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Amazon’s big holiday shopping advantage: An in-house shipping network swollen by pandemic-fueled growth

After struggling with shipping at the start of the pandemic, Amazon quietly built a logistics operation that rivals UPS.

The wave of online shopping during the coronavirus pandemic forced Amazon to grow and adapt its logistics operations. (Video: The Washington Post, Photo: Jovelle Tamayo/The Washington Post)
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SEATTLE — When the economy sputtered with the coronavirus pandemic‘s spread this spring, unemployment surged as employers laid off workers by the thousands.

Amazon took a different tack, hiring 400,000 workers to stow, sort, pick, pack and deliver goods from its warehouses across the country, and pushing its total employee count over 1.1 million people.

It didn’t stop there. The e-commerce giant leased 12 Boeing 767-300 cargo aircraft, bringing its air fleet above 80 jets. It added 220 package facilities since the start of the year, ranging from urban delivery stations to giant warehouses, according to an industry consultant.

Amazon announced on March 17 that it would hire 100,000 workers to manage surge in orders, as many people turn online for goods during the coronavirus outbreak. (Video: Reuters)

Amazon used the crisis, when prices on everything from commercial real estate to cargo jets plummeted, to amass an empire already beginning to rival the U.S. operations of United Parcel Service and FedEx, long the most dominant logistics companies, which helped the e-commerce giant get its start. But its ambition reaches well beyond delivering parcels to its own customers, according to former Amazon executives. The company is building a logistics system to one day deliver packages for customers to compete directly against UPS and FedEx, something it’s already doing in the United Kingdom.

“They are building the world’s biggest package-delivery company,” said David Glick, a former Amazon logistics executive who serves as chief technology officer at Flexe, which helps retailers warehouse and deliver goods. “If you believe the carrier network is tapped out today, and it is, there is no other option.”

Amazon said on a recent earnings call that it boosted its fulfillment capacity — the collection of warehouses, delivery stations and drivers it uses to get packages to customers — by 50 percent this year, helping fuel $30 billion in total capital spending.

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While Amazon’s move into shipping its own packages and freight has been building for years, the implications will provide it a stark advantage this holiday season, when Amazon’s rivals will probably wrestle with getting packages delivered by a network already clogged with pandemic shopping.

That will probably hand Amazon a massive advantage in a holiday season in which U.S. e-commerce purchases will climb 35.8 percent to $190.5 billion, according to a forecast by the research firm eMarketer.

(Amazon chief executive Jeff Bezos privately owns The Washington Post.)

When the pandemic started, there were few e-commerce companies that seemed less prepared than Amazon. It went beyond just logistics. Warehouse staff around the globe sounded alarms that company policies put their health in jeopardy. Rogue third-party sellers gouged buyers on such hard-to-find items as hand sanitizer and listed products making dubious claims about virus protection.

Meanwhile, shipping delays led customers to gripe about third-party sellers at the highest levels ever. The clogged network, and the new hurdles caused by the pandemic, led Amazon to throw gobs of money at the challenge. It sped up spending it had planned for next year on acquiring new warehouse space, to supplement a logistics network straining under the weight of pandemic-fueled shopping.

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“We are erring on the side of having too much capacity,” Amazon’s finance chief, Brian Olsavsky, said late last month during a conference call with analysts. Amazon spokeswoman Rena Lunak said the company is ready for the holidays.

Even so, the added surge in holiday shopping could pose a challenge. Olsavsky noted that Amazon’s capacity will be “tight” this holiday season, and that the company continues to rely on shipping partners such as UPS and the U.S. Postal Service. When the pandemic shopping fades, Amazon will have a massive network, built when few were looking.

Amazon’s push into logistics echoes past moves into markets where longtime partners operate. The company has a long record of leveraging its dominance in one market, and the data it gleans from that hegemony, to dive into another. A House subcommittee that last month accused Amazon, along with Apple, Google and Facebook, of engaging in anticompetitive conduct, found that the e-commerce giant “routinely appropriates seller data to benefit its own private-label and retail businesses,” a charge Amazon denies.

