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Does Amazon need a separate network to court outside shippers?

AskWaves: Company may be able to deliver packages for non-Amazon customers through its own network

In April 2020, already struggling with deliveries of e-commerce volumes of an unforeseen magnitude, Inc. said it would suspend a pilot program in the U.S. designed to deliver non-Amazon packages. The program, which was shut down that June, has not been restarted, and the company has not said publicly that it will be.

Various experts have said that a reboot will occur over the next one to two years as Amazon Logistics, Amazon’s delivery arm, dramatically expands its air and ground networks to better balance goods deliveries for its own customers with businesses that may want a delivery option but don’t sell on Amazon’s site or use its fulfillment services. However, with e-commerce traffic expected to surge over the next two to three years and with demand for Amazon’s (NASDAQ:AMZN) selling and fulfillment services remaining extremely high, the question is whether the company has the desire or even the need to go outside its ecosystem if it wants to expand its delivery business and take share from competitors in the process.

When revealed in 2017, the concept seemed to mark a pivotal point in the parcel industry’s history. Amazon would pursue FedEx Corp. (NYSE:FDX) and UPS Inc. (NYSE:UPS) shippers with a pickup and delivery service bypassing Amazon’s fulfillment and distribution network. The move would create a third national parcel-delivery carrier with resources that rivaled those of FedEx and UPS. 

The initiative would take work. Amazon would have to handle pickups at origin, a service it still doesn’t provide. It would need to determine how to manage the long-haul part of the move. In effect, Amazon would be building out a network in less than a decade that took UPS 114 years and FedEx 50 years to construct.

The pilot moved in fits and starts for a couple of years but seemed to be heading for a sustainable ramp-up in early 2020 when the pandemic hit. It was never available in more than a small group of U.S. cities. The model has gained more traction in the U.K., where Amazon operates a logistics-as-a-service program.

David Glick, who worked for years at Amazon Logistics and is today chief technology officer of warehouse operator Flexe Inc., said the program will relaunch within the next two years. By then, Amazon Logistics will have sufficiently scaled its operations to reliably support its customers, and will then pursue other shippers as a way to build last-mile delivery density by reducing fixed costs per mile and drive time between stops, Glick said.

Others believe Amazon Logistics’ prospects as a national third-party carrier are limited because it doesn’t provide nationwide coverage. It currently covers about 70% of the U.S. population and has huge coverage gaps in states, although most of the states it doesn’t serve are sparsely populated. Amazon Logistics would also be challenged to find adequate backhaul capacity to fill vans and trucks with parcels after unloading the items on the headhaul without disrupting its existing freight flows.

Nate Skiver, founder of parcel consultancy LPF Spend Management, said the service would be confined to specific lanes that have the type of volume characteristics that Amazon is comfortable with. Dean Maciuba, managing partner, North America, at consultancy Last Mile Experts LLC, said Amazon Logistics would gain only incremental benefit from expanding delivery services beyond its ecosystem. “They are not an integrated carrier and they lack middle-mile capability to move shipments both regionally and nationally,” said Maciuba. “They still source nearly all their shipments from their fulfillment centers, not from individual shippers.”

Satish Jindel, founder and CEO of ShipMatrix, a consultancy, takes a different view. Jindel said that Amazon has no reason to build out a delivery service to court outside customers because it can meet that goal through the ever more efficient scale of its current network, as well as the rich data trove on its current sellers, such as product location, transit times and delivery destinations, and detailed supply and demand data. If customers’ packages are already headed to addresses on Amazon’s existing routes, it would be efficient to inject external packages into those routes.

As Amazon’s business becomes even more scalable, its density and last-mile delivery costs, which are already superior to those of FedEx and UPS, would be further enhanced, according to Jindel.

Amazon has three channels for deliveries: items sold on its website, items sold on the site and fulfilled by Amazon out of its own facilities, and seller fulfillment, in which merchants sell their products on Amazon but can use other delivery vendors, subject to Amazon’s performance requirements, which have ratcheted higher in recent years. 

It is the third category where Amazon could plant the flag for outside deliveries. According to ShipMatrix estimates, 55% of Amazon Logistics’ volume is for customers who use its fulfillment services, and 45% is from products sold on its website. Of the latter, the seller-fulfilled volume makes up 15% to 20% of the units sold on, according to ShipMatrix.

“With the third group, they have complete visibility,” Jindel said. “They are sitting on top of the food chain.” With deep intelligence on all aspects of the sellers’ business, Amazon can build a strong case for providing a less expensive and more reliable level of service than the vendors those merchants currently use, Jindel said.

Jindel scoffs at the notion that Amazon lacks a strong middle-mile network to support an outside delivery model. That may have been the case at one time, but today it has a strong system that is self-supported and backed by 10 of the top 15 LTL carriers, all of whom ship substantial loads for Amazon, Jindel said.

Amazon Logistics could find itself in a virtuous cycle in gaining “outside” business just by leveraging its own network. It continues to gain more merchants, many of whom may be using other carriers. Once these businesses recognize the value of Amazon’s low-cost and efficient transportation network, they may ditch their legacy providers. The scenario honors the credo of founder and Executive Chairman Jeff Bezos, who famously once said, “Your margin is my opportunity.”

The FREIGHTWAVES TOP 500 For-Hire Carriers list includes FedEx (No. 1) and UPS (No. 2).

Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.