Amazon has a new idea for anyone who has ever dreamed of owning and running a small business, but was daunted by the hurdles, or didn’t know where to start: Launch and run an independent company of your own to deliver its packages.
Intrigued? As with any new business, it won’t be easy. That’s why Amazon promises to help you get started, and provide a steady source of revenue once your company is up and running. It’s a rare opportunity to hitch your entrepreneurial fortunes to one of the fastest-moving companies in the world.
But even with Amazon’s help, it will take an immense amount of work and effort to make your new package delivery business even modestly profitable.
That is a key takeaway from GeekWire’s analysis of the Amazon Delivery Service Partner program. This program is a new effort by the tech giant to spark the creation of hundreds of small businesses across the country. Launched with its help, Amazon hopes these businesses will ultimately employ tens of thousands of delivery drivers in Prime-branded blue vans and uniforms.
In the weeks following Amazon’s June 27 announcement, we’ve been examining the economics of the program. We’ve talked with logistics and delivery experts, peppered the company with questions, read the fine print in the application materials, and compared the new program to similar delivery businesses.
Our goal was a deeper understanding of Amazon’s strategy, and the potential risks and rewards for these new delivery business owners.
For Amazon, the need to expand its delivery capacity will be illustrated again this week. Prime Day, now in its fourth year, creates another peak shopping season for the company. Prime Day has already surpassed Black Friday and Cyber Monday as Amazon’s busiest shopping day, requiring even more from the company’s delivery infrastructure.
Here are the major pros and cons we found in the Amazon Delivery Service Partner program.
- The financial barriers to entry in the Amazon program will be significantly lower than for other contract delivery businesses. That makes it more accessible to a wider range of entrepreneurs.
- The profit potential appears lower than for similar delivery businesses, according to logistics industry experts who have analyzed Amazon’s initial public projections.
- Amazon’s help promises to reduce or remove many of the traditional hurdles to starting and operating a small business.
- That help comes with strings attached, including a requirement that Amazon-branded vans can only be used to deliver Amazon packages.
- Businesses that participate in the Amazon program will benefit from the company’s massive negotiating power with third-party vendors.
- Limitations on fleet size will likely prevent any one Delivery Service Partner from gaining too much negotiating power against Amazon.
- These are hands-on businesses, not passive investments to be operated from across the country.
Owning an Amazon delivery business
Amazon “DSP” business owners will build and manage a team of 40 to 100 of their own employees, with fleets of 20 to 40 vans delivering packages seven days a week, 365 days a year, serving thousands of customers.
The company describes the job in a “day in the life of an owner” timeline in its Delivery Service Partner application materials. Daily duties will include scheduling drivers, setting up routes, rallying the team in a morning huddle, tracking progress throughout the day, working with Amazon to troubleshoot problems, debriefing drivers upon their return, and making sure vans are properly fueled and parked at the end of the day.
But first comes the nitty-gritty work of building and launching the business: securing the required licenses; vetting and hiring employees; lining up key business services; setting up a pay structure and benefits; working with legal and corporate advisers; building a “customer-obsessed culture” and coaching your team to “exceed expectations on every delivery.”
All of this will sound familiar to anyone who knows the company’s legendary leadership principles. Amazon says a key trait of successful delivery partners will be resilience and the ability to handle “the ambiguity of a fast-paced, ever-changing business,” while delivering results with a “can-do attitude.”
The company says many people who served in the military will have the traits required for success as Delivery Service Partner business owners. Amazon is committing $1 million to reimbursing up to $10,000 in startup costs for qualified U.S. military veterans.
“Serving thousands of customers daily isn’t easy, but the smiles are incredibly rewarding,” the company says in its application materials.
And there will be little time to waste after launching. “Successful owners add five additional routes in their 5th, 9th, and 11th week, bringing their business to 20 or more routes after three months,” Amazon says.
Sure, it may sound exhausting. But look at the upsides.
