Grand Junction - Local Delivery Reinvented

Amazon’s Flex Program Is a Private Uber

Amazon is quietly expanding a program where they work directly with independent drivers to do package delivery from local Amazon warehouses. The program, called Amazon Flex, is now active in a dozen cities, and pay $18 and $25 per hour to drivers, who work 4-hour shifts. They have some vehicle requirements, but are not overly restrictive in their recruitment. In fact, the requirements sound a lot like Uber driver requirements without the background checks. But why is Amazon building it’s own in-house version of Uber Everything?

Because of delivery economics and competitive differentiation.

Amazon Flex is extremely cost efficient as it removes the margin a local delivery carrier normally takes— carriers, which often use the independent contract driver model, have historically done a significant amount of Prime and same-day deliveries for Amazon. Carriers traditionally pay about 65%, of what they charge shippers for a delivery, to their drivers, and they keep the rest to end up with a profit after covering the cost of sales, recruiting drivers, routing and dispatching, warehousing and customer service. Flex dis-intermediates the carrier by using Amazon’s fulfillment centers, customer service and replicating everything else with technology developed in-house (final mile software and a driver app).

By removing the carrier, Amazon is able to lower the cost by as much as 35%, while gaining even more control by interacting directly with drivers. Amazon is also showing savvy and a willingness to invest in the program by paying hourly wages. It’s a huge challenge to balance the supply (drivers) with demand (orders) when establishing a delivery network. By paying hourly, Amazon takes on the cost of low volume periods, a major departure from the approach of Uber and others that use an independent contractor model—they force drivers to accept low incomes during low volume periods. With sufficient order volume, Amazon Flex can shift to paying on a per delivery basis or towards paying out a higher wage based on a deliveries per hour metric, allowing them to control costs and drive operational efficiency.

Competitive Differentiation
Amazon likely wants Amazon Flex to be a closed network (i.e., proprietary) for competitive reasons. By working with carriers (local, regional, UPS or even UberRush), Amazon leaves open the possibility that their competition would simply use the same set of carriers to match their service offering (e.g., 1-hour, AM/PM). And, with Amazon’s massive, rapidly growing volume, they would effectively be subsidizing their competitors’ rates. Amazon Flex eliminates these possibilities, and puts more distance between Amazon and their competition.

It’s possible that Amazon may go a step further with Amazon Flex, making it “open”—i.e., available for others to use much like they do with Amazon Web Services. Such a move would put Amazon in direct competition with UPS as a common carrier; however, it’s unlikely since Amazon is dependent, for the time being, on UPS and FedEx. And Amazon Flex would need years to mature before they could risk alienating UPS and FedEx.

Why Is Amazon Doing This Now?
Amazon is unique in that they have the volume to establish a private, dedicated delivery network. They can shift Prime volume from local carriers, or from UPS, to provide instant volume to Amazon Flex drivers. No other retailer has the volume, or efficient local fulfillment centers, to make this happen. Meanwhile, Uber has paved the way for Amazon Flex’s recruitment efforts and independent contractor liability issues. Uber is spending billions developing an independent driver pool, from which Amazon can recruit. Uber is also leading the independent contractor classification charge, and is fighting legal battles that will ultimately benefit Amazon Flex.

Wrap Up
Amazon’s private Uber network for package delivery is going to create even more challenges for retailers to overcome, and does not bode well in the long-term for UPS and FedEx. For retailers, a private network makes Amazon’s delivery economics and service levels nearly impossible to replicate. For UPS and FedEx, the proprietary network at minimum provides Amazon with negotiating leverage and potentially introduces their first competitor, one purpose-built for eCommerce and same-day delivery.

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