Amazon assembling executive team to support rollout of shipping network

Amazon.com Inc. has begun the process of assembling a high-level executive team to lead the company's push to develop its own transportation network, according to a person familiar with its strategy and planned execution.

The person, who asked to remain anonymous, said Seattle-based Amazon will announce plans to launch its shipping infrastructure sometime in 2016, though no firm time period has been discussed. Amazon has retained one of the world's leading recruitment firms to identify senior executives within the small-package industry, the person said. The individual declined to disclose the name of the firm, saying it does not want its identity revealed at this time.

The individual was told that Amazon will do "whatever it takes to serve every community" in the United States. The online retailer and fulfillment provider's objective is to guarantee delivery within a 90-minute to two-hour window, the individual was told by top executives at the recruiting firm.

Amazon plans to operate the service with its own equipment and will supplement it with purchased transportation services. It currently uses the U.S. Postal Service, UPS Inc., and FedEx Corp., as well as regional parcel carriers when they are needed.

The individual said that Amazon plans to continue using Atlanta-based UPS, though UPS may be reluctant to continue handling large volumes, given that the two may soon be going head to head. Amazon's relationship with Memphis-based FedEx has lessened in recent years; in its fiscal year 2015 annual report, FedEx reported that average daily volume for its "SmartPost" product, where it aggregates large-scale volumes for customers and inducts the shipments deep into the USPS network for "last-mile" delivery to residences, declined 6 percent "due to the reduction in volume from a major customer." FedEx didn't identify the customer, but those following the industry believed it to be Amazon.

Kelly Cheeseman, an Amazon spokeswoman, declined comment.

Amazon's desire to penetrate the transportation sector is not new. In early 2014, DC Velocity reported that Amazon was looking at ways it could fulfill and distribute orders through its own network rather than continue to rely on FedEx and UPS. At the time, it was reported that Amazon had divided the nation into three segments based on population size: The top 40 markets, which comprise about half of the U.S. population; the next 60 largest areas, which account for about 17 percent of the population; and the remaining areas, which account for about one-third of the population. The story indicated that Amazon was moving rapidly to develop the network, but gave no timetable.

In 2014, Amazon generated nearly $89 billion in net sales, defined as sales after deducting the costs of returns, allowances for damaged and missing goods, and any other allowable discounts. Of the total, $55.4 billion was generated in North America and the balance from sales across the rest of the world. Amazon, which launched in July 1994 as an online bookseller, has built a massive business selling a multitude of merchandise on its website, and providing fulfillment services to small and midsize merchants that lack the size and resources to manage those functions in house. Much of Amazon's shipping revenue comes from businesses that use it as an online storefront and a de facto third-party logistics provider.

In a research note yesterday, Colin Sebastian, Internet analyst at investment firm Robert W. Baird and Co. Inc., estimated the global fulfillment market presents a $400- to $450-billion opportunity for Amazon. In the note, Sebastian said Amazon might be the only company with the density and scale to compete globally against established transport and logistics providers. It also has an investor base that is "historically tolerant of large-scale investment and low-margin revenues," Sebastian said, a reference to Amazon's inability to become sustainably profitable despite significant year-over-year increases in revenue.

Sebastian said that Amazon, which currently operates 165 fulfillment centers worldwide, is testing "last mile" deliveries of products that are not sold on its own website.

One reason that Amazon may want to take more control of its logistics is that its escalating shipping costs continue to outstrip its shipping revenue. Shipping costs exceeded $8.7 billion in 2014, up from $6.6 billion in 2013. Meanwhile, shipping revenue in 2014 did not quite reach $4.48 billion—which nevertheless was a 45-percent increase over 2013 levels, according to information in Amazon's 2014 annual report. Increases in Amazon's shipping costs and revenues are seen as byproducts of the growing demand for its services.

From 2012 to 2014, the company's shipping revenue nearly doubled, while net shipping costs—the ratio of revenue to expenses—rose $1.4 billion over that time. Shipping costs as a percentage of net sales hit 9.8 percent in 2014, up from 8.9 percent in 2013, according to the annual report. (The figures exclude shipping revenue from third-party sellers that do not use Amazon for fulfillment.)

Another factor may be Amazon's desire to control its own distribution. It was critical of UPS' and FedEx's performance during the 2013 critical peak holiday shipping period, when an avalanche of Amazon packages hit both carriers' air networks two and three days before Christmas, resulting in late deliveries of millions of holiday packages. UPS' system was considerably more impacted than FedEx's.

In early 2014, Amazon told UPS and FedEx that it would re-evaluate its shipping options following the 2013 holiday fiasco, even though several observers blamed the snafus on Amazon's unrealistic fulfillment expectations given its acceptance of so many last-minute orders from customers. Terrible mid-December weather in the important Dallas-Fort Worth market added to the mess by creating bottlenecks across UPS' network that took weeks to completely resolve.

In response, Amazon has deepened its relationship with USPS, considered the low-cost delivery provider in the U.S. USPS provides Amazon with Sunday deliveries, among other things. Amazon has begun erecting fulfillment centers closer to its end-delivery markets to cut transportation expenses and speed time in transit. It also has been inducting more of its own parcels into the USPS network for last-mile deliveries and to lessen its reliance on UPS and FedEx to aggregate its parcels and perform the same service in conjunction with the postal service.