Amazon Is Quietly Shipping Non-Amazone Order To Compete
Amazon is on a spending spree to grow its shipping business and competewith FedEx and UPS. It's increased capacity of its in-house logistics network by 50% year-over-year, using all that growth to get into the bigbusiness of third-party shipping. That's right, Amazon may be the carrier delivering to your door even when you didn't order on the world's biggeste-commerce site. They want to be a new kind of U.S. Postal Service where everything can geteverywhere, but also quickly. In 2014, Amazon started building its global transportation network fromscratch. Seven years and 10 billion deliveries later, Amazon now has 400,000 drivers worldwide, 40,000 semitrucks, 30,000 vans and a fleet of70+ planes operating out of its very own air hub that just opened in Northern Kentucky in August.
I don't think anybody in the industry would be surprised if this enormouscapacity that Amazon has built out, if they use that to, you know, offer shipping service that would compete directly with somebody like UPS orFedEx. Although Amazon still depends on UPS and the Postal Service for more than aquarter of its deliveries, analysts say this reliance is shrinking. Instead, Amazon is competing with them, already offering shipping servicesfor non-Amazon orders in the U.K. Eventually they were going to offer it to someone else. That's just how thesystem works. Amazon's usually more efficient than anyone else. Amazon's usually focusing on the right numbers, and so they're usually able to getcheaper than everyone else, too. CNBC headed to an online merchant conference in Las Vegas to talk to formerAmazon employees and current sellers about how third-party shipping is likely to be the behemoth's next big venture.
Amazon is on a spending spree to grow its shipping business-
Back in 1994, when it was just a website selling books, Amazon says JeffBezos hand-delivered the first customer packages to a Seattle post office himself. As business grew, it relied on UPS, the Postal Service and to alesser degree FedEx for shipping.
In the old days, Amazon worked with FedEx, UPS, they needed help deliveringpackages, right, as quickly as possible. And they didn't want to disappoint Prime members. Nowadays, Amazon has way more planes than they used to.They've got vans in every neighborhood. Now Amazon's got 300 million customers in 200+ countries. Former AmazonProduct Safety Program Manager Rachel Greer says by 2011 online shopping volume was overwhelming even the most established nationwide shippers. It turned out that UPS couldn't handle the volume. So at that point, our VPwas saying we can't handle this, we can't have this happen. Amazon cannot be hamstrung in our growth by a third-party service provider. We have tosolve this ourselves. By 2014, Amazon says it wanted better control.
So it started developing aglobal transportation network from scratch to ensure consistent and reliable delivery. It really hasn't taken them that long to build that capability. It's agreat moat around their business, right? Building a logistics network is a really hard thing to do. And other companies, you know, won't be able toeasily follow in their footsteps relative to that. In 2019, Amazon was delivering less than 47% of its own packages. Now in2021, that number has soared to 72%. Similar growth has happened with warehouses. In 2018, 51% of the U.S. population lived within an hour of anAmazon warehouse. Now that's up to 77%. To get there, Amazon's Q1 capital expenditures, which includes logistics expansion grew by a whopping 80%over the previous year. I don't think they had a choice. They knew that it was going to be achallenge for UPS and FedEx to do the kind of investment required in order to meet that standard for their customers.
In 2019, Amazon changed the game when it made one-day shipping the norm.That same year, FedEx announced it would not renew its partnership with Amazon. But Amazon still depends on UPS and the Postal Service. At leastfor now. USPS delivers to every zip code every small town in America, and Amazonbuilt its strategy around taking away the high-volume centers. According to one investigation, Amazon has already begun quietlytransporting cargo on its planes for the Postal Service. USPS isn't exactly known right now for being on time or efficient. So it may be that Amazon'sthe better option in those cases. And in May last year, Amazon launched a logistics-as-a-service program in the U.K. Researchers from DePaulUniversity predict something similar will launch here in the U.S. in the next 18 months.
While Morgan Stanley predicted it could happen this year.Analysts say Amazon will likely focus on shipping from retailers directly to consumers rather than trying to replicate the vast array of servicesoffered by FedEx and UPS Well they're not going to be just this blanket carrier that will deliverwhatever package that you want them to, to whatever address.
Why Amazon is on a spending-
Amazon is sort of cherry-picking the routes they want to run and sort of the parcel sizesthey want to deliver. Like all carriers, Amazon experienced significant shipping delays duringthe pandemic. Yet the number of Prime members continued to soar, reaching 200 million in 2020.