In the case of its newer transportation business, Amazon has long studied the shipping routes of its partners, digging into the economics of population density of urban markets, said a former Amazon executive who spoke on the condition of anonymity because the person was not authorized to speak publicly on the matter. The more dense a region’s population, the more lucrative the route is for partners like UPS. Drivers can deliver more packages in a shorter period, and keep other costs, such as fuel consumption, down. It’s why Amazon has left many of its costlier rural deliveries to other partners, primarily the Postal Service.

UPS often shared proprietary routing data with Amazon executives, and gave them tours of its operations to sell them on its business, according to a former executive who wasn’t authorized to speak on the matter. As Amazon’s shipping aspirations became clearer, UPS shared less. But then Amazon hired dozens of logistics executives to help it map out its own delivery strategy.

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The key is managing the costs in the most expensive part of a parcel’s trip to customers, the “last mile.” Learning from its shipping partners, as well as its own shipping operations, Amazon squeezes costs by focusing on high-density markets and dotting urban markets with delivery stations that allow it to reduce its reliance on other shipping companies. This month alone, Amazon has announced plans to open delivery stations near Atlanta, Colorado Springs and Syracuse, N.Y.

It’s not the first time Amazon has used its immense resources to disrupt an industry. As Netflix took off and DVD sales withered, the company debuted its Prime Video service. Amazon similarly pushed into corporate computing, disrupting the business models of legendary giants IBM and Oracle with the now-dominant Amazon Web Services.

For the time being, Amazon and UPS and the Postal Service are dependent on each other. (In 2019, FedEx announced it decided not to renew key domestic contracts with Amazon.) But analysts and former employees say the company’s hiring spree and the rapid expansion of its fulfillment capacity hint at its long game: to enter a new market large enough to make a difference to Amazon’s finances. Already, Amazon’s logistics business will handle 5.1 billion packages in the United States this year, just shy of the 5.3 billion packages UPS will ship domestically, estimates Montreal-based logistics consulting firm MWPVL President Marc Wulfraat. Amazon declined to comment on MWPVL’s data.

“I say they are building their own UPS because it’s not far from the truth,” Wulfraat said.

UPS spokesperson Kara Ross called the carrier’s relationship with Amazon “mutually beneficial,” noting that other large customers handle pieces of their transportation business.

“We are confident in our ability to compete and will continue to focus on opportunities that generate good financial returns,” Ross said in an emailed statement.

U.S. Postal Service spokesman David Partenheimer declined to specifically address the Amazon threat, but said generally that the agency competes by “providing reliable service at a competitive price.”

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The holiday season in 2013 triggered an awakening for Amazon: UPS struggled to meet holiday shipping deadlines after a last-minute shopping surge caught the shipping giant off guard, tarnishing Amazon’s reputation when gifts didn’t arrive before Christmas. Within two years, Amazon launched Flex, an Uber-like service for package deliveries with contract drivers who often use their own cars to drop off orders at customers’ homes. Two years later, Amazon invited entrepreneurs to form small businesses to lease 20 to 40 gray vans with Amazon’s blue smile logo to expand further into delivery in metro markets.

The company now says it has 1,700 delivery-service partners in the United States, Canada, the United Kingdom, Spain and Germany. In total, more than 400,000 drivers deliver goods for Amazon, all of them either self-employed or working for other companies.

The company has moved quickly into airfreight, too. By 2016, Amazon had leased 40 jets to move its freight around the country. That same year, Amazon began tinkering with the prospect of taking on UPS and FedEx and began a pilot project in Los Angeles to soak up capacity in its shipping operations in off-peak times, a program it has since paused.

The company has created its own same-day services, offering Prime Now deliveries in many urban areas and grocery delivery from its Whole Foods Market.

In June, Amazon placed an order with Rivian, a Detroit start-up that’s building electric vehicles, to build 100,000 delivery vans starting next year. That will more than double the roughly 75,000 vehicles in Amazon’s delivery fleet, according to MWPVL estimates. (In January, UPS agreed to purchase 10,000 electric vehicles from London-based start-up Arrival.) And Amazon also agreed to buy the self-driving technology firm Zoox, expanding its portfolio of technologies to automate the delivery of packages.

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The company is making those moves to dial back its dependence on traditional carriers. It’s a stark difference from Amazon’s earliest days, when it relied on UPS to help it roll out its Prime membership business that promised to deliver packages in two days to customers who paid in advance for the service. UPS handled nearly two-thirds of all Amazon U.S. deliveries in 2015, according to estimates from investment bank Cowen.

