Amazon’s third-party delivery network to redraw truck capacity

William B. Cassidy, Senior Editor | Jun 30, 2018 10:00AM EDT

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Amazon’s new network could help reduce shipper costs, and even aid other transportation providers, as volumes outstrip capacity. But as one might sense, Amazon’s latest play also will affect resources in an already beyond-tight US trucking sector. (Above: An Amazon facility in Nevada, United States.) Photo credit: Shutterstock.com.

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Amazon’s effort to build its own third-party last mile/last touch delivery network could help reduce shipping costs and make the small parcel market more competitive, and even aid other transportation providers as package volumes outstrip capacity. But Amazon and its partners will need lots of drivers, which could pull resources away from drayage and over-the-road trucking companies.

Shippers stand to benefit from Amazon’s plans to launch its own delivery operations, supplementing services provided by the US Postal Service (USPS), UPS, FedEx, and many regional and local companies, right down to the guy carrying a package to your house in his trunk, experts say. It’s beginning to look as if Amazon wants as many delivery options as it has customers.

More competition for small parcel market

The emergence of an Amazon-branded delivery option could help “rationalize” pricing in the small parcel market, said John Haber, CEO of Spend Management Experts, an Atlanta-based transportation spending consulting firm that helps shippers negotiating parcel and freight contracts. “There’s not enough competition in the US small parcel market,” he said.

There’s certainly not enough capacity for the future volume Amazon expects. “If Amazon is growing at 18 to 20 percent on 7 million packages a day, this is going to result in no reduction in volume for the big three [the USPS, UPS, and FedEx], but a reduction in the percentage of [Amazon] volume handled,” said Satish Jindel, president of SJ Consulting Group.

“As the total volume goes up to 8 million packages a day, that extra 1 million goes to the new delivery source. Amazon doesn’t have enough people to absorb the new volume, leave aside shift anything away from the big three,” Jindel said. “Also, this does give them some leverage if our president is able to prevail in pushing the Post Office to cut its costs” and raise pricing.

But as the sprawling, international e-commerce enabler touches on so many aspects of logistics and transportation, anything it does to shift the balance in its favor has unexpected effects. FedEx may benefit from Amazon’s decision, Jindel said, while Haber thinks the USPS may be the biggest loser. “A lot of people are challenging their pricing structure.”

Amazon on Thursday announced plans to inject more competition and capacity into the last mile/last touch by building a network of small delivery businesses that would help handle its growing volume. The online giant isn’t starting from scratch. Amazon has been building delivery muscle for years, owning its own airline with more than 30 cargo planes and thousands of 53-foot trailers.

The e-retailer is reaching farther into supply chains, to the point where it is offering to match its own empty import ocean containers with agricultural exports. “We can do things to help each other,” Joshua J. Dolan, director of global inbound supply chain and logistics at Amazon Global Logistics, told the annual meeting of the Agriculture Transportation Coalition this month.

Now Amazon wants to help entrepreneurs break into the delivery business and tap the enormous and rapidly growing volume of shipments moving through its network. “Amazon will take an active role in helping interested entrepreneurs start, set up, and manage their own delivery business,” and earn up to $300,000 net a year, the company said Wednesday.

“Individual owners can build their business knowing they will have delivery volume from Amazon, access to the company’s sophisticated delivery technology, hands-on training, and discounts on a suite of assets and services, including vehicle leases and comprehensive insurance,” the company said, claiming start-up costs could be as low as $10,000.

Amazon will offer those entrepreneurs discounts on everything from vehicles to uniforms. “Over time, Amazon will empower hundreds of new, small business owners to hire tens of thousands of delivery drivers across the US, joining a robust existing community of traditional carriers, as well as small and medium-sized businesses that already employ thousands of drivers.”

Amazon is not hiring deliver drivers — it’s hiring delivery companies

A key point is that Amazon is not hiring drivers, it’s hiring companies that will employ drivers. That’s an important distinction, and one that FedEx Ground already has learned at some cost. FedEx Ground originally contracted with independent drivers, but switched to a model in which independent service providers (ISPs) — companies with driver employees — contract to deliver goods.

