Amazon's delivery drones seen as bid to overcome company's Achilles Heel

On D-(Drone) Day plus 2, the fallout (no pun intended) continued.

No drawing-board concept in recent memory has been so thoroughly dissected as Amazon.com's plan— revealed Sunday night to a national television audience—to use automated drones to deliver packages within 30 minutes to destinations located 10 miles from one of its fulfillment centers. The service, dubbed "Prime Air," could be in operation by mid- to late decade depending on when, or if, the Federal Aviation Administration approves the use of commercial drones.

The initiative faces myriad legal, safety, regulatory, and economic challenges. For example, each drone flight will transport one package weighing up to five pounds. Given that volume density—or packages per stop—is critical to a parcel operation's success, it's anyone's guess as to how Seattle-based Amazon would achieve sufficient economies of scale with a one-drone, one-package operation.

Robert Howard, founder of Grand Junction, a San Francisco-based company that provides IT support for local delivery services, said the venture illustrates Amazon's weakness relative to traditional retailers: The absence of a storefront inventory network that is close to consumers and can provide rapid deliveries into densely populated urban areas. Amazon's fulfillment centers are situated mostly in suburban or rural areas, making it difficult to deliver products within a one- to two-hour window. By contrast, traditional storefront retailers are contracting with local ground delivery firms to transport parcels from their store backrooms to the customer within a matter or hours, if not minutes.

"If successful, the drone project will increase the area Amazon can serve, but it will not work in urban areas where drone drops are not realistic," Howard said. "For once, traditional retailers hold the upper hand when it comes to one-hour delivery. This drone project, even if successful, will not change that."

Drones may actually find more value in the industrial business-to-business space, where supply flows and deliveries could be regulated in a more closed-loop manner than in business-to-consumer (B2C) commerce, according to Sandeep Kar, global director of commercial vehicle research at the consulting firm Frost & Sullivan. To that end, Kar sees drones gaining traction in intra-company logistics services.

Kar said that parcel carriers like FedEx Corp. and UPS Inc., which both haul a good chunk of Amazon's parcels, could stand to lose a share of light-weight, time-critical package delivery business. This could lead FedEx and UPS to develop similar delivery options, which could open up market opportunities for the two giants, he said.

Susan Rosenberg, a UPS spokeswoman, said the Atlanta-based company is monitoring commercial drone use. Drones are "an interesting technology, and we'll continue to review [it] just as we do with other technology applications," she said.

Scott Group, analyst for Wolfe Research, a New York-based consultancy, said in a research note today that UPS and FedEx "may have to prepare to lose [Amazon] as a customer." Amazon's launch of its own trucking capabilities to deliver groceries in West Coast cities, its recently announced partnership with the U.S. Postal Service to make Sunday deliveries, and the development of delivery drones put Amazon "at least on a path to eventually bypass UPS and FedEx," he said. Group estimated that Amazon accounts for 2 to 3 percent of revenue for each carrier.

Group said the impact on FedEx and UPS will be negligible as long as Amazon gradually shifts its business. The risk, he said, comes as Amazon becomes a larger part of overall retail sales, and FedEx and UPS don't benefit from that growth as was originally anticipated.

Rob Martinez, president and CEO of Shipware LLC, a San Diego-based parcel consultancy, sees delivery drones having virtually no impact on UPS' and FedEx's market share. "UPS delivers 14-plus million packages a day. How many drones would it take to capture just 1 percent of that market share?" he said.