Amazon has negotiated special deals on van leases; data plans; mobile devices; insurance, HR, legal and accounting services; vehicle maintenance; and other programs for new delivery business owners. The company will provide technology, tools and a comprehensive playbook to run a delivery business, a three-week training program for new owners, driver assistance on the road, ongoing support from an account manager, and the ability to benefit from its decades of experience putting brown boxes on doorsteps.
Delivery Service Partners will also get the benefit of operating out of an Amazon delivery station, reducing or eliminating the need to operate their own facilities.
It’s the business equivalent of a meal kit — providing not just the recipe but also the ingredients to cook up a new company, plus a customer service line to call when you get stuck on the first course.
All of the deals and assistance will reduce the cost of launching the business to as little as $10,000, Amazon says.
But perhaps most importantly, Amazon will remove one of the biggest hurdles facing any new business: revenue.
The company promises its delivery partners a fixed monthly payment based on the number of vehicles they operate with Amazon, a separate rate based on the length of their routes, and a per-package rate based on the number of packages they deliver successfully.
A steady stream of work
Amazon says the total revenue potential will be $1 million to $4.5 million once a company reaches critical mass.
One early Delivery Service Partner business owner, who took part in an Amazon pilot program, says the impact of that revenue has been meaningful. Olaoluwa Abimbola, an immigrant from Nigeria who previously drove in the Amazon Flex delivery program for individual contractors, has hired 40 people in the first five months at his package delivery company in Aurora, Colo.
“We don’t have to make sales pitches for loads every day, or go to a job board and start nit-picking on what to do. There is constant, constant work. Every day. All we have to do is show up,” Abimbola said at the Amazon Delivery Service Partners unveiling. “There is always work to do. Great, steady income. It’s been fantastic.”
Bottom line: Once established, a delivery business could realize annual profits of $75,000 to $300,000 — if it’s successful, and if Amazon’s projections are accurate.
Those financial estimates are where some delivery and logistics veterans are focusing their attention.
“I think there’s a massive opportunity here, but only for the right person,” said Tony DiNitto, an Austin-based former FedEx route manager who brokers the purchase and sale of delivery routes and has analyzed the Amazon program on his Route Tycoon delivery business consulting site. DiNitto acknowledges that he is biased toward the value of FedEx Ground contract businesses over other delivery operations. However, the comparison to FedEx Ground provides important context for Amazon’s new initiative.
The “massive opportunity” comes from the low startup expenses, a fraction of the cost of acquiring an established FedEx Ground route.
DiNitto, who closely tracks data on FedEx contract business sales, estimates that the average FedEx contractor controls between 5-to-15 routes on a daily basis. Acquisition costs average between $700,000 and $950,000 to buy a business consisting of multiple FedEx Ground routes.
Amazon’s promise of as little as $10,000 in startup costs makes the Delivery Service Partner program a much lighter lift for someone just getting started.
However, the ultimate earnings potential doesn’t look nearly as strong. DiNitto points to Amazon’s best-case scenario of $300,000 in profits on 40 routes, full capacity under the initial structure of the Amazon Delivery Service Partner program. That’s $7,500 in annual profits per route. In contrast, he said, many contractors operating independent FedEx Ground delivery businesses can make $25,000 to $30,000 in annual profits per route, more than three times as much.
In other words, by those numbers, Amazon is following its tradition of asking its partners to be comfortable with lower profit margins to take part in its meteoric growth.
We relayed this profit comparison to Amazon, but the company declined to speculate on the profit potential of an Amazon delivery business as compared to the FedEx program. To be sure, the definition of “route” may vary depending on the situation, and it’s tricky to make an apples-to-apples comparison between an established program and one just getting off the ground.
But with the creation of this program, Amazon can establish an entirely new set of economic realities with delivery partners of its own making.
