There are typically two ways to get anything done: do it yourself, or to pay someone to do it for you.
When you’re building a new technology, you have to do everything yourself. If you wanted to make a website in the 90s, you had to have a physical server in your house (expensive), know how to set it up, and do the work to maintain it. Nowadays, you barely need to lift a finger — new services can do it all for you.
In 2006, some 15 years after the web became public, Amazon Web Services (AWS) was launched — a pay-as-you-go one-stop-shop that removed the barrier to entry for serious computing.
Coincidentally, another transformative service launched that same year. It changed e-commerce in the same way, enabling an entirely new class of people start selling online. Not by coincidence, this service was called Fulfilled by Amazon (FBA).
If you shop Amazon, there’s a good chance you’ve been enjoying the fruits of FBA’s labor — last year, over half of Amazon items were sold by third parties, a majority of whom use FBA. Let’s take a peek behind this $80 billion curtain.
The year is 2018. Your brick-and-mortar store is going well, and it’s time to start selling your artisanal socks online.
You now face three logistical headaches:
It comes down to the age-old question: Do it yourself, or pay someone to do it for you?
Unless you have a lot of money sitting around or are willing to go into debt, doing it yourself can be prohibitively expensive. Large up-front investments in warehouses and bespoke supply chains, even if you can afford them, are a big risk since you don’t know whether this whole “e-commerce” thing will even work out.
Thankfully, there’s an easier way: outsourcing your logistics to a third-party provider like FBA. Just ship your products to their warehouse and watch the money roll in — they’ll handle everything else.
Your inventory is stored with Amazon and as your orders come in, their warehouse team deals with them in the same way as their own products — packing them into the appropriate box and handing them over to delivery drivers.
Traditionally, this kind of convenience comes at a price — a higher marginal cost per unit. Amazon might charge $5 to fulfill an order in the same way as would only cost you $4 with your own setup.
At massive scale, however, this rule breaks down. With Amazon-size scale, you can actually get a service that’s qualitatively different than what you could do yourself, for lower cost. Amazon has invested in a delivery network that can keep up with Prime, warehouse robots to pack orders, and, perhaps more contentiously, an army of workers to whom they can get away with paying very little.
This model — providing a service that empowers a massive market and taking a skim off the top — is timeless.
With all this infrastructure in place for their own inventory, it doesn’t cost them much to rent it out to others via FBA. Sellers are happy because online sales are 10x easier, and Amazon is happy because other people are doing the hard work of sourcing products — while paying the Amazon tax to sell them.
This model — providing a service that empowers a massive market and taking a skim off the top — is timeless. So far, it’s worked very successfully for Amazon in web services (AWS) and e-commerce fulfillment (FBA). What’s next?
Recognizing consumers’ irrational hatred for delivery fees was one of the key insights that brought Amazon to where it is today, but free delivery comes at a cost. Even after taking Prime membership fees into account, the company loses over $7 billion on shipping every year to keep customers happy.
Naturally, this is a number Amazon wants to bring down. Until recently, the company outsourced all shipping to third parties like UPS and Fedex, but they’re now at a scale where it makes sense to start “insourcing.” Amazon has begun building out its own delivery infrastructure, including a fleet of Boeing 767’s — 27 and counting, at $25M a pop — and its own last-mile delivery provider.
The last mile of every delivery segment is disproportionally costly. Moving 1,000 packages across the country in a truck is simple, but delivering those packages from a local depot to 1,000 different addresses takes a lot of work. Delivery providers are constantly fighting to improve efficiency, and “the last mile” is their current battleground.
Amazon Flex — a network of crowdsourced delivery drivers that can be summoned as required — is Bezos’ latest weapon in this fight. This “Uber for delivery” service lets anyone with a car make some extra cash on a flexible schedule by delivering Amazon packages in their local area.
While Flex rates — around $20 an hour — are less than what a UPS or FedEx driver would make, the real benefit of the crowdsourced model is that Amazon can scale its capacity to match demand. At peak times they can get more drivers to keep up with deliveries, and in downtimes they don’t need to pay contracted courier drivers unnecessarily. It also allows “Earth’s most customer-centric company” to finally own the customer experience end-to-end, giving them a chance to change the overwhelminglypoorperception ofdeliverycompanies.
This new division could also be Amazon’s opportunity to turn its poor employment reputation around and start improving its practices.
Courier drivers, including Amazon Flex’s, are often part of the gig economy — technically self-employed — which subjects them to less-than-reasonable working conditions. Third-party couriers are known to be put on strict delivery timetables created by Amazon’s scheduling software, forcing them to break speed limits and skip toilet breaks to avoid being fined for late deliveries.
While Amazon’s recruitment spiel promises “being your own boss” and “enjoying a great work-life balance,” it’s not uncommon for courier drivers to work long hours and end up making less than minimum wage. Earlier this year, a DPD driver of 19 years collapsed at the wheel and died after being fined for attending a hospital appointment and subsequently missing three others. Although Amazon Flex itself hasn’t had any such horror stories, reviews have so far been very mixed.
How do FedEx, UPS, and other delivery services feel about all this?
With Flex, Amazon claims they just want to increase delivery capacity. According to them, existing delivery partners have nothing to worry about. “[It’s] not meant to replace them,” said CFO Brian Olsavsky.
When it comes to partnerships, however, it doesn’t end well for companies that put too many eggs in their Amazon basket. Toys “R” Us and Borders both had deals with Amazon, but in the process of relinquishing the e-commerce baton they unwittingly handed over the keys to their kingdoms. Both have since gone bankrupt. Amazon ate their market share.
It’s unclear what the future holds for traditional delivery companies. But judging by Amazon’s recent movements, there’s going to be a new delivery kid on the block. Today they’re delivering for themselves, tomorrow it’ll be for other companies. Before we know it, Amazon will be delivering everything for everyone.