Amazon driver Shawndu Stackhouse will deliver packages in northeast Washington, DC on Tuesday, April 6, 2021.
Tom Williams | CQ Appeal, Inc. | Getty Images
Amazon has long had a goal of being the fastest in the online delivery race. The earnings report for the first quarter on Thursday showed how much he is willing to spend on it.
Speaking to investors about earnings, Brian Olsavsky, CFO of Amazon, said the company’s investments, which include expanding logistics and increasing data center costs, have increased a whopping 80% in the past 12 months.
While the coronavirus pandemic caused many companies to slow their spending, Amazon poured profits back into physical expansion and built its transportation and logistics presence across the country. Olsavsy said the company added more bearings and expanded its fleet of aircraft and line haul trucks. Amazon is also expanding its contracted delivery network, often identified by blue Amazon-branded vans, to monitor more than 100,000 drivers.
Overall, the company has increased the capacity of its in-house logistics operations, known as AMZL, by 50% over the previous year, said Olsavsky. Amazon expects spending in these areas to continue to be high later in 2021 and possibly through 2022.
Expanding logistics is vital for Amazon to speed up deliveries and make the package delivery business more cost effective in the future. Signaling that Amazon is making headway in this regard, Olsavsky noted that “our costs are currently very competitive with our external options”. It’s unclear whether Amazon has closed this rural void, which significantly increases last mile delivery costs compared to more densely populated areas.
Amazon continues to rely on third-party providers like UPS, FedEx, and the US Postal Service to handle some of the deliveries. But the company has steadily expanded its fleet of planes, trucks, and vans to get one step closer to its shipping partners. An estimate made last August found that Amazon now ships roughly two-thirds of its own packages.
By operating its own fulfillment and logistics network, Amazon can further optimize the process of preparing and delivering packages to customers’ doorsteps. Amazon has already switched from a two-day delivery model to one-day and even one-day deliveries.
“What we’re seeing, which is very helpful, is the ability to control the entire flow of product from the warehouse to the end customer,” Olsavsky told investors on the conference call. “It has developed into a batch process in which we transfer a large number of orders to third parties once a day, for example to a continuous flow process in which we leave orders from our warehouses five to six times a day through the middle mile and then to final delivery, either by our AMZL drivers or [contracted delivery] Partner. “
Ultimately, these investments in fulfillment and logistics also reinforce the “flywheel effect” of Amazon.
Amazon’s increasing end-to-end control over a package’s journey from warehouse to door has resulted in consumers “receiving more accurate estimates of delivery after ordering,” Olsavsky said. That makes things like Amazon’s Prime subscription service, which recently expanded to 200 million paying members, well worth the cost to consumers.
As customers continue to flock to Amazon, more businesses need to be present on the site and, if they haven’t already, buy and pay for ads to use Amazon’s warehouse space. Amazon makes money selling third-party services by cutting back on every sale and collecting fees from sellers who use its warehouses. Revenue in this segment increased 64% for the quarter.