Many online retailers were frustrated at the end of the 2013 holiday season when a combination of ecommerce growth and bad weather led to many consumers not receiving purchases in time for Christmas. But Amazon.com Inc. did more than gnash its teeth—it set out to establish its own delivery network to ensure that its customers would not be disappointed.
Since 2014, Amazon has spent $39 billion to build out a massive delivery network, according to Bank of America Global Research, a unit of big U.S. financial institution Bank of America Corp. And that investment soars to $60 billion when including capital leases for such items as warehouses and aircraft, the report says. (Amazon leased 97% of its fulfillment and data center space in 2019, the retailer said in its annual report.)
“Amazon is approaching a truly vertically integrated logistics network on par with the largest delivery companies in the world,” the report says.
That massive investment enabled Amazon, No. 1 in the 2020 Digital Commerce 360 Top 1000, to deliver 2.3 billion of the 4.5 billion parcels, or 58%, it shipped to U.S. consumers in 2019, the report says. Plus, that represented 22% of the 10.6 million online retailer parcel deliveries last year in the U.S. and made Amazon the fourth-largest U.S. shipping service, the Bank of America report says.
Internationally, Amazon handled 48% of its own deliveries—1.2 billion of the 2.5 billion packages it shipped outside of the U.S. in 2019, according to the Bank of America study.
What’s more, Amazon may compete more aggressively in the years ahead with its Amazon Shipping service to deliver orders for other online retailers, including those that do not sell on Amazon’s online marketplace. By 2025, Amazon could deliver between 7.5 billion and 9.7 billion packages in the U.S., including its own orders and those of other retailers. That would represent between 38% and 49% of the what Bank of America projects will be 19.5 billion U.S. online order deliveries that year.
However, the report notes retail competitors may hesitate to hand over fulfillment to Amazon now that it is a major rival in many merchandise categories: “Other B2C [business-to-consumer] retailers may not want to ship with Amazon, so Amazon may have to look to the B2B [business-to-business] market to grow its non-Amazon shipping business.”
Amazon announced in April plans to temporarily suspend its shipping service starting in June because of the pressure on its fulfillment network from increased demand since the COVID-19 outbreak.
Amazon spends more on shipping packages
Besides investing in fixed assets like warehouses, robots and delivery vans, Amazon is steadily increasing its variable expenses for shipping, including fees paid to carriers, employee salaries and vehicle fuel and maintenance. Those shipping expenses more than doubled from $16 billion in 2016 to $38 billion in 2019, and will reach $117 billion by 2025 as Amazon spends more on next-day shipping and online grocery delivery, Bank of America says.
Free next-day delivery for Amazon Prime members, which Amazon introduced last year, cost the retailer $1.5 billion in 2019, the report says. But Amazon is reaping rewards by offering free shipping: A Bank of America consumer survey found that shipping cost is the second-most important consideration for online shoppers after the price of the merchandise itself.
And Amazon Prime members are noticing that orders are arriving faster. A recent Bank of America consumer survey found 42% of Prime members said Amazon orders have arrived more quickly over the past year compared with only 19% of Amazon customers who are not members of Prime.
Amazon’s growing warehouse and delivery center network
Amazon now operates nearly 500 logistics facilities in the U.S. covering 173 million square feet and another 1,100 globally that cover 262 million square feet, the report says, referencing data from logistics consulting firm MWPVL.
Here is a brief description of the facilities Amazon operates, as described in the Bank of America report:
- 10 receiving centers, often located near major seaports, take in products in bulk. These facilities average about 600,000 square feet.
- Receiving centers ship merchandise to 170 fulfillment centers, the giant warehouses near major highways that average 773,000 square feet and employ thousands of workers. There are “sortable” receiving centers, some for large items and others for small products, where workers pick and pack orders for delivery to consumers. More than 200,000 robots assist employees at 50 of these sortable centers.
Fulfillment centers for non-sortable items range up to 1 million square feet in size and ship large items such as rugs and patio furniture.
- Packages destined for consumers outside of a fulfillment center’s region are sent to one of 20 air hubs where cargo planes fly parcels around the country. Amazon is spending $1.5 billion to expand its air hub in Hebron, Kentucky, which is near Cincinnati, to serve as the center of its U.S. hub-and-spoke air cargo system. It plans to complete that project in 2021. Amazon operates 40 cargo planes and plans to expand to 70 planes by 2023.
- Whether from an air hub or a fulfillment center, packages go to one of 49 U.S. sortation centers, each averaging 340,000 square feet, where 100 to 300 workers per facility sort packages by ZIP code, putting them on pallets for shipment by truck.
- Last-mile delivery is handled by delivery stations—Amazon has about 200 delivery stations in the U.S. and plans to open another 84 in 2020, according to MWPVL. These facilities typically average 129,000 square feet, employ 200-300 workers and are located near airports of major cities. Drivers pick up packages at these delivery stations to cover the last mile to consumer’s homes.
Who delivers packages for Amazon?
Deliveries to shoppers are handled by two types of drivers—those hired by Amazon’s Delivery Service Partners, companies that deliver exclusively for Amazon, and independent couriers who pick up Amazon packages when Amazon needs them as part of a program called Flex.
Amazon launched the Delivery Service Program in 2018, offering applicants willing to invest about $10,000 discounts on delivery vans, insurance, mobile devices and uniforms. There now are about 800 companies operating under this program with some 75,000 delivery drivers, according to the Bank of America report.
For this program, Amazon has acquired 20,000 Mercedes-Benz Sprinter vans. In September 2019, Amazon announced it would purchase 100,000 electric-powered delivery vans from a startup called Rivian for delivery from 2021 to 2030.
The Flex program began in 2015 and now employs couriers in about 90 U.S. cities, Bank of America says. Amazon provides auto insurance for Flex couriers, except in New York, and says those drivers can earn $18-$25 per hour.