“Amazon isn’t getting in this world because they were happy paying UPS / FedEx levels of prices for their 5 billion shipments they made in 2017,” DiNitto said, referencing the company’s Prime shipment volume for the year. “They’re doing it to squeeze out every drop of profitability that was found in the logistics industry in their never-ending customer obsession mission.”
Those economics are important because Amazon is spending record amounts on shipping: Its gross shipping costs totaled nearly $22 billion in 2017, up more than 35 percent from the prior year, according to its financial reports. An expense of $22 billion is a huge consideration given the company’s own thin margins — $3 billion in annual profits on $178 billion in net sales last year.
For now, Amazon says it isn’t looking to replace UPS, FedEx, the U.S. Postal Service or other delivery services. Instead, the company sees a need to expand its “last-mile” delivery capabilities.
“As we started our multi-year planning a few years ago, we realized that given the growth of e-commerce and the growth of our business in general, we really needed to look at how we were going to meet our capacity over the long term,” said Dave Clark, Amazon’s senior vice president of operations, announcing the new delivery initiative at a media event in Seattle.
Sparking small businesses
Clark cited the potential for the Amazon Delivery program to create hundreds of new small businesses, following in the footsteps of Amazon’s marketplace for third-party sellers, which last year accounted for more than 50 percent of items sold across Amazon.com. These initiatives supporting new entrepreneurs and small businesses are important for Amazon’s growth, but they also give the company a way to counter negative sentiment about the impact of e-commerce on Main Street retailers across the country.
But the economics of Amazon’s last-mile delivery also promise to pose a challenge to these new businesses.
UPS and FedEx are already cutting Amazon deals on shipping, leaving little room for further savings for the company, if Amazon wants its delivery partners to be profitable, wrote analysts Jonathan Root and Robert Jankowitz of Moody’s Investor Service, in a July 2 research note assessing the impact of the new Amazon program.
“Assuming discounts of 20% and 15%, respectively, we estimate that Amazon pays a per-package rate of about $6.50 to UPS and about $7.35 to FedEx for Ground services,” they wrote. “We believe these rates would leave little profit margin for other vendors if Amazon seeks to improve its net shipping cost by lowering the per package fees it will pay to its local delivery contractors.”
On the other hand, geography could work in the favor of Amazon Delivery Service Partners. The initial map of available Delivery Service Partner routes, above, shows that these businesses will operate in many of the most populous cities and regions in the country, where the economics of delivery are often stronger thanks to population density and the volume of business.
In other words, Amazon is leaving the less lucrative business of rural package delivery to FedEx, UPS and the U.S. Postal Service.
That’s a touchy subject for the company given everything happening in the political realm. The announcement of the new program came a few months after Amazon’s economic impact on the USPS was publicly questioned by President Donald Trump in a series of widely-discussed tweets.
However, the Moody’s analysts say they don’t view the new Amazon Delivery Service Partner program as an immediate threat to established delivery giants.
“We anticipate that the new Amazon delivery vendors will capture mostly incremental order volumes, at least through 2020, suggesting that it will be quite some time before Amazon’s expanded contractor fleet potentially reaches the scale it seeks,” they write. “We also believe that the level of profitability that the contractors will achieve remains a question mark.”
This is part of a broader push by Amazon into logistics and delivery. The Seattle-based tech giant is increasingly handling the shipping and delivery of items purchased on its site, leveraging everything from its fleet of Prime-branded planes to its a growing retail footprint.
Amazon has also partnered with established delivery businesses in the past who have larger fleets of non-Amazon-branded delivery vehicles. In addition, the company contracts with individual drivers to deliver packages through its Amazon Flex program, often likened to Uber for package delivery. But the new initiative takes a different approach.
“Rather than Amazon saying ‘we need 100 drivers today,’ Amazon will say to 3-4 operators, ‘We need each of you to get us 25 drivers today,’ and the responsibility of staffing and managing drivers is held by four contractors, not all by Amazon,” said James Thomson, a partner at Buy Box Experts, a consulting firm for third-party Amazon sellers. Thomson previously oversaw Amazon’s recruitment of third-party sellers as the Amazon Services business head.
