Amazon.com Inc. (NASDAQ:AMZN) is coming to a suburban enclave perhaps near you.
The Seattle-based e-tailer plans to open 1,000 parcel-delivery stations in suburban U.S. locations to support local fulfillment operations, according to a report Thursday on Bloomberg.com. The report said that Amazon’s goal is to reach 1,500 stations, The report did not provide a timetable for the rollout. Consultancy MWPVL International, which closely tracks Amazon’s physical distribution program, expects 450 stations to be open by the end of 2020.
Delivery stations are local terminals that receive goods from Amazon’s fulfillment centers and ship them to end customers. Amazon has been adding delivery stations in clusters over the past few months. It recently announced it will open seven stations in Phoenix alone. Amazon did not comment on the Bloomberg story.
The stations will be close to densely populated neighborhoods, ostensibly to make it easier for Amazon to execute same-day or in many cases two-hour deliveries to residences. In the short term, Amazon plans to use the expanded network to respond to retailers Walmart Inc. (NYSE:WMT) and Target Corp. (NYSE: TGT), which are broadening their same-day residential delivery offerings. Walmart has launched a same-day delivery service, Walmart+, where online customers can receive unlimited deliveries with a $98 annual subscription. The service launched with a selection of about 160,000 products.
Target, meanwhile, is building micro-fulfillment centers adjacent to retail stores to help it quickly push out online orders to residences, and to facilitate the process of consumers buying an item online and picking it up either inside the store or at curbside.
Amazon’s long-term objective is very different, according to Satish Jindel, founder and CEO of transport consultancy ShipMatrix. Amazon plans to self-handle 85% to 90% of its traffic within the next couple of years, up from about 67% in the second quarter, according to MWPVL and ShipMatrix estimates. The expanded delivery network, which includes the additional 1,000 or so new stations, is part of Amazon’s strategy to grab the share of merchants who sell on Amazon but rely on others for fulfillment and delivery, Jindel said.
Amazon has ratcheted up fulfillment and delivery compliance requirements for customers who sell under its popular Prime service but who select other companies for fulfillment. Amazon has said it wants to improve the customer delivery experience. However, several analysts said Amazon has made the criteria for remaining a coveted Prime merchant so onerous that merchants will simply relinquish the fulfillment business to Amazon.
Amazon’s capabilities will also be leveraged to capture backhaul opportunities that currently don’t exist, Jindel reckons. After completing their routes, UPS and FedEx drivers typically swing by their customers to vacuum up return parcels. The now-familiar blue Amazon vehicles, by contrast, return with little or nothing, Jindel said. “It has more empty backhaul space than any carrier in the country,” he said in a phone interview Thursday.
An expanded and reconfigured network that creates more backhaul density will basically translate into free money for Amazon, Jindel said.
Amazon’s plans will likely impact delivery partners UPS Inc. (NYSE:UPS) and the U.S. Postal Service (USPS), which on a combined basis handle the remaining one-third of Amazon’s traffic. In the future, UPS and USPS will mostly be called upon to support Amazon’s delivery surges, Jindel said. Still, UPS will get its fair share of Amazon’s volumes because they will grow so exponentially that it will be nearly impossible to self-handle it all, Jindel said. Amazon is UPS’ largest individual customer.
Brittain Ladd, a former Amazon executive and now the head of an e-commerce consultancy, said UPS, USPS and FedEx Corp. (NYSE:FDX), which no longer has a U.S. relationship with Amazon, are whistling past the graveyard if they think the new delivery-store initiative won’t hit their market share. “When I worked for Amazon, the weakness that I saw in what UPS and FedEx were doing was that they weren’t focused on hyper-local fulfillment. Their networks are top static,” Ladd said in an email.
Ladd said he remains “amazed at how little UPS, FedEx and USPS have truly paid attention to what Amazon is doing.”
In a statement, Amazon said it is “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.”
David Glick, who was a top logistics executive at Amazon before becoming chief technology officer at Flexe, an on-demand warehouse provider, said Amazon’s latest move is the “next logical step” in a 20-year strategy to offer free quick-turn deliveries. Glick, who said he had no details about the program, surmised that Amazon may now massively expand its network of warehouses supporting its two-hour delivery initiative, known as Prime Now.
If FedEx and UPS don’t know or care about Amazon’s doings, that ignorance is not reflected in their recent quarterly results and share price movements. All three companies, in fact, have shot out the earnings lights, and their share prices have surged this year amid the turmoil of a coronavirus pandemic that has fueled big-time demand for e-commerce activity and deliveries.
FedEx walked from Amazon last year because it was tired of the deep discounts and ultra-low yields that didn’t reflect its high cost of serving the very demanding account. Publicly, at least, FedEx executives have not mourned the loss. Dean Maciuba, director of consulting services at consultancy Logistics Trends and Insights LLC, said UPS has already begun untethering from Amazon for the very same reasons as FedEx.
UPS and FedEx recently announced substantial peak-season delivery surcharges that target their highest-volume shippers. The objective for both is to recoup the costs of serving the businesses that put the most cost pressure on their networks. But the UPS surcharges send a pointed message to Amazon, Maciuba said — namely that the days of accepting low yields in return for large volumes are over.
As for the same-day segment that the Amazon program is designed to support, FedEx executives said on the company’s fiscal 2021 first-quarter analyst call earlier this week that same-day deliveries make up a very small part of FedEx’s overall business. As it happens, FedEx is one of Walmart.com’s leading transport partners.
