Amazon is encroaching on an industry that’s key to its success (AMZN, UPS)

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UPSPhoto by Scott Olson/Getty Images

You’d think Amazon’s surging sales would be a boost for UPS. But no.

Amazon packages used to be delivered to our place in San Francisco by UPS or the United States Postal Service. But for some time now, our Amazon packages have been delivered by some men and women in regular clothes. Most of them came in unmarked vehicles, sometimes cars, sometimes small vans. One of them wore a vest with an Amazon logo. He’d pulled up in a small white van marked with an Amazon logo.

I asked him if he worked for Amazon. He said he worked for a delivery company with about 20 vans.

Now jump to the brown vans that don’t bring our Amazon packages anymore. UPS announces rate increases every year. Here’s the last batch:

  • Effective December 30, 2013: average increase of 4.9% for UPS Ground, Air, and International.
  • Effective December 29, 2014: average increase of 4.9% for UPS Ground, Air, and International.
  • Effective December 28, 2015: average increase of 4.9% for UPS Ground; average increase of 5.2% for UPS Air and International services.
  • Effective December 26, 2016: average increase of 4.9% for, the UPS Ground, Air, and International.

UPS’s “average increases” can understate the actual increases. For example, the rate increases for UPS Ground are generally higher at the lighter weights and less at heavier weights. This might range from a 4.1% rate increase for 76-150 pounds Ground to a 6.8% rate increase for the Ground Minimum charge. So the many light parcels of the internet economy would get the higher annual rate increases.

UPS also just announced that it will add surcharges for online orders shipped to residences around Thanksgiving and the week before Christmas, as it “must flex its delivery network to meet increased demand,” it says.

Sure, Amazon has worked out deals with all its carriers. But the principle is the same even if Amazon gets a better deal: It’s expensive, and it gets more expensive every year by a rate double or triple the rate of inflation, and it gets a lot more expensive for lighter packages that form the core of online retail, and it gets even more expensive just when you need to ship the most.

But UPS – despite these rate increases, and despite growing international revenues – has experienced essentially 0% revenue growth in 2015 and only 4.3% revenue growth in 2016 (to $ 60.9 billion).

Amazon’s revenues grew 20% in 2015 and 27% in 2016. E-commerce in the US is growing at a rate of about 15% a year. Clearly, UPS is not benefiting from the surge in online sales. So how is Amazon getting its merchandise to its customers?

In the “Greater San Francisco Area,” as Amazon calls it, Amazon has been leasing all kinds of warehouse space over the past few years as part of its distribution network. The new “fulfillment centers” it leased in 2016 include a 224,154-square-foot warehouse in Richmond, and a 1 million square-foot warehouse in Tracy, at the edge of the Bay Area, near I-5, the main north-south Interstate in California. In 2014, it leased a 574,000-square-foot warehouse in Newark, Alameda County, in the East Bay. It has other warehouse operations scattered the Bay Area, including in South San Francisco.

But it’s not UPS or the Postal Service that is delivering from these warehouses to the customer. Amazon has set up two ways to get the merchandise delivered. Same-day delivery is possible. And none of it involves drones.

“Amazon Flex” is not in every city yet, but it’s in “more than 30 cities” in the US, Amazon says. “And we’re adding new ones all the time.” It’s a way to “make $ 18-$ 25/hour delivering packages with Amazon.” It’s an app that allows you to choose a time block in which to pick up and deliver packages. Your pick-up location may be an Amazon facility or “a store or even a restaurant.” You can use your car, bicycle, or whatever to deliver the packages. “Be your own boss, set your own schedule, and have more time to pursue your goals and dreams,” it says. It’s part of the gig economy.

And there are “Amazon Delivery Providers.” OK, the name isn’t fancy, but it works. “You choose the cities where you’d like to deliver. Whether you have one van or a fleet, our volume and your business could be a great match,” Amazon says. “All deliveries are within a specific service area and delivery services vary by location.”

You pick up at “a local facility.” You use “Amazon’s routing technology,” which “helps you navigate efficiently.” You “earn money by delivering packages to Amazon customers.”

The drivers in these two systems are not highly paid UPS drivers. Amazon Flex drivers are contractors for Amazon, working for $ 18-$ 25 per hour (less if costs of the vehicle are included). Drivers working for “Amazon Delivery Providers” make whatever their arrangements are with their bosses. And if the Amazon Delivery Provider is a one-person-one-van show, and you own it, you make whatever Amazon pays you per delivery minus your costs.

This is a huge change in the US logistics landscape. Amazon has gotten big enough to where it is now building out a nationwide delivery network that includes the last mile in competition with UPS, FedEx, and the Postal Service. And it relies on the gig economy to deliver the last mile. It’s upending decades of established systems and companies. I don’t know if this is cost-effective for Amazon, but it is certainly trampling on the entrenched logistics sector that is hooked on annual rate increases as sole source of revenue growth.

Here’s something Wal-Mart could do to Amazon, just to be nasty. Read… Amazon to Slash Jobs at Whole Foods, Dump Cashiers, Switch to Cheaper Products in Price War with Wal-Mart

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