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How Amazon Gains Control & Domination

Published: December 26, 2019 | Print Friendly and PDF

Source: wolf street

By Wolf Richter. This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

Amazon just gave us an update on how rapidly its own delivery system is replacing UPS, the US Postal Service, FedEx, and other carriers in delivering packages from an Amazon fulfillment center to the door of Amazon’s customer.

The numbers show how big this system is already after practically no time of starting it up, how big the package volume is already, and how many drivers are already working in this system.

This has huge consequences for the US logistics business, the companies that slug it out in it, such as UPS and FedEx, and that keep raising their published rates despite the dynamics of the market, which is facing Amazon’s creation, the mushrooming companies that Amazon is building up to get around the established carriers. Its purpose is twofold:

  • One, bring down delivery costs.
  • And two, gain control.

Delivery costs have always been a primary issue in ecommerce. And gaining control became a primary issue for Amazon in the 2013 holiday season. The flood of Amazon orders was such that it overwhelmed UPS and FedEx, and packages were delivered after Christmas, which created a huge debacle for Amazon.

So, to gain control and bring down costs, it has to become the number 1 gorilla in the logistics business and surround itself by thousands of small logistics companies that it totally controls and that are eating the lunch of today’s giants, UPS and FedEx. And that’s what’s happening at an astounding speed.

Amazon didn’t invent ecommerce. But from day one, it has been pushing the envelope in every direction to make itself the dominant player in just about all related fields, some high-tech, some low-tech, from cloud computing to delivery, to bring down costs and gain control.

To do this, Amazon is helping create thousands of smaller companies. It’s enticing potential entrepreneurs with attractive entry deals. These companies have non-unionized drivers, and they have no fancy corporate headquarters and overhead, and they can operate for less, especially if they can use Amazon’s purchasing power for vehicles and insurance, which Amazon has set up for them to do.

The first time I noticed it enough to where I chatted up a delivery driver was in early 2017. Amazon packages used to be delivered to our building in San Francisco by the US Postal Service, by UPS, or by FedEx. But then I noticed that Amazon packages were being delivered by people in regular clothes. Some of them came in unmarked vehicles. Others were marked with Amazon logos.

One of them pulled up in a small white van with an Amazon logo. And he wore a vest with an Amazon logo. So, I asked him if he worked for Amazon. He said he worked for a delivery company with about 20 vans in Oakland that’s delivering for Amazon.

At the time, Amazon was setting up two programs in select cities, for which it was actively recruiting gig workers and “entrepreneurs.”

One program was “Amazon Flex”: Amazon billed it as a way to “make $18 to $25 per hour delivering packages with Amazon.” It was app-based and allowed gig workers to choose a block of time during a day in which to pick up and deliver packages. The pick-up location could be an Amazon facility or “a store or even a restaurant,” it said. Gig workers could use their car or bicycle or whatever. And they were contractors, paid by Amazon.

The other program was dubbed Amazon Delivery Providers. “Whether you have one van or a fleet, our volume and your business could be a great match,” Amazon said at the time.

They’d pick up at a local Amazon facility. They’d use Amazon’s routing technology. And off you go, making gobs of money, or so you hope, delivering packages for Amazon. The entrepreneurs, so the owners of these little delivery companies, contracted with Amazon, and received their revenues from Amazon. And they paid their own drivers – like the guy I’d chatted up.

All of them were doing the work that employees of the US Postal Service, FedEx, and UPS used to do.

A year later, in June 2018, Amazon announced a new program, now called, Delivery Service Partners. At the time, Amazon said that this program would help “entrepreneurs build their own companies delivering Amazon packages.”

“Amazon will take an active role in helping interested entrepreneurs start, set up, and manage their own delivery business,” it said in the announcement at the time.

“Successful owners can earn as much as $300,000 in annual profit operating a fleet of up to 40 delivery vehicles,” Amazon said.

“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,” Amazon said.

“Over time, Amazon will empower hundreds of new, small business owners to hire tens of thousands of delivery drivers across the US,” it said.

Start-up costs would be as low as $10,000, Amazon said, given all the support from Amazon – the training, the software technologies, the operational support, the special deals and leases on Amazon-branded customized vans, special deals on branded uniforms, special deals on fuel, comprehensive insurance coverage, etc.

The entrepreneurs would not have to do any marketing – Amazon would be their only customer, and Amazon would give them the volume of packages to support their business. So Amazon said, “individuals with little to no logistics experience have the opportunity to run their own delivery business.”

This has apparently taken off in a massive way. Amazon announced a few days ago that its dedicated last-mile delivery network is on track to deliver 3.5 billion customer packages globally this year. Up from zero a few years ago.

By comparison, UPS delivered 5.2 billion packages and documents globally last year. At the growth rate of Amazon’s delivery system, if will blow past UPS in a couple of years globally.

Amazon said that in the US, its delivery system already handles the largest share of its customers’ orders, ahead of the share of each, the US Postal Service, UPS, and FedEx.

It said it has 150 delivery stations across the United States that employ over 90,000 Amazon “logistics associates,” as it calls them. These are Amazon employees who make a wage of at least $15 an hour plus get some benefits, it said.

They get the packages ready to be picked up by the drivers of the small logistics companies that Amazon has helped set up – namely the Amazon Delivery Service Partners.

It now had over 800 of these Amazon Delivery Service Partners in the last-mile network, it said, and these companies were employing 75,000 drivers in the United States.

So, 75,000 drivers at 800 companies, means that the average delivery company now has 94 drivers. And these companies didn’t even exist a few years ago.

For these 800 companies and their 75,000 drivers that Amazon helped create, Amazon is everything: It controls the business volume, namely the packages to be delivered, and the revenues, via the rates it is paying. It provides special deals on leasing the delivery vans, getting insurance, and even on getting fuel. It provides the app-based technology to design the most efficient routes every day.

In a situation like this, as a delivery business, where you have one giant customer that helped create your business and that controls everything, including your revenues to the last penny, how you run your business, and what services you use, there is one thing to remember: Your business thrives or dies by the grace of Amazon.

And once Amazon has the system up and running to the full extent, the squeeze invariably begins. It will start in small items here and there, paying for services that used to be free, and the special deals will get less special, and the amount Amazon pays for deliveries will get squeezed – because now that it has control, Amazon will proceed with the goal: bringing down delivery costs of ecommerce. And the way to do this is by squeezing the delivery network.

The merchants that use Amazon’s platform and that have built thriving businesses relying on the platform, they’ve been finding out the same principle: the squeeze is on and it’s eating into their business and profits, and if they don’t like it, they have trouble moving on.

Giants like Nike, they can, and do, pull their merchandise off Amazon and use their own established websites and sales channels to continue, but mom-and-pop merchants, whose business has become dependent on the Amazon platform, they’re sitting ducks, waiting to be squeezed. This is now playing out in full force.

For the little delivery companies, this is still in the future – the recognition that at Amazon it’s all about gaining control and cutting the costs of ecommerce.

Without Amazon, ecommerce would still be in the stone age of ecommerce. Amazon has been pushing the envelope in every direction from day one. It has upended brick-and-mortar retail. It has upended cloud computing that ecommerce is based on. It is muscling in on online advertising. It is leading in placing its spy-devices into homes, such as its Alexa smart speaker. It is now upending the established logistics system.

None of this happened overnight. Each took many years to reach critical mass. But Amazon’s last-mile delivery system has reached critical mass in just three or four years and appears to be progressing faster than any of its other initiatives. And it’s a logical expansion of Amazon’s drive to cut costs and gain control.

You can listen to and subscribe to my podcast on YouTube.

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