And as the number of customers grew, so too didAmazon's spend on logistics. Perhaps the biggest investment so far is the new $1.5 billion Amazon air hub in Kentucky. Planes were always part of the plan because, you know, if you're trying todo two-day delivery, there's just certain things you got to use planes for. Amazon launched its air cargo division in 2016, contracting with severalcarriers to fly packages closer to Amazon's sprawling system of 185+ global warehouses. The Kentucky hub has been in development for four+ years, withBezos attending the groundbreaking in 2019. It's going to let us get packages to customers faster. And that's a bigdeal.
The new 600-acre Amazon hub at the Cincinnati/Northern KentuckyInternational Airport includes an 800,000-square-foot robotic sort center. A smaller 20,000-square-foot Amazon air hub opened in Germany lastNovember. But as early as 2018, analysts were calling Amazon Air a competitive risk to UPS and FedEx. By 2019, it had 50 planes. But it alsofaced the risk of pilot strikes, with one union saying Amazon paid pilots 33% less than they got paid to fly similar cargo planes for UPS and FedEx. I don't believe that consumers will ever go backwards from where we are.But that doesn't mean it has to put this kind of pressure on the system. It's going to take a lot of coordination between the big companies, Amazonsof the world, and our contractors to build a system that's both fair, equitable and sustainable. After six+ years of labor negotiations, many Amazon pilots now have a newcontract with improved pay rates and work rules. Amazon now says it leases or owns more than 70 aircraft that fly to 35+ destinations in the U.S. andEurope. In comparison, FedEx operates a fleet of 680 aircraft and UPS has 576. At 70+ planes, Amazon's reach is still smaller, but its rapid growthsets it apart.
DePaul researchers found Amazon has expanded from 122 daily flights in August 2020 to 140 in February 2021. Predicting Amazon will have200 planes by 2028. An earlier key to faster delivery was Amazon's big investment in the most expensive part of the shipping process: getting apackage that last mile to your door. Some of this is done by Amazon Flex drivers, individual gig workers who make between $18 and $25 an hourdriving routes on demand. Another 115,000 Amazon drivers work for Delivery Service Partners, or DSPs, small independent companies that contractexclusively with Amazon. The DSP program started in 2018, with Amazon offering $10,000 to incentivize current Amazon employees, veterans, Black,Latinx and Native American entrepreneurs to launch a DSP. There's now more than 2,000 DSPs in the U.S. Ultimately, it's a very low cost structure compared to the competitors. Andso if you're a seller, and you don't have a personal issue with some of the stories that are coming out, which are growing in number, unfortunately,then it's a real cost advantage for you. But DSP drivers have voiced big concerns lately, from cameras recordinginside vans at all times, to running stop signs and urinating in bottles to keep up the pace. Which is definitely disgusting, you know, getting into the vans the nextday and seeing somebody's pee bottle sitting behind the seat, or sitting in the cupholders. Regardless, Amazon's army of drivers and branded vehicles is only growing.It purchased 100,000 electric vans from Rivian in 2019.
They're being tested in 16 cities now, with 10,000 of them scheduled to hit the road nextyear. I think there are some growing pains there. But once they sort out some ofthose issues, it'll be more attractive as a side hustle for people the same way Instacart was or Uber driving is. For its growing number of international shipments, Amazon uses oceanliners, especially between China and the U.S. For domestic cross-country shipments, Amazon has 40,000 Prime-branded semitruck trailers, and it's gotpowerful algorithms that know when one of those trucks won't be full. Very few companies are filling in an entire 53-foot truck to shipsomewhere.
If you've got all these trucks running around and they're only operating at 20-30% capacity, Amazon's smart enough to know hey, we shouldbe filling these trucks up any way we can to maximize, you know, the capital that we've invested in these things. Keith Gregory's vitamin and supplement company is based in a 3,500-persontown in Oregon. It does about $4 million of annual sales on Amazon. They've reached out to us very aggressively trying to get us to work withthem for our shipping arrangements, but not just for our own branded products. They're interested in LTL and freight for our other segments ofour business as well: the the pieces that UPS and FedEx are currently handling for us. The Amazon Freight program lets sellers like Gregory take advantage of LTL,less than load truck space, at discounted rates, while allowing Amazon to make money on otherwise wasted space. Gregory just started using theprogram and says Amazon charges up to $17,00 less than FedEx or UPS Freight for some of his routes from Oregon to Southern California.
