Even Amazon's Feeling the Strain From Insatiable Delivery Demand

(Bloomberg) -- Amazon.com Inc.'s call for entrepreneurs to help expand its package-delivery network is a cry for help.

The online retailer's Prime service, offering free two-day shipping on many goods for $119 a year, is spurring annual growth of 25 percent on product sales. As other retailers also fuel the surge of e-commerce, United Parcel Service Inc., FedEx Corp. and the U.S. Postal Service are straining under the load.

Enter Amazon's new effort to expand its capacity to drop off packages at customers' homes. The company envisions hundreds of small contractors employing thousands of drivers across the U.S. What remains to be seen is whether such would-be delivery impresarios can fill the seats of vans emblazoned with Amazon's logo -- especially in a tight labor market.

“The Amazon business model of delivering to your doorstep is under pressure,'' said Marc Wulfraat, president of MWPVL International, a logistics consulting firm. “This is a signal that they're actually very starved for resources to get this type of work done.''

Explosive Growth

Amazon on Thursday said it plans to provide technology, training and sales volume to people who start delivery companies. The Seattle-based retailer will also bring its buying power to help lower costs on trucks, fuel, insurance and even uniforms.

For now, Amazon relies on the post office, UPS and FedEx to deliver about 90 percent of its packages, said Satish Jindel, founder of SJ Consulting. And the retailer is counting on those carriers to ramp up operations to meet explosive growth. But for UPS and FedEx, home deliveries are less profitable than shipments to businesses, where drivers tend to handle more parcels per stop.

While the post office has benefited from handling pre-sorted packages for Amazon, President Donald Trump has said the internet giant needs to pay more. That's made the relationship riskier for Amazon.

“Amazon has decided they have to take control of their own destiny, to a certain extent, and can't rely on the Big 3 to provide the capacity and speed they need and want to deliver to their customers,” said John Haber, chief executive officer of Spend Management Experts, a consultant.

‘Labor Shortage'

Building a contract delivery system will be hindered by a tight labor market, with the unemployment rate at less than 4 percent, said Lee Klaskow, an analyst with Bloomberg Intelligence. With delivery of everything from food to groceries on the rise, there's plenty of competition for drivers from couriers, truckers and ride-sharing companies.

Assembling a delivery network is “not something that's going to happen overnight,'' Klaskow said. “There's a labor shortage.''

Read more: With Truckers in Control, Money Talks

Amazon says a contractor with a fleet of 20 to 40 Amazon delivery vans can have revenue of $1 million to $4.5 million and profit of $75,000 to $300,000 a year. The company said actual results will depend on factors such as expense management. It's unclear what level of driver pay the company used for its calculation.

The company's program could ship an additional 400,000 packages a day with the creation of 100 small delivery companies, based on average van loads, said Bascome Majors, an analyst at Susquehanna Financial Group. That's about 4.5 percent of FedEx Ground's daily volume and 2.7 percent of UPS's, Majors said.

Capacity Need

Amazon isn't inventing a new approach to logistics. FedEx relies on third-party companies it calls independent service providers to handle ground deliveries with branded vans and drivers in FedEx uniforms. Walmart Inc. employs outside trucking companies as well as managing a large private fleet of vehicles to deliver goods to its stores and distribution centers.

“We have great partners in our traditional carriers and it's exciting to continue to see the logistics industry grow,'' said Dave Clark, Amazon's senior vice president of worldwide operations, in a statement. “Customer demand is higher than ever and we have a need to build more capacity.

The company has other options as well. Amazon could charge more for Prime, the price of which recently went up from $99, and encourage customers to pick up packages at a central location by offering discounts in such situations, said Wulfraat, the consultant at MWPVL.

“We can't continue with this luxury of having everybody ordering anything they want, whenever they want and it's gets delivered to their doorstep,” Wulfraat said. “It's just too resource demanding.”

--With assistance from Alistair Barr.

To contact the reporter on this story: Thomas Black in Dallas at tblack@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson

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