The delivery industry has felt immense pressure from Amazon in recent years as the e-commerce giant continues to grow its network. One of Amazon’s top execs says he believes the company will take over as the top dog in delivery, sooner rather than later.
In an interview with CNBC, Dave Clark, Amazon’s CEO of worldwide consumer, said that the company will overtake carriers like UPS and FedEx to become the largest package delivery service in the U.S. by as early as December 2021. Clark said that at the latest, the tech titan would be the largest delivery carrier in the nation by early 2022.
Amazon has never been one to shy away from spending to improve its services. In its most recent quarter, total fulfillment costs increased 50 percent year over year to $473 million, whereas total shipping costs grew 20 percent to $18.1 billion. These efforts have largely resulted in building out a network that could leverage in-house parcel delivery without relying on third parties.
During the company’s third-quarter earnings call, Amazon laid out its holiday shipping dedication at $4 billion, adding in efforts such as chartering its own vessels, hiring 150,000 U.S. seasonal workers and boosting pay with signing bonuses of up to $3,000.
In September alone, Amazon opened more than 100 new buildings in the U.S., including fulfillment centers, sort centers and last-mile delivery stations.
When zooming out, Amazon says it has nearly doubled the size of its fulfillment network since late 2019, with more than 930 facilities throughout the U.S. in total. In that time period, Amazon also hired approximately 670,000 people, bringing its worldwide workforce to over 1.4 million.
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An estimated 30 new fulfillment-and-delivery centers are expected to open by the end of 2021, which can stock an additional 3 million combined items. The facilities are planned near Chicago, Atlanta and Washington, D.C., with some 150 more centers set to open near some of Amazon’s biggest markets over the next few years, Marc Wulfraat, president of logistics consultant MWPVL International, told The Wall Street Journal.
And the expansion isn’t just occurring on the ground, which has enabled the company to close the gap as supply chain constraints hamper both ocean freight and intermodal transportation. With 85 jets set to be included in its arsenal by next year, Amazon even hired its own flight crews in an effort to bring more product over from China.
Much of the tide appeared to have turned throughout the Covid-19 pandemic as delivery networks were hit with an unprecedented number of orders. In 2020, Amazon surpassed FedEx in terms of number of packages delivered—4.2 billion compared to FedEx’s 3.3 billion, according to Pitney Bowes data—and started to gain on UPS and the United States Postal Service: Amazon shipped 21 percent of packages in the U.S. while UPS shipped 24 percent and USPS shipped 38 percent, according to the September 2020 data. In comparison, FedEx only delivered 16 percent of packages.
As such, Amazon is keeping its shipping capabilities in its own hands as much as it can. As of the first quarter of 2021, the e-commerce giant delivered more than 56 percent of its own packages, according to research from Nielsen Consumer LLC. Shipping solutions platform and consulting firm ShipMatrix pegged the number at 61 percent between April and June, and that number jumped even further to 66 percent of its own packages in July.
A recent Insider report from early November unveiled that Amazon pulled “hundreds” of workers away from FedEx in particular, and hired talent away from UPS, DHL and other delivery companies, ultimately helping the e-commerce giant bolster its logistics infrastructure. Allegations from former FedEx employees expressed that they would finally be able to be more creative in presenting new ideas that could improve the shipping giant’s delivery network.
The expansion efforts haven’t all been rosy for the “everything store.” In fact, the tech titan saw more than $1 billion of costs tied to lost productivity and disruption in the prior quarter, illustrating that despite its growing stature, it is still optimizing its delivery network on the fly.
“In the third quarter, labor became our primary capacity constraint, not storage space for fulfillment capacity. As a result, inventory placement was frequently redirected to fulfillment centers that had the labor to receive the products,” said Brian Olsavsky, chief financial officer at Amazon in the October earnings call. “This resulted in less optimal placement, which leads to longer and more expensive transportation routes. In short, our operations are normally well-staffed and optimized to be in stock and to deliver to customers in one-to-two days. Labor shortages and supply chain disruptions upset this balance and resulted in additional costs to ensure that we continue to maintain our service levels to customers.”
From a profit standpoint, the investments are admittedly expected to make a dent. Between the wage increases and the fulfillment spending, Morgan Stanley downgraded Amazon’s stock price target from a then-$4,300 to $4,100 on the grounds of the exorbitant costs over the next few years. With shipping and fulfillment costs expected to grow 17 percent to $129 billion in 2021 and 9 percent to $162 billion in 2022, equity analyst Brian Nowak said Amazon won’t be able to absorb the costs in the near-term, leading to margin hits.
But the continued expenses are just yet another example of how far Amazon is willing to go to ensure that its network will continue to grow to capture more market share.