Amazon is spending big to take on UPS and FedEx

FAN Editor

Amazon driver Shawndu Stackhouse delivers packages in Northeast Washington, D.C., on Tuesday, April 6, 2021.

Tom Williams | CQ-Roll Call, Inc. | Getty Images

Amazon has long set its sights on being the fastest in the online delivery race. Its first-quarter earnings report on Thursday revealed just how much it’s willing to spend to get there.

On an earnings call with investors, Amazon CFO Brian Olsavsky said the company’s capital expenditures, which include things like logistics expansion and the costs of data centers, increased a whopping 80% over the trailing 12 months.

While the coronavirus pandemic pushed many businesses to slow spending, Amazon plowed profits back into physical expansion, growing its transportation and logistics presence across the country. Olsavsy said the company added more warehouses and grew its fleet of airplanes and linehaul trucks. Amazon also continues to grow its contracted delivery network, often distinguishable by blue Amazon-branded vans, to oversee more than 100,000 drivers.

All told, the company increased capacity of its in-house logistics operations, known as AMZL, by 50% year over year, Olsavsky said. Amazon expects to keep spending big in these areas throughout the remainder of 2021 and potentially into 2022.

Logistics expansion is critical for Amazon as it seeks to speed up deliveries and, in the future, make the business of delivering packages more cost effective. Olsavsky signaled that Amazon is making progress on that front, noting that “our cost right now is very competitive with our external options.” It’s unclear whether Amazon has closed that gap when it comes to rural areas, which significantly increase last-mile delivery costs compared to densely populated regions.

Amazon still relies on third-party providers like UPS, FedEx and the U.S. Postal Service to handle a portion of deliveries. But the company has steadily grown its fleet of planes, trucks and vans to inch closer to its shipping partners. One estimate last August suggested Amazon now delivers roughly two-thirds of its own packages.

By operating its own fulfillment and logistics network, Amazon can continue to optimize the process of preparing and delivering packages to shoppers’ doorsteps. In doing so, Amazon has already shifted from a two-day delivery model to one- and even same-day delivery.

“What we see which is very helpful is the ability to control the whole flow of products from the warehouse to the end customer,” Olsavsky told investors on the call. “It’s turned what normally was a batch process, where we would hand off a large batch of orders to a third party once a day, let’s say, to a continuous flow process where we continually have orders leaving our warehouses five, six times a day, going through middle mile and then to final delivery, either through our AMZL drivers or [contracted delivery] partners.”

Ultimately, these investments in fulfillment and logistics also strengthen Amazon’s “flywheel effect.”

Amazon’s increasingly end-to-end control of a package’s journey from warehouse to doorstep has meant that consumers “get more precise estimates of delivery” after they’ve placed an order, Olsavsky said. That makes things like Amazon’s Prime subscription service, which recently crossed 200 million paying members, worth the expense for consumers.

As shoppers continue to flock to Amazon, it pushes more businesses to have a presence on the site and, if they’re not already, buy ads and pay to tap into Amazon’s warehouse footprint. Amazon makes money from selling third-party seller services, by taking a cut of each sale and collecting fees from sellers who use its warehouses. Revenue in that segment surged 64% during the quarter.

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