While most retailers in the U.S. struggled amid the coronavirus pandemic, Amazon quietly made strides towards a goal several years in the making: meeting its shipping needs without outside help.
The e-commerce giant is now shipping 67 percent of its own packages directly to customers, according to data from supply chain consultant MWPVL International. That's up from 50 percent in 2019, and the Canadian consulting firm estimates it will reach 85 percent by 2023.
The engine behind this uptick is Amazon's growing network of last-mile delivery centers across North America. These facilities, which are popping up everywhere from North Jersey to Ontario, Canada, serve as the final stop before a package is sent out to a customer's doorstep.
In the past, the U.S. Postal Service and other private courier services handled the majority of last-mile deliveries, particularly in lower density areas where it was less cost-efficient to bring packages. But over the past year, Amazon has rapidly expanded its footprint. The number of Amazon delivery centers increased from 163 in 2019 to 278 in 2020 so far, and MWPVL estimates there will be 415 locations by the end of the year.
"Every time they flip on a delivery station, they're helping improve the service level, plus they're improving the traceability of the package," Marc Wulfraat, president and founder of MWPVL, told Cheddar. "They want to own that customer experience from beginning to end."
Walmart has made similar efforts to build out its delivery network in recent years, but Amazon has held the lead in creating a vertically integrated system that soon could rival UPS, FedEx, and even USPS.
"Amazon is in the best position of all the carriers right now, from a technology perspective, from a model perspective, from a sophistication perspective," said Daniel Sokolovsky, founder and CEO of AxleHire, a logistics company that sees itself in competition with Amazon. "Do I think that in 10 years Amazon can kill UPS and FedEx? Yeah, probably."
Amazon Goes Solo
Understanding where delivery centers fit into Amazon's growth strategy, however, first requires understanding the shape of its shipping network.
At the top are fulfillment centers, where inventory is stored, sorted, packed, and labeled for shipping. Some are designed for small, sortable items such as books and DVDs, while others deal in large, non-sortable items such as TVs and microwaves. There are also facilities designed for specific product lines, such as shoes or automotive parts.
In the middle are what Amazon calls "sortation centers." They are regional hubs that receive packages from fulfillment centers, sort them by zip code, and then ship them out to either a delivery partner, such as UPS or a local post office or to an Amazon delivery center, where a patchwork of 1,300 delivery service partners — often driving Amazon-branded vans — handle the last leg.
Amazon's desire to cut out the middleman goes back to at least 2007 when it opened its first delivery center. Founder Jeff Bezos has also speculated for years about serving up packages directly via drones. But it wasn't until 2013 that the company started to ramp up expansion. That was the year Amazon saw widespread delays in the heat of the holiday season. After that, delivery centers went up at a steady pace, reaching 71 in 2017 and almost doubling to 122 in 2018, according to MWPVL. Over that period, the buildings themselves have also gotten bigger.
"Not only are they adding a heck of a lot of delivery stations, the delivery stations are becoming a lot bigger and able to handle far more package volume," said Wulfraat, who added that early centers were usually under 100,000 square feet, and now they're often five to six times that size.
Brick-and-mortar retail's downfall could be a boon to this strategy. Amazon is reportedly in talks with Simon Property Group, the largest mall owner in the country, to take over large spaces left behind by struggling department stores.
So what's stopping Amazon from going completely solo? In part, the company still depends on partners for the hardest to reach places.
UPS, for instance, usually handles deliveries to areas far outside Amazon's current shipping network, such as a remote farm in northern Canada. USPS, meanwhile, tends to serve customers who are within Amazon's delivery network but are less efficient and profitable to serve.
"The packages they're giving to USPS, those are the ones that would be more expensive for Amazon anyway," said Satish Jindel, founder of ShipMatrix, a research firm whose Amazon data matches MWPVL. "Anything they can do for less money, they're doing themselves. It's natural you would cherry-pick the best packages for yourself."
He predicts Amazon will cap out at shipping 80-90 percent of its own packages but continue to rely on third-parties to fill in the geographic gaps or meet sudden spikes in demands.
"They'll probably never do all of it, because of the fluctuation in the volume," Jindel said. "They'll continue to use the post office for the part of the country that no one else can do for even twice the price."
'Certain Major Customers'
All of this could have implications for the cash-strapped postal service, which noted in a regulatory filing last year that increased competition in shipping "significantly impacts both revenue and volume."
"Certain major customers of the Postal Service have recently begun diverting additional volume from the Postal Service’s network by in-sourcing the last-mile delivery," the filing stated.
Amazon clearly matches this description, but whatever the company's long-term plans, right now it's just keeping up with surging demand.
"Of all the companies, Amazon is probably under the greatest pressure to add capacity for delivery," Jindel said. "Demand is so much greater than supply."
While USPS, FedEx, and UPS also saw package volume spike during the COVID-19 pandemic, Amazon is positioning itself for future dominance, said Sokolovsky of AxleHire.
"Not only are they operating normally, they're operating better now than UPS and FedEx and everybody else," he said. "I think a lot of this actually has to do with having technology as your infrastructure more so than speed. UPS has been in business for over a hundred years. Why are they opening up delivery stations so much slower than Amazon?"
Jindel said that Amazon's ultimate goal is to expand its logistics arm to deliver packages for other companies as well, but increased demand during the coronavirus pandemic has put those plans on hold.
"I'm sure they're going to look at bringing that back to life, but it won't be until spring or summer of next year," Jindel said.