approximately $21.7B, which represents about 15% of the company’s revenue, up from 12.3% in 2016 and 8% in 2012. With an operating margin of less than 3%, Amazon needs to find ways to face the challenges of managing order costs, which include transporting, sorting, handling, and delivery.
Amazon is a company that focuses on continually pushing the envelope and experimenting with ways to shorten delivery times and reduce costs. It built a network of “sortation centers” around the country, sorting packages by zip code and trucking to post offices, with the USPS handling the final mile of delivery. This makes total sense, as the USPS already has workers bringing mail daily to every home in the country. It also launched Amazon Flex, an Uber-like service deploying drivers with their personal cars and phones to make urban deliveries available now in most major cities.
Last year Bloomberg reported:
“Amazon’s rising costs to handle orders is also a consequence of the popularity of its program that allows independent merchants — from big brands like Nike to a dad selling fidget spinners from his garage — to sell their products on Amazon.com and have the option to stow their inventory in Amazon’s warehouses.
About half of the orders on Amazon now come from these independent sellers, and Amazon recently said the number of orders it handled for those merchants was growing nearly 40 percent a year. The downside is that as these sales grow, Amazon needs to employ new tactics to manage the complexity of deliveries originating from an array of sellers.”
In an interview with Walt Mossberg at the Code Conference in 2016, the company’s Chief Executive Jeff Bezos said “Amazon’s business with carriers like UPS and the U.S. Postal Service is growing even as the company gets more involved in the delivery realm. Amazon’s shipping services have given the company a way to keep up with the growth in its business, which is especially helpful when courier’s partners are being slammed during extremely high volume times and flooding of packages. Operating its shipping services could also offer a way to negotiate better prices with the outside delivery companies.”
The media has been reporting this as basically a “killing.” Indeed, they seem more concerned about this than anyone else, especially UPS or FedEx, who realize that while their pieces of the Amazon pie are shrinking, the pie itself is growing.