For months if not years, e-commerce stakeholders have been waiting for Amazon to enter the small parcel logistics space in earnest.
In February 2018, The Wall Street Journal reported the e-commerce giant was preparing to launch a small parcel logistics service called “Shipping with Amazon” to shippers in Los Angeles. The report said the service would likely undercut UPS and FedEx rates, citing “people familiar with the matter.”
In April 2019, TJI Research reported the service, which it called Amazon Shipping, is operating in New York, Chicago and Los Angeles, but only shipping Prime orders.
According to three executives from iDrive Logistics, a consultancy specializing in third party logistics relationships and contracts, the terms of Amazon’s logistics service, which is indeed available to shippers in Los Angeles, New York and Chicago, deviates from common practice in the industry in ways that make it not an attractive option for many shippers.
In January, an iDrive Logistics client — an apparel brand shipping out of a warehouse in Chicago — reached out to an Amazon Seller-Fulfilled Prime (SFP) program representative via email to ask if the retailer could ship its goods. The shipper was then employing USPS but due to some hiccups with service, Amazon removed it from the SFP program because it had not met the 2-day timeframe with enough frequency.
According to emails between the shipper and several project managers at Amazon, reviewed exclusively by Supply Chain Dive, an Amazon manager replied in January 2019: “I’d love to connect with you at some point in the next couple week [sic] and get your feedback on a new service we’re launching.”
After a few months, the Amazon manager sent the shipper a rate card and set up a call to discuss terms. When the shipper and Amazon eventually connected over the phone in June, several executives at iDrive Logistics were on the call with the shipper and the same project manager. The consultants shared the terms with Supply Chain Dive along with the rate card.
A key detail in the offering is parcel pickup. In today’s e-commerce environment, 3PL pickup times are the difference between next-day and two-day delivery. Since Amazon upgraded the default Prime member shipping time from two-day to one-day for millions of items in April, the pressure to get packages out the door the day they are ordered is even greater. FedEx and UPS are offering extended pickup hours and soon seven-day service with this pressure in mind.
Amazon will deliver packages that do not transact through its e-commerce site, but it will only pick up packages that are the result of Amazon transactions, according to the iDrive executives on the call. Like many carriers, Amazon will still rely on USPS for many of its last-mile deliveries, iDrive executives said.
There is precedent for a small parcel service that does not include pickup, according to some experts consulted for this report. Budget carriers have traded low rates for lack of pickup in the past. But especially in the urban locales Amazon is initially offering this service, dropoff by the shipper at an Amazon facility would significantly cut into the hours shippers could accept orders and still ship same-day.
“That is a nonstarter for basically all shippers,” said Matthew White, a strategist at iDrive.
When it comes to rates, the picture is a bit murkier.
With any parcel carrier, rates vary from shipper to shipper based on many factors including parcel volume, shipment origination, pickup frequency, common parcel destinations and more. In most cases shippers negotiating with a new carrier would send an invoice from an existing carrier (with pricing redacted) to show the prospective new carrier a snapshot of its parcel volume and the carrier would then develop a proposal based on this data.
In this case, the Amazon representatives used the shipper’s Amazon order history, representing roughly 20% of its business, to develop the rate card.
The actual rate per package in this proposal is less instructive without the shipper details, which iDrive did not disclose beyond what is reported here to protect its client’s anonymity.
But two values in the rate card are fairly simple to compare with rates from USPS, UPS and FedEx.
The first value is dimensional weight (DIM). DIM is calculated by multiplying a parcel's width by height by length and then dividing the product by a divisor set by the carrier. A lower divisor means volume is more of a factor in the price to ship a parcel. USPS' divisor dropped from 194 to 166 in June. FedEx uses a divisor of 139, which is equal to UPS’ divisor for retail customers. The more premium services place higher value on the volume in their trucks in addition to the weight they carry than USPS.
Amazon’s proposal also includes a DIM divisor of 139 — in line with UPS and FedEx, but significantly lower than USPS.
The second value is Delivery Area Surcharge (DAS). DAS refers to the fees charged on top of normal shipping rates when a parcel’s destination is more rural.
The shipper for whom Amazon generated the proposal, according to iDrive, is an ideal one for a parcel carrier, meaning much of its parcel volume goes to urban addresses where delivery density is already high. With Amazon’s proposed rates, roughly 20% of the shipper’s parcels would be subject to some form of DAS fees ranging from $0.66 - $1.03 per package.
USPS charges no DAS fees. UPS and FedEx charge DAS fees slightly higher than Amazon’s and on roughly the same share of the shipper’s business.
iDrive analyzed the rates and terms presented by Amazon for its client and found the service to cost roughly 8% more than USPS priority mail and 4% less than UPS or FedEx.
Industry experts familiar with 3PL contracts told Supply Chain Dive the terms imparted to iDrive and its clients on the call sound like those of a fledgling operation. With a limited number of cities available, a limited network demonstrated by the preponderance of DAS fees and selective pickup, Amazon’s service offering as described by iDrive would only suit a minority of shippers with specific needs.
Furthermore, iDrive Logistics President Glenn Gooding told Supply Chain Dive a standard carrier contract negotiation would involve dozens if not hundreds of variables available to tweak in order to please both parties. Amazon’s proposal contained fewer than 10.
Negotiation is key in the shipper-carrier relationship and shippers attempt to use their shipping volume to garner discounts and massage fees. The largest business-to-consumer shippers in the U.S. however are large retailers who will likely have no interest in working with Amazon in this capacity. Small and medium-sized shippers with less volume to wield frequently rely on USPS priority mail for small parcel e-commerce, and it’s here that iDrive underlined, Amazon’s rates as communicated to their client would put it somewhere between USPS and the major private providers — with a lesser service than either.
“We think that it’s very easy for a supply chain executive to … spend a lot of time chasing down something that doesn’t exist,” said Gooding, calling the service offering a “nothing burger.”
He continued, “I would think strongly about whether it’s worth chasing down.”
When asked to confirm the service and some of the details in this report, an Amazon spokesperson told Supply Chain Dive: “We’re always working to develop new, innovative ways to support small and medium businesses including shipping programs that help these businesses get packages to their customers quickly and reliably.”