Amazon puts outside delivery program on ice

In late 2017, Inc. (NASDAQ:AMZN) launched a pilot to offer parcel deliveries to businesses outside its retail and fulfillment universe. It was thought the program would lead to the biggest transport network build-out in years, and would put Amazon in direct competition with FedEx Corp., UPS Inc. and the U.S. Postal Service (USPS) for the first time.

Now the initiative, Amazon Shipping, has been put on hold, overtaken by unprecedented life-or-death events, as well as a perception, fair or not, that the program may not have lived up to the billing.

Amazon has notified customers that the program will be suspended, effective in June. The company will help customers transition out of the program, according to a communique reviewed in The Wall Street Journal. The initiative targeted businesses that had previously not used Amazon to sell goods and fulfill orders. The pilot began in Los Angeles in December 2017 and expanded in early 2019 to New York, Chicago and London. The program is not believed to have generated meaningful revenue or cost savings from more favorable shipment density characteristics.

Amazon has not publicly commented on the development. However, it’s apparent that the company is focusing its resources to cope with a surge in demand as the COVID-19 pandemic keeps people indoors and almost exclusively reliant on home deliveries of online orders. Amazon has announced plans to hire 100,000 employees — with 80,000 already hired — prioritizing deliveries of essential items, and pushed out delivery windows for its Amazon Prime and Amazon Fresh grocery customers.

Ravi Shanker, transport analyst for Morgan Stanley & Co. (NYSE:MS), said in a note Wednesday that Amazon is likely to resume the delivery initiative once global markets return to some semblance of normal. The company is “pulling back” on the investment in light of the current situation, Shanker said. Once current demand calms down, Amazon will launch a “full-fledged” outside delivery service, cherry-picking the densest lanes in the process, according to Shanker.

UPS, which accounts for about 23% of Amazon’s annual shipping costs and is its largest shipping vendor, will be most at risk from Amazon’s move, Shanker said. FedEx and UPS cut ties in 2019, though Amazon reinstated FedEx as a hauler of some Amazon volumes during the high-volume holiday period.

In a December report, Shanker forecast a full-scale launch by the end of 2020. However, the timetable is likely to be pushed out a few months due to the disruptions caused by the pandemic, he said in the Wednesday note.

However, Matthew White, analyst for consultancy iDrive Logistics, said the delivery program faces structural challenges that will lead Amazon to delay the rollout for at least five years, with a 30% chance that it will ever be relaunched. The pilot was viewed as a way to amortize the costs of any excess shipping capacity during nonpeak periods for Amazon Logistics, the Amazon unit that provides integrated fulfillment and delivery services for Amazon customers, White said. However, the surge in traffic related to the pandemic, as well as what may be a permanent upshift in demand as more consumers and businesses acclimate to e-commerce, means that Amazon is “looking at an indefinite peak season” for logistics, he said. In this scenario, there is little value in competing with large incumbents like FedEx and UPS for midsize e-commerce accounts where low-margin, capital-intensive transportation programs is the only category that can be monetized, he added.

The program also has shortcomings for prospective customers, White said. In reviewing an Amazon Shipping proposal for a large customer, IDrive found that the offering did not allow the customer to choose the last-mile provider. Ceding delivery control doesn’t sit well with many shippers because they are likely fulfilling in-house or through a third-party logistics provider. In addition, dividing up delivery functions, which is likely to happen in the vast majority of relationships, could rob the shipper of volume discounts that it would receive by tendering most, if not all, parcels to one carrier, White said. 

That said, White said he expects Amazon Logistics’ volumes will grow enormously due to secular e-commerce growth trends and the strength of the Amazon integrated retail, fulfillment and transport business.