Attention entrepreneurs: Uncle Jeff wants you. Or, perhaps more accurately, he needs you.
Amazon.com, Inc.'s plan to team with partners who want to launch their own delivery businesses is Chairman and CEO Jeff Bezos' latest attempt to bridge the gap between the Seattle-based company's breathtaking volume growth—estimated at 20 percent per quarter--and the delivery infrastructure it requires to hit its ever-demanding service commitments.
The concept itself is not foreign to Amazon; it already uses local couriers as well as stopgap citizen drivers that fill a temporary delivery void under its "Flex" service. Today's step expands and formalizes the existing concept, according to Mark S. Schoeman, president and CEO of The Colography Group, Inc., a consultancy.
James Thomson, a former top Amazon executive and now a partner at Buy Box Experts, a marketing firm that helps companies work with Amazon, lauded the move, saying it will efficiently funnel local delivery operations through one partner who can supply 20-40 drivers, rather than Amazon having to deal individually with dozens of one-person operators in each market.
Thomson said the service that stands to benefit the most from the initiative is "Prime Now," which promises deliveries to Amazon "Prime" subscription members within 2 to 4 hours of ordering. Currently, a small percentage of Amazon's volumes move under Prime Now. However, Amazon sees the program as a "category killer," Thomson said.
Memphis-based FedEx Corp. and Atlanta-based UPS Inc. move most Prime Now traffic. However, Amazon isn't satisfied with the status quo, according to Thomson. The alternative, until now, was working with one-person operators, which Amazon found unwieldy, Thomson said. The new initiative will give Amazon to quickly scale up the Prime Now network, Thomson said.
The Amazon program resembles the independent contractor structure currently used by FedEx to support its fast-growing ground parcel service, known as "FedEx Ground." In the 20 years since FedEx began domestic ground deliveries, the operation has transitioned from a relationship between the company and independent drivers to an "Independent Service Provider" (ISP) model where a third-party is layered between FedEx and the drivers. Because of multi-year contractual commitments between FedEx and its ISPs, it is doubtful Amazon's initiative will lead to the poaching of FedEx's partners, said Bascome Majors, transport analyst for Susquehanna Capital Partners, an investment firm.
One key difference is that FedEx does not provide the type of support to its contractors that Amazon has promised to its fledgling partners. Amazon said it will provide training, technology, discounts on fuel, insurance, leases of Amazon-branded equipment, and most importantly, a stable flow of packages. The individuals, in turn, would be incented to hire thousands of drivers across the U.S. to augment Amazon's established delivery network.
Starting Gun Sounds
The initiative, which officially began today and is available nationwide, focuses on last-mile delivery services, the segment showing the fastest growth, as well as strong profitability, due to the continued surge in e-commerce ordering and fulfillment. Commercial drivers' licenses will not be required as long as the vehicles in use fall under the 10,000-pound gross vehicle weight threshold. Gross vehicle weight is the sum of cargo, cab and trailer. Those who sign up for the program can work with other delivery concerns as long as they don't use Amazon-branded trucks or wear company uniforms.
In the medium-term, Amazon wants the new network as finely tuned as possible by the time the peak holiday delivery season rolls around.
Amazon said it is seeking partners who could manage 20 to 40 daily routes with between 40 to 100 employees. The payment structure consists of a fixed monthly fee based on the number of vehicles operated, a rate based on a route's length, and a per-package fee for each successfully delivered package. Based on Amazon's assumptions of a $10,000 start-up fee and annual revenue potential of $1 to $4.5 million, a partner could pocket between $75,000 and 300,000 a year.
Amazon said it has earmarked $1 million in start-up funding to military veterans, and it will offer $10,000 reimbursements to qualified veterans.
Amazon said the program is aimed at supplementing the work of its existing delivery partners, not to replace them. Dave Clark, the company's senior vice president, worldwide operations, said in a statement that the company has "great partners" in FedEx, UPS and the U.S. Postal Service, among others. Amazon has said its logistics buildout is designed to stay ahead of its internal growth and not take volumes away from its partners, whom it currently needs. Amazon, which currently moves 5 to 7 percent of its own traffic, is anxious to gain more control over its shipping both to meet customer requirements and to drive down its shipping costs, which continue to spiral upward as volumes surge.
However, Amazon's customers are its priorities, not its carriers. If operators in the new network can deliver goods cheaper than its established partners, it could shift existing business, and direct fresh volumes, to the newbies. Should that happen, the pain could be felt most by USPS, which, according to consultancy MWPVL International, handled about 62 percent of Amazon's parcels last year. According to Majors of Susquehanna, USPS stands to lose about $550 million in annual revenue should Amazon divert one-third of its last-mile packages now moving under the USPS' "Parcel Select" direct-to-residence service.
Majors estimated the Amazon operation is realistically capable of shipping about 400,000 packages a day.
The analyst said the threat of shipment diversion is likely to place a cap on rate increases for Parcel Select. At the same time, President Donald Trump has ratcheted up the rhetoric about USPS' unprofitability, arguing that it loses money on every package tendered by Amazon. The claim is widely believed to be untrue.
UPS and FedEx could be hurt as well because the last mile is a highly profitable part of each enterprise, said Thomson of Buy Box. The price of UPS shares fell $2.50 a share today, while shares of FedEx dropped more than $3 a share. Amazon shares jumped nearly $41 a share to close at more than $1,701 a share.