By Greg Bensinger and Laura Stevens
Just before the morning rush hour on a recent Thursday, a
brigade of vans rolled up to a low-slung warehouse near Los Angeles
International Airport.
Workers in bright green vests crammed some 150 Amazon.com
packages into each truck before the fleet headed through the urban
sprawl to customers' doorsteps.
This logistical dance wasn't performed by United Parcel Service
Inc., FedEx Corp. or the U.S. Postal Service, all longtime carriers
for the online-retail giant. It was part of an operation by
Amazon.com Inc. itself, which is laying the groundwork for its own
shipping business in a brazen challenge to America's freight
titans.
Tackling the delivery business, Amazon executives publicly say,
is a logical way to add delivery capacity -- particularly during
the peak Christmas season. But interviews with nearly two dozen
current and former Amazon managers and business partners indicate
the retailer has grander ambitions than it has publicly
acknowledged.
Amazon's goal, these people say, is to one day haul and deliver
packages for itself as well as other retailers and consumers --
potentially upending the traditional relationship between seller
and sender.
Some executives refer to the initiative as "Consume the City," a
nod to the company's plans to build a massive delivery network that
could eventually compete with such partners as UPS, according to
people familiar the matter.
Executives at the freight giants are skeptical, and so are
analysts and logistics experts. They say it would be difficult and
costly to build a domestic delivery network to rival the big U.S.
players, especially after the failed multibillion-dollar attempt by
Deutsche Post AG's DHL Express in the 2000s.
Memphis-based FedEx says it is spending more than $5 billion
annually on expansion and upgrades; UPS says it shells out in
excess of $2.5 billion. The two companies have managed to blanket
the world with a total of roughly 4,000 hubs and other facilities
to sort tens of millions of packages a day. Combined, they operate
more than 1,000 planes and 200,000 vehicles to deliver packages to
doors.
"The level of global investment in facilities, sorting,
aircraft, vehicles, people to replicate the service we provide, or
our primary competitor provides, is just daunting, and frankly, in
our view, unrealistic," says FedEx CFO Alan Graf. "We've been at
this for 40 years."
Atlanta-based UPS has played down any competitive threat. On a
conference call with analysts, Chief Commercial Officer Alan
Gershenhorn said UPS's network would be "very difficult to
match."
In an emailed statement, an Amazon spokesman said "we are very
happy to have the delivery capacity our carrier partners can
provide. They provide a high quality service, and our own delivery
efforts are needed to supplement that capacity rather than replace
it."
Inside the company, executives describe, in the words of one
senior official, how Amazon "is building a full-service logistics
and transportation network effectively from the ground up."
Amazon's push into the shipping sector reflects a willingness
among today's powerful tech companies to defy the traditional
constraints of business and leap into new ones.
The company, which started out as an online bookseller, has
gained credibility as a producer of TV programs and big-screen
movies. Amazon Web Services, which provides data servers to big
companies, is now its fastest-growing division with at least $10
billion in sales expected this year.
Now the stage is set for Amazon to move against the partners
that have helped power much of its success so far. Shipping costs
as a percentage of sales have risen every year since 2009. Last
year, Amazon spent $11.5 billion on shipping, or 10.8% of sales,
compared with 7.5% in 2010. Total revenue for the year was $107
billion.
The company could save $1.1 billion annually if it stopped using
UPS and FedEx, according to Citigroup Inc. analysts. Keeping
packages under its own control just over longer distances could
save Amazon around $3 or more on a typical delivery, the analysts
say. The average cost to ship a package via UPS or FedEx is $7.81,
they estimate.
Amazon currently delivers its own packages from roughly 70
facilities in 21 states, having built most of them in the past two
years, according to data from supply-chain consultancy MWPVL
International Inc. Today, 44% of the U.S. populace is within 20
miles of an Amazon facility, compared with 5% in 2010, according to
investment bank Piper Jaffray.
All of this helps to explain why Amazon wants more control over
its delivery chain -- from factories in China through U.S. ports to
sprawling suburban warehouses and neighborhood package-sorting
centers. It hopes to offer more delivery times, including hours not
available from traditional carriers, say people familiar with the
plan. The cost of such a system isn't known.
To help oversee its delivery projects, Amazon this summer
brought back Uber Technologies Inc. executive Tim Collins as a vice
president of global logistics. Mr. Collins spent 16 years at
Amazon, helping to lead the retailer's European operations, before
leaving the company in late 2014 to join Uber.
Amazon has also recruited dozens of UPS and FedEx executives and
hundreds of other UPS workers in recent years, say people familiar
with the matter.
