From Land to Sky: Amazon’s Package Delivery Initiatives

Posted on by Luana Tung

Retail sales have seen a surge on Cyber Monday (December 1) with an increase of 8.5% over last year, resulting in the “largest online shopping day” so far in 2014.1 E-shopping continued its climb, as online sales during Thanksgiving weekend grew by 17% over last year.2 Amazon, the largest U.S. online retailer,3 shipped an estimated 608 million U.S. parcels in 2013.4 USPS handled about 35% of Amazon’s U.S. packages, while UPS handled about 30%, FedEx 17%, and regional carriers 18%.5 Amazon is paying an estimated $2 to $8 to ship each package, with USPS being the most economical option, and UPS or FedEx being the most expensive.6 Since 2009, Amazon’s shipping costs have grown as a percentage of sales each year, from 7.2% in 2009 to 8.9% in 2013.7 In October, Amazon reported the biggest quarterly loss in 14 years, with a 32% increase in shipping expenses.8 The upward trend in shipping expenses shows no sign of levelling off, as “UPS and FedEx ground rates on average have increased 3% to 5% annually in the past five years.”9

To counterbalance the costs, Amazon has already raised its Prime unlimited two-day shipping membership in the U.S. by $20, which represents a 25% increase.10 Amazon is also actively seeking to diversify its delivery chain and avoid repeating the Christmas holiday delivery delays of last year. In November 2013, Amazon had contracted with USPS to deliver its packages on Sundays, thus shifting some of the shipments away from UPS and FedEx, which do not deliver on Sundays.11 Yet many of Amazon’s orders failed to arrive on time for the holidays when UPS’ hubs were overloaded by the large volume of packages, a problem that was exacerbated by the inclement weather.12

To reduce its reliance on UPS, FedEx, and USPS, Amazon has built 38 new fulfillment centers and 15 sortation centers, which are smaller warehouses that pre-sort packages by their zip codes.13 The sortation centers give Amazon the option of shipping packages directly to its customers should its shipping partners become overwhelmed.14 Earlier this April, Amazon was “testing its own delivery network for the ‘last mile’” in San Francisco.15 The network deployed its own trucks driven by Amazon-supervised contractors to deliver packages to the customers’ doorsteps.16 In addition to developing its own delivery system, sources revealed that Amazon began testing the use of licensed cab, summoned through the taxi-hailing mobile app Flywheel, for deliveries in San Francisco and Los Angeles this fall.17 The cabs would pick up some 10 packages destined for the same zip code from the local mini-distribution centers and deliver them within one hour at $5 per package.18 Apart from providing an alternative to current delivery vendors, cabs allow Amazon to “compete more directly with brick-and-mortar retailers” through speed deliveries.19 Furthermore, through AmazonFresh, Amazon has been conducting trial runs of delivering fresh meat, dairy, produce, and other groceries in San Francisco, Los Angeles, and Seattle through USPS.20

Looking into the future, Amazon has been experimenting with helicopter-like aerial drones for parcel shipment.21 The company hopes to operate the drones to drop-off items 5 pounds or lighter within a 10-mile radius of its warehouses in about 30 minutes.22 In December 2013, Amazon Chief Executive Jeff Bezos projected that Amazon “could start using drones for deliveries within four to five years.”23 Currently, only recreational drones are allowed to fly in U.S. airspace.24 The FAA is reportedly looking to propose rules for commercial drones requiring pilot licenses for operators and restricting drone traffic “to daytime hours, below 400 feet and within sight of the person at the controls.”25 The FAA’s plan is to “gradually open U.S. skies to commercial unmanned aircraft . . . [and] allow more drone operations as technology improves.”26 Amazon has been testing drones indoors in Seattle.27 It has submitted a request to the FAA in July for approval to test the drones in a field near its Seattle headquarters, but the FAA has yet to respond.28 In the meantime, the upcoming holiday season will put Amazon’s recent initiatives in improving package delivery to the test.

  1. Hadley Malcolm, Cyber Monday Grows as Busiest Day of Season, USA Today (Dec. 2, 2014, 10:54 AM), http://www.usatoday.com/story/money/business/2014/12/01/cyber-week-deals-begin/19733541/. ↩

  2. Id. ↩

  3. Shelly Banjo, Apple Jumps to Second Place in Online Retail, Wall St. J. (May 6, 2014, 10:08 AM), http://blogs.wsj.com/corporate-intelligence/2014/05/06/apple-jumps-in-rankings-now-second-largest-online-seller/. ↩

  4. Greg Bensinger & Laura Stevens, Amazon, in Threat to UPS, Tries Its Own Deliveries, Wall St. J. (Apr. 24, 2014, 7:17 PM), http://online.wsj.com/articles/SB10001424052702304788404579521522792859890. ↩

  5. Id. ↩

  6. Id. ↩

  7. Greg Bensinger, Amazon Is Testing Taxis for Deliveries, Wall St. J. (Nov. 5, 2014), http://online.wsj.com/articles/amazon-testing-taxis-for-deliveries-1415209630. ↩

  8. Id. ↩

  9. Bensinger & Stevens, supra note 4. ↩

  10. Id. ↩

  11. Ron Nixon, Postal Service to Make Sunday Deliveries for Amazon, N.Y. Times (Nov. 11, 2013), http://www.nytimes.com/2013/11/11/business/postal-service-and-amazon-strike-deal.html?_r=0. ↩

  12. Brad Stone, Amazon’s Grand Plan to Avoid Holiday Delivery Snafus Again, Bus. Wk. (Sept. 26, 2014), http://www.businessweek.com/articles/2014-09-26/amazons-grand-plan-to-avoid-holiday-delivery-snafus-again. ↩

  13. Id. ↩

  14. Id. ↩

  15. Bensinger & Stevens, supra note 4. ↩

  16. Id. ↩

  17. Bensinger, supra note 7. ↩

  18. Id. ↩

  19. Id. ↩

  20. Greg Bensinger & Laura Stevens, U.S. Mail Delivers Amazon Groceries in San Francisco, Wall St. J. (Sept. 4, 2014, 2:14 PM), http://online.wsj.com/articles/u-s-mail-to-deliver-amazon-groceries-in-san-francisco-1409854499. ↩

  21. Alistair Barr & Greg Bensinger, Google Is Testing Delivery Drone System, Wall St. J. (Aug. 29, 2014, 4:04 AM), http://online.wsj.com/articles/google-reveals-delivery-drone-project-1409274480. ↩

  22. Id. ↩

  23. Jack Nicas & Alistair Barr, Those Amazon Delivery Drones? Not So Fast, Wall St. J. (Nov. 25, 2014), http://online.wsj.com/articles/faas-planned-drone-rules-would-pose-commercial-concerns-1416951084. ↩

  24. Id. ↩

  25. Id. ↩

  26. Id. ↩

  27. Id. ↩

  28. Id. ↩

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