- Amazon is rapidly in-housing its transportation network — particularly in the last mile, where the retailer is buying hundreds of thousands of home delivery vans.
- But not all of Amazon’s customers will spot the vans on their blocks. That’s because Amazon is leaving the US Postal Service to deliver packages for rural customers, according to a lengthy Morgan Stanley report.
- That’s a great way for Amazon to slash costs at its quickly scaling transportation network. But it will only likely bleed out the USPS even more.
- Visit Business Insider’s homepage for more stories.
Amazon’s delivery vans are becoming an increasingly common sight on America’s streets.
As long as you live in a big city or a suburb.
According to a recent Morgan Stanley report, Amazon is “disproportionately servicing” the United States’ densest areas alone.
That’s a win for Amazon’s bottom line as the company seeks to manage its massive transportation investment, which will total $3 billion this year.
Servicing the densest areas is a way to keep costs low, but it could bleed out the USPS, which has the legal imperative to serve all US addresses — even the low-margin, low-density rural neighborhoods.
Amazon is a quietly expanding transportation company
Amazon began building out its delivery network in 2013. The past few years have seen a remarkable evolution in Amazon’s logistics network spanning rail, trucking, and ocean freighters.
The company’s last-mile, or home delivery, network is a major threat to UPS, FedEx, the US Postal Service, and other traditional parcel carriers. That’s not just because Amazon is lessening its dependence on those companies, but also because the retailer is slated to start moving non-Amazon packages in its network.
Through a combination of Amazon’s own packages and other e-commerce packages, Amazon stands to become a larger last-mile deliverer than FedEx and UPS by 2020 and 2022 respectively, according to the Morgan Stanley report.
But Amazon Logistics isn’t servicing all 41,702 of America’s zip codes equally. Instead, Morgan Stanley’s report says the burgeoning logistics company is focusing on urban and suburban areas.
Amazon and the USPS did not respond to a Business Insider request for comment.
Industry-wide, 60% of packages go to suburban homes, 20% are urban, and another 20% are rural. But Amazon Logistics’ share of rural packages totals just 11%. Urban (28%) and suburban (61%) dominate the package share, according to Morgan Stanley’s research.
Building up density is key for any transportation company. Servicing big cities makes it easier for Amazon drivers to, say, park their van and make several dozen or even hundred deliveries in one block. As areas have fewer and fewer customers in one square mile, Amazon would have to spend more and more on sortation costs, fuel, and labor to make deliveries.
Indeed, rural America is so costly to service that McKinsey recently reported that even drone delivery may not offset the costs.
Morgan Stanley pointed to internal AlphaWise data that shows about 78% of Americans live in 28% of zip codes. The analysts wrote that Amazon is “cherry picking” the densest zip codes, and only hiring delivery service partners in those areas.
“To build a B2C network from scratch, we believe it makes more sense to build a network that only services dense urban areas (the aforementioned 28% of the zip codes) and rely on the USPS or third-party delivery partner to go to rural or other areas with lower delivery density,” Morgan Stanley’s analysts wrote.
That only puts the USPS in a worse situation
Amazon’s bottom line win is a loss for the USPS, the quasi-governmental agency that’s been struggling with billions of dollars in losses in recent years.
The USPS lost $3.9 billion in fiscal year 2018, according to a December 4 report from the Task Force on the United States Postal System. Its cumulative losses are nearing $70 billion.
One major contributor to USPS’ woes is a 2006 law passed under President George W. Bush surrounding prefunding retirement benefits. That law required the USPS to determine how much it would spend on pension over the next 75 years and quickly build up a fund to cover all of it. According to USPS’ Inspector General, the new requirement to prefund retiree benefits accounted for $54.8 billion of the agency’s $62.4 billion loss incurred between 2007 and 2016.
Previously, the boon of e-commerce packages had served to buoy the USPS. But Amazon’s increasing in-housing, along with moves from FedEx to outsource fewer parcels, has fostered a decline in USPS volume. In August, the agency reported its first volume decline since 2010.
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The fact that Amazon is outsourcing fewer parcel deliveries to the USPS already alarmed experts like Nicholas Farhi, a partner at OC&C Strategy Consultants.
“It’s extremely hard for USPS to reverse that decline,” Farhi told Business Insider in August. “If they’re not delivering packages and obviously not really delivering letters, it seems like it’s definitely going to be eroding in the next decade.”
And the fact that Amazon’s outsourced packages will mostly be in rural areas will only slam USPS’ finances further. The agency has a legal imperative to serve all zip codes in the US, but rural America’s lack of density means low margins for whomever is doing the delivery.
Do you work for Amazon? What do you think about its quest to take over transportation? Email firstname.lastname@example.org.
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