The company is buying long-haul truck trailers to ship by
ground, building delivery drones to conquer the sky and looking to
manage shipping by sea. In August, it showed off the first in a
fleet of 40 Boeing 767-300s it is leasing for its branded Prime Air
logistics service.
Stitching together a full-fledged logistics network could give
Amazon a piece of a world-wide delivery market that, according to
financial services firm Robert W. Baird, generates roughly $400
billion in annual revenue.
It could also damage its relationships with UPS and FedEx.
Amazon contributes around $1 billion to UPS's revenue, according to
people familiar with the matter. Perhaps more important, the retail
giant's heft helps both UPS and FedEx to be more cost effective by
allowing drivers to drop off more packages in the same areas. If
Amazon pulls too much business from the delivery giants, the
carriers could respond by eliminating certain volume discounts.
Amazon already has pushed out some smaller parcel carriers. In
the past two years, it has parted ways with or started reducing
package volumes at several local and regional delivery partners,
according to people familiar with the matter.
Currently, Amazon is focused on solving the riddle of the
so-called last mile -- the final and most expensive leg of a
package's journey to the doorstep.
To make last-mile deliveries profitable, logistics experts say,
companies need shorter drives and more packages per stop. Amazon,
they say, doesn't yet have enough consumer deliveries to hit this
threshold.
The company is conducting its trials in large cities such as Los
Angeles, Chicago and Miami. Those places have a high density of
members who belong to Amazon's $99-per-year Prime unlimited
shipping program. Gnarled traffic in those cities -- especially in
Los Angeles -- also tests drivers' mettle and speediness.
As part of its efforts, Amazon is making some deliveries using
only trucks and infrastructure it oversees, people familiar with
the matter say.
The retailer also has begun distributing boxes and packaging
materials to a small number of Los Angeles customers so they, too,
can use Amazon as a delivery service, the people say. The test
helps ensure Amazon's trucks aren't empty when they return to
warehouses and give customers more incentive to keep ordering from
Amazon.
Amazon embarked in earnest on building its own last-mile network
after UPS failed to bring orders to customers in time for Christmas
in 2013, costing Amazon millions of dollars in refunds, according
to people familiar with the matter. That holiday season, Amazon
overwhelmed UPS and other carriers after it failed to accurately
forecast its delivery needs, prompting chaos at sorting
centers.
Since then, Amazon has more than doubled the number of
warehouses in the U.S. to more than 180, according to MWPVL. That
includes more than 70 local delivery stations and Prime Now hubs
within reach of nearly every major metropolitan area. In many of
those areas, Amazon can deliver merchandise in as little as one
hour after receiving an order.
Just a few years ago, if an Amazon Prime customer in Atlanta
ordered a $13 set of beer glasses only available from California,
Amazon would load that order, with others, onto a tractor trailer
and haul it to the closest UPS air hub. Next, a plane might ferry
it to Louisville, Ky., and load it onto another flight bound for
Atlanta. Then the package would be trucked to the nearest delivery
center, sorted a final time and delivered by a UPS van. Such a
journey could wipe out any profit for Amazon.
The company now aims to do more of the steering. If those
glasses aren't in stock at a fulfillment center near Atlanta, it
could fly them there in its own planes and then pay the Postal
Service to ship them a shorter distance. Or, contract drivers could
make final delivery.
Amazon has flirted with delivery by Uber drivers and newspaper
carriers. It has experimented with a program known as "I Have
Space," stashing inventory in warehouses owned by other
companies.
A more established program called Flex hires so-called
citizen-couriers, who work as freelance delivery people to pick up
packages from warehouses using an Amazon app. It has expanded to
nearly 30 metropolitan areas in the last year. Drivers can earn up
to $25 an hour in two-hour shifts making deliveries, according to
Amazon's website.
Some Amazon executives believe that the on-demand contract
driver model, which passes along fuel and insurance costs, could
eventually become an important part of the company's network.
Meanwhile, Amazon's last-mile effort has become particularly
visible in San Francisco's relatively compact confines. Just two
years ago, workers loaded rented delivery vans with packages from a
modified trailer in a parking lot beside Candlestick Park, the
former football stadium. Today, hundreds of Amazon-branded white
trucks, dispatched from a giant warehouse near the airport, troll
the city's winding streets -- even on Sundays.
Write to Greg Bensinger at greg.bensinger@wsj.com and Laura
Stevens at laura.stevens@wsj.com
(END) Dow Jones Newswires
September 27, 2016 13:00 ET (17:00 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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