Amazon has also reduced its reliance on the U.S. Postal Service. To offer package deliveries on Sundays, Amazon turned to the Postal Service in 2013, which agreed for the first time to deliver packages at regular rates on Sundays. Amazon still counts on that service from the post office, as well as deliveries to costly rural routes, though the agency has seen its share of deliveries slide, too.

Amazon executives recently pushed their counterparts at the Postal Service for clarity on rate hikes that President Trump demanded, according to internal Postal Service documents obtained by The Post from American Oversight, a watchdog group that requested the records under federal open-records law. Postal Service executives fretted over Amazon taking business away if the rate hikes were passed.

The logistics buildup, and Amazon’s changing relationships with carriers, has led to Amazon handling the shipping of two-thirds of its package deliveries in the United States by the end of this year, according to MWPVL.

“That 67 percent is going to go north to 85 percent” in 12 to 18 months, Wulfraat said.

Compare that to 2015, when UPS, the Postal Services and FedEx delivered more than 97 percent of Amazon’s packages in the United States, according to estimates from Cowen.

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The number of warehouses, sorting centers and distribution facilities Amazon owns or leases in the United States grew 46 percent by October this year, to 697 facilities, says MWPVL, which tracks Amazon’s footprint. At the end of last year, UPS owned or leased more than 1,000 U.S. logistics facilities with roughly 80 million square feet of space, the company disclosed in its annual regulatory filing.

Olsavsky said during the earnings call that Amazon’s overall square footage will climb about 50 percent by the end of this year, and half of that will be in the company’s transportation facilities.

One of Amazon’s new facilities is a candy factory in the beachside Boston suburb of Revere, Mass., that sat idle for nearly two years, after the 170-year-old New England Confectionery Co. shut down its Necco Wafers plant. In July, Amazon transformed it into an 800,000-square-foot distribution center.

That facility, and massive distribution centers near Denver and Chicago that also opened in July, reduce the time it takes Amazon to get packages to customers in those regions.

It’s not just space that Amazon has amassed this year. The 400,000 jobs it has added since the pandemic started, all of them permanent, some of them part-time, are part of the surge in front-line staff that has also led retail rivals such as Walmart, Target and CVS Health to add tens of thousands of workers to their payrolls this year.

At Amazon, those workers unload products from manufacturers and third-party sellers, stock them in the shelves of their massive warehouses and pick the goods from those shelves to pack orders from customers. Its giant warehouses are often located near airports, and sometimes close to other logistics hubs run by such carriers as UPS.

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The hiring binge at Amazon, where the starting warehouse wage is $15 an hour, has fueled a jump in pay across the industry, said Brian Devine, a senior vice president at ProLogistix, a warehouse staffing firm that competes with the e-commerce giant to hire workers. ProLogistix’s average wage is $15.68 an hour, up from $14.02 a year ago, Devine said.

Amazon’s spending on workers, vehicles and warehouse buildings will give it an advantage this holiday season over competitors that will be relying on shipping companies that are already stretched thin.

Shipping capacity among the major carriers for this holiday season is largely tapped out by now, said Carson Krieg, co-founder of Convey, which provides digital technology to retailers such as Walmart and Home Depot to help them select the best shipping options. FedEx and UPS are both adding surcharges for business shippers during the holiday surge.

Many of Convey’s customers are turning to regional carriers, including LaserShip or OnTrac, and finding that even those options are limited.

The capacity constraints from carriers are likely to lead online retailers to move deadlines for guaranteed Christmas delivery earlier in December than they have in previous years to prevent customers from being disappointed. Amazon’s network may allow it to ship later in the month, as well as deliver last-minute with its two-hour Prime Now delivery network in major markets.

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Amazon’s burgeoning logistics operations may lead to the company competing directly with UPS and FedEx, shipping packages for customers beyond its third-party sellers. It has debuted Amazon Shipping in the United Kingdom to deliver items for e-commerce customers there.

The primary impediment to doing that right now: Amazon’s retail growth. The company’s retail operations, with both its products as well as third-party merchant sales, will continue to soak up the shipping capacity it creates with its own logistics operations, especially during the pandemic.

“There has always been an eye toward” building a carrier that could handle shipping for business customers, said the former Amazon executive who requested anonymity. “But with covid, they have enough growth.”