But even with all the help they’ll get, Amazon emphasizes that these will be independent package delivery companies.
This independence is key from a legal perspective. A series of costly court cases have dogged FedEx Ground’s program, challenging the company’s contention that FedEx Ground operators were independent contractors, asserting that they should have been classified as employees. FedEx is in the process of transitioning from its previous Contracted Service Provider approach to a new Independent Service Provider model that establishes new requirements for participating in the program, while giving contract businesses additional flexibility.
It’s becoming a familiar issue for companies and workers in the emerging gig economy.
And that’s where the setup of Amazon’s new program is especially interesting. Delivery Service Partner companies will hire drivers as their own employees, including health benefits, effectively shifting the burden of direct employment away from Amazon and to the independent delivery companies, adding a new twist to their small business economics.
On online forums popular among UPS and FedEx drivers, a big question is whether existing delivery companies could improve their economics and operational efficiencies by delivering packages from the same trucks for both FedEx Ground and Amazon’s Delivery Service Partner program. Asked about this possibility, an Amazon spokesperson said the company’s branded delivery vehicles can only be used to deliver Amazon packages.
The company doesn’t explicitly preclude the possibility of operating an Amazon Delivery Service Partner business using non-Amazon vehicles, which could allow companies to deliver both types of packages. Amazon emphasizes the independent nature of these companies, saying that Delivery Service Partner owners “are empowered to build their businesses as they see fit.”
However, skipping the company’s negotiated deals on leased vehicles could put the owners at a financial disadvantage.
Amazon says getting startup costs down to $10,000 will depend heavily on taking advantage of deals negotiated by Amazon for vehicle leases, insurance, mobile devices, data plans and uniforms. Delivery companies aren’t required to take advantage of those deals, but “may not be able to achieve the startup cost figure without doing so,” Amazon cautions in its financial notes.
Additional financial requirements
In addition, the $10,000 in minimum startup costs don’t represent the entire picture. After clicking through to apply, Delivery Service Partner applicants are told they will need a strong credit history and at least $30,000 in liquid assets to take part in the program. An Amazon spokesperson says the company wants to ensure partners can cover startup costs and living expenses while building successful businesses.
Previous business ownership is “preferred, but not required,” the company says.
And finally, Amazon makes it clear that its revenue and profit projections are unproven estimates. The company says the numbers are informed by its experience working with similar delivery companies, plus additional research, but says that actual results will vary.
“We do not guarantee results of any kind, including that what a delivery company earns will exceed the owner’s investment in his or her business,” reads the fine print in Amazon’s brochure. “Each delivery company’s results will differ, and results will depend on a number of factors, including the owner’s efforts and management of expenses as well as the size of the company.”
Of course, risk factors and cautionary notes are part of any legitimate business offer. Big picture, Amazon says it believes the program represents a unique entrepreneurial opportunity.
“In this environment our entrepreneurs don’t have to fight for customers. They don’t have to fight for sales,” Amazon’s Clark said. “They get the opportunity, with our demand, to have a good consistent volume and to grow with Amazon as we grow. And as a result, they get to focus their time on developing and hiring great talent.”
Amazon declined to say how many Amazon Delivery Service Partner applications it has received, but initial interest has been strong, based on inbound inquiries to GeekWire from prospective applicants after our initial coverage was published.
So is this a smart business to get into or not? For now, it depends on your situation. And long-term, the ultimate answer may not be clear until more Amazon Delivery Service Partner businesses are up and running.
Based on Amazon’s projections, “there’s a real possibility that people could find themselves working twice as hard for half the pay vs owning a FedEx route,” said DiNitto, the FedEx delivery business broker. “We won’t know for sure until we see the program flesh out a bit more to see how much time and stress it takes to successfully operate an Amazon logistics business.”
GeekWire reporters Taylor Soper and Kurt Schlosser contributed to this story.