Amazon has been testing the use of its own delivery vehicles in Los Angeles, New York City and San Francisco following an earlier pilot in the U.K.
Industry insiders have stated that Amazon intends to slowly roll out its own delivery fleet – branded as Amazon Logistics – until it eventually covers the top 40 domestic markets, representing about half of the U.S. population. Deliveries to the rest of the U.S. would eventually be handled by the US Postal Service principally, and to a smaller degree, regional carriers.
There are many factors driving Amazon’s exploration of parcel deliveries, perhaps the most significant of which is cost. Higher shipping and fuel surcharge costs drove out much of the company’s profits in 2013, and was cited as one of the reasons Amazon was forced to raise the cost of Amazon Prime from $79 to $99.
In addition to cost, Amazon’s latest move to handle package deliveries is undoubtedly the outcome of the well-publicized failures of UPS, FedEx and the U.S. Postal Service during the 2013 holiday season. Amazon will do everything in its power to avoid in the future the customer and public relations fiasco it faced.
Finally, the move will allow Amazon to offer Same Day delivery service to more customers, on more products, in more markets. Same Day service – both through Amazon’s fleet as well as delivery partners – is now being offered in Baltimore, Boston, Chicago, Dallas, Indianapolis, New York, Phoenix, San Bernardino, San Francisco, Seattle and Washington, DC.
Amazon to Compete with UPS and FedEx?
Does Amazon’s move mean it will compete with UPS and FedEx and become a third private player in the U.S. parcel delivery market? Certainly, it will have an impact and could begin to manage inventory, fulfillment and delivery for other consumer products businesses.
But it’s an enormous undertaking. 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.
UPS has more than a century’s experience delivering parcels; it has spent billions of dollars developing a system of efficiencies. And it continues to invest in smarter package and driver routing, sorting expansion, vertical industry integration, customer automation, delivery transit upgrades, brand awareness, etc. It would be difficult for any company to compete with UPS (and FedEx) on any significant scale.
Amazon shipped 608 million packages in 2013. UPS shipped 4.3 billion. We estimate that UPS handled about 200 million packages for Amazon, which of course, is as much as 4-5% of the overall total for the package delivery giant. So 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. 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. An old industry joke comes to mind: How do you make a million dollars in the shipping business? Start with $2 Million.
Finally, we haven’t seen the consumer demand for Same Day delivery service, which again is one of the key drivers in Amazon’s plan to handle deliveries. 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).
A 2013 Boston Consulting Group survey showed that only 9 percent of U.S. consumers cited same-day delivery as a top factor that would improve their online shopping experience, while 74 percent cited free delivery. Jonathan Kapplow, ShopRunner’s chief marketing officer said he’s not surprised at the BCG findings. Same-day shipping, he said, “feels like a solution looking for a problem.” By the way, it is noteworthy that Amazon just canceled its Same Day delivery service in Las Vegas.
However, with Amazon pushing $5-$10 Same Day delivery options, Same Day delivery WILL grow in consumer popularity and demand very quickly. Once consumers are used to something, they come to expect it. But we’re just not there yet on any macro level.