They certainly seem to want to own the market. And, you know, for us beingin a rural community, the fact that somebody is willing to cater to us and they're willing to accommodate pickup schedules and not just say, okay,we'll be there every day at 3:30 is also very attractive to us. Not just the rate piece, but the fact that they're also willing to, you know, usetheir vast fleet of vehicles to help us with our logistics as well, which UPS and FedEx are not cooperative in that sense with us. Amazon has this odd imbalance where they have an enormous amount of goodsgoing inbound to Amazon warehouses, but then very often those trucks are leaving empty going other places. Again, a kind of a classic Amazon thingto do: by taking that internal service and then making it available to anyone to use externally, they're able to, you know, now have more revenue. Many Amazon sellers like Bernie Thompson, pay to use a service calledFulfilled by Amazon, or FBA, where sellers store inventory in an Amazon warehouse and rely on Amazon to pack and ship out customer orders. Amazonalso offers FBA service for orders not made on Amazon.com. There were points in time in our company's existence where really Amazonshipped 100% of our orders for all channels, not just an Amazon, but also on eBay, Newegg, Walmart, Google. Amazon calls this multi-channel fulfillment. Thompson uses it for many ofthe 120+ consumer electronic products he sells from his warehouse outside Seattle.
So if you go today and buy a Plugable product on eBay, it's actually goingto be coming from an Amazon warehouse and very often delivered by an Amazon delivery service. This explains why some orders from eBay or Walmart and others arrive atyour door in Amazon packaging. Although Amazon has tried to solve this with varying success, Amazon's had on-off programs over the years to fulfill items from thewarehouse but have it be in packaging that was not Amazon marked. They've never really succeeded at that. Like, we were part of that program, andthen we found out that yea, the boxes were blank, but they were using this super colorful Amazon marketing Christmas tape. You know, and these werebeing used for Walmart orders. I think the killer feature will be when Amazon is able to domerchant-branded fulfillment. They might be able to slap on or inkjet on branded aspects to that fulfillment package so that a customer doesn'tunderstand that this box is being delivered by Amazon and that it's in the brand of the merchant. So why does Amazon want to take on the expensive behind-the-scenes job ofshipping non-Amazon orders? It may in fact help Amazon hold on to its reputation for the lowest prices online. It might cost me say $3.30 to send an envelope type of product across thecountry for an Amazon order. That same order, when it's not an Amazon order, let's say an eBay order, might be $5.70 or something like that. Andso that causes an effect where brands like us, on a $10 product or a $30 product, you will almost always find the Amazon price lower than the eBayprice. If they can double, even add 30% more revenue and capacity because they'redelivering not just for Amazon customers but for, frankly, the entire internet, it does help them get more scale, more costs benefits, especiallyas you move into more remote areas where they just don't have as much Amazon customer volume. There was in fact already a program called Amazon Shipping being tested inseveral U.S. cities last year, until it was shut down at the beginning of the pandemic. Amazon drivers would pick up packages from businesses anddeliver them to consumers without ever setting foot in a warehouse. You'll see this start off in a couple of markets. And you know, they'lltweak it and they'll sort of take some learnings away from those initial markets and then they'll expand the program more broadly. And if you look at all of the third-party services that they opened up tosellers over the years, including AWS, they've had to become the best in the business to service their own. And by bringing in additional revenuestreams to help support scale, ultimately brings down cost, creates more of a situation where they can gain more market share, more market power, andthey are addicted to growth. Indeed, Amazon's current shipping expansion is reminiscent of other timesit's used immense resources and data to disrupt an industry.
Learning with Amazon-
Think Prime Video and Amazon Web Services. I was part of the process for making sure that FBA sellers were compliantmore than a decade ago. And they were like, well, we have excess capacity. Let's use it. And then when AWS started, we have excess capacity. Let's useit. So of course, if Amazon develops a platform, it works well, and of course it's going to be excess capacity, they're going to try to sell it tosomeone. And Amazon has learned much from its more established shipping partners about how to keep costs down. For example, it still primarilyoutsources costly rural deliveries to USPS and outsources the expensive last-mile portion to those small delivery service partner contractors. What Amazon is able to do right now is sort of pick off probably the mostattractive routes, the most attractive packages, and deliver like to the most densely populated areas.
On the extreme end, some think there's a chance Amazon will try to buyother shippers outright. Down the road, I think Amazon will be so big, so powerful and so wealthy,they will simply absorb UPS. But one thing is certain. Amazon says it's continuing to spend onlogistics, figuring out how to keep climbing to the top of e-commerce and beyond. Amazon is a company that will unabashedly compete with everyone. They willcompete with their customers, they will compete with their partners, and they will compete with themselves. And it's not a bad thing. It's justthat's part of the secret to Amazon's success.