That’s the model Amazon is pursuing, and it could shield them from lawsuits charging that contractors are actually employees. “They’ve been thinking this through very carefully,” Haber said. “This Amazon model is basically following FedEx. This issue of are these contractors or employees is not going to go away, especially with union membership on decline.”

Jindel believes Amazon will attempt to draw the ISPs delivering for FedEx Ground into Amazon’s network. And that’s not necessarily bad news for FedEx, he said. “If I’m a FedEx Ground ISP this is a great opportunity for me, and it’s a good opportunity for FedEx too, because now those companies will be seen as truly independent, not just working for FedEx.”

Drivers working for those ISPs could also benefit, as Amazon’s expansion in delivery will raise the ante in terms of pay, benefits, and other blandishments offered to recruit drivers. “The guy who was willing to work as an ISP driver for $14 or $15 an hour may be getting a dollar more,” Jindel said. Amazon has also been blamed for driving up costs of warehouse workers.

Finding more drivers is key to Amazon’s ability to meet its commitment to increasingly fast delivery. “It starts with the customer,” David Bozeman, vice president of Amazon Transportation Services, said at a symposium last autumn. “To meet that customer obsession, we’ve had to systematically build out our sort centers, linehaul middle-mile, and air network.”

“No matter what you hear, there is no one person or entity that can handle the amount of [volume] that is out there,” Bozeman said at the Eno Center for Transportation event, held at Amazon’s offices in Washington, DC. Amazon continues to work with multiple transportation providers, but “there has to be a balance, and we have to continue to build.”

To anyone building a transportation network, drivers are the equivalent of bricks, and they’re in short supply. “I’m really interested to see what the wage rate is they built in to attract drivers,” Haber said. “You’ve got 3.8 percent unemployment, wages on the rise. Are you going to be able to attract the drivers you need to make this successful? A lot of this will hinge on that.”

Amazon blamed for truck driver shortage, but it started in 1914

Some trucking executives have been blaming Amazon for a recent driver shortage. But this shortage has been around for years (since at least 1914, in fact, when Traffic World magazine first noted the “motor truck driver problem”). Amazon’s plans to “empower” small businesses and create new delivery companies could ratchet up pressure on long-haul driver pay and rates.

In terms of pricing, shippers will come out ahead, Haber believes. “I think Amazon is going to offer a lower-cost shipping alternative to UPS and FedEx for sure,” he said. “Amazon is now talking about a model where they’re delivering business packages, because that’s where the margin is. As they move into that model, they’ll undercut UPS and FedEx on that market.”

There’s plenty of small parcel business out there, however, and not all boxes are marked with Amazon’s trademark smile. “UPS is confident in its strategies and believes there is tremendous opportunity in the [business to consumer] market, and more growth coming,” the largest US transportation company said in a statement in response to the Amazon announcement.

“UPS has a broad suite of e-commerce solutions for shippers and consignees that go beyond final-mile delivery, including warehousing and fulfillment, parcel tracking, delivery status updates, custom delivery options, simplified merchandise returns and much more,” the company said, noting its first-quarter revenue grew 10 percent overall, with room for more growth.

With a new Teamsters contract up for a rank-and-file vote, UPS hopes to extend package delivery to Sunday, as the Amazon era makes a mock of the traditional weekend plans of drivers accustomed to a Monday-Friday routine. If UPS Teamsters reject the contract, there will be plenty of drivers willing to haul that freight in trucks or vans blazoned with the Amazon logo.

That battle shows how rapidly Amazon is upending traditional ways of doing business. The biggest winner, if Amazon succeeds, will be the consumer, especially the Prime subscriber, as Amazon offers faster and faster delivery times in more and more markets. Prime Free Same-Day and Prime Free One-Day delivery is now in more than 8,000 cities and towns.

Don’t expect that growth in services or footprint to slow, as long as the US and global economies keep humming along. And where Amazon needs capacity, it tends to create options.