Amazon Logistics growing fast but so are costs

The strategy provides Amazon a way to bolster its last mile delivery capabilities by encouraging entrepreneurs to form small last mile delivery companies for Amazon packages. 

These start-ups, which can grow to operate a fleet of up to 40 delivery vehicles and employ up to 100 drivers under the scheme, also qualify for Amazon-subsidised assets and services, including vehicle leases and insurance.

Ti head of research Nick Bailey says: “Amazon’s faith the delivery technology its developed to manage the operations is such that it is offering the scheme to entrepreneurs with no experience in the logistics industry. Amazon’s strategy has seen it focus on increasing volumes to the extent to which it now controls vastly significant market shares of online retail markets home and abroad. In the US, its share is estimated at around 40%. To this end, the new last mile network aims to handle some of the volumes that it believes UPS, FedEx and USPS cannot.”

It’s also been an expensive process. Amazon reports both ‘shipping costs’ and ‘fulfilment costs’. Shipping costs are made up of the cost to Amazon of receiving products from suppliers and is included in inventory costs. In 2018, Amazon’s shipping costs totalled $27.7bn, a rise of 27.6% year-on-year and a near doubling of the $16.2bn in 2016. Fulfilment costs relate to Amazon’s expenditure in operating and staffing fulfilment centres, customer service centres, and physical stores worldwide as well as payment processing costs. Fulfilment costs in 2018 of $34bn were 34.8% higher year-on-year, and up 93.1% over the 2016 total.

Nick says: “Both sets of costs are expected to increase as Amazon’s fulfilment network is expended, but a key to managing both sets of costs include usual logistics strategies of cost efficiency through higher sales volumes and enhanced operational efficiency at facilities. Perhaps more importantly, management of the mix of in-house and third-party shipping services used and the deals negotiated with those third-party suppliers is also a central pillar of overall cost management. Within the last mile, Amazon is providing clear indications that it will continue to expand its operations, bringing more volume in house as it moves to consolidate its services in key markets.”