Will Amazon Kill FedEx?

Sep 07, 2016

For UPS and FedEx, Amazon’s been great for business. Now it’s taking business away from them.

Last fall, when he was running for mayor of Wilmington, Ohio, John Stanforth heard a rumor. A big company was testing an airfreight operation at the local airport, Wilmington Air Park. Whoever it was wanted to keep the project quiet. People who frequented the airport said the company was wrapping its packages in black plastic to obscure any lettering and referred to its experiment as Project Amelia. He wasn’t sure which company it was, though some people were whispering it was Amazon.com.

Stanforth, 71, owns a storage business and looks a bit like the actor Jeffrey Tambor. In November he easily won the mayoral election. But even then he didn’t ask too many questions about what was going on at the airport. He didn’t want to jeopardize anything by being too nosy. “Guys, just bring me the jobs,” he recalls thinking.

Wilmington is about 35 miles southeast of Dayton and has a population of about 12,000. Jobs used to be plentiful. The air park was a hub for Airborne Express and then DHL, the German shipping company, which bought Airborne Express in 2003. Thousands of people toiled at the airport, sorting packages that arrived and loading them onto outbound planes. It wasn’t the most spiritually rewarding work, but it paid well, enabling package handlers to patronize the shops on Wilmington’s Main Street, to get haircuts in the barbershop and body illustrations at the tattoo parlor. Even the local bookstore did great business, especially when Harry Potter novels came out. “They shut down the main street,” Stanforth says wistfully, about the release party the store threw in 2007 for the seventh book in the Potter series. “There were people everywhere. Our Rotary Club made $1,000 selling shaved ice. A thousand bucks!”

In 2008, DHL shuttered its Wilmington operation, and almost everybody at the air park lost their jobs. “It was devastating,” Stanforth says. “You can’t lose that kind of an industry in a small community and not be hurt.” The following year, the city was featured on a 60 Minutes segment as a symbol of recessionary America. “When President Obama spoke of ‘the winter of our hardship’ in his inaugural address, no one in America understood that better than the folks we met in Wilmington, Ohio,” correspondent Scott Pelley said.

Starting in September 2015, people in the city noticed more planes flying in and out of the airport, loading and unloading those black-wrapped boxes. This March, Amazon announced that it was leasing 20 Boeing 767s from Air Transport Services Group, a cargo company that operates out of the air park. Amazon had also negotiated an option to buy nearly 20 percent of the company. “We’re excited to supplement our existing delivery network with a great new provider, ATSG, by adding 20 planes to ensure air cargo capacity to support one- and two-day delivery,” Dave Clark, Amazon’s senior vice president for worldwide operations, said in a statement at the time. Amazon denies wrapping its boxes in black during the trial period.

Two weeks after Amazon’s announcement, I meet with Stanforth in a conference room outside his office at the municipal building. He’s joined by Marian Miller, his lively executive assistant, and Bret Dixon, Clinton County’s economic development director. Amazon still hasn’t said much about its plans for the air park, but Stanforth is hopeful there will be some jobs soon.

The mayor, who wears a green fleece jacket and confesses to being a little hard of hearing, lets his younger colleagues do most of the talking. “We don’t know what it’s going to do yet,” Miller says, “but we’re crossing our fingers. We have people that like slinging packages.”

It’s hard to tell who’s more pro-Amazon, Miller or Dixon. “They’re changing the face of e-commerce,” Dixon says.

“They are a feel-good company,” says Miller. “Who wouldn’t want a feel-good company like Amazon? Look at the way they treat their customers and their employees!”

The conversation turns to those Harry Potter events. Stanforth perks up. “Well, we had a local bookstore that really promoted it and took the initiative,” he says. “Sad to say, it’s closed up. Wonder who closed them up?”

Miller gives him a look. “Don’t say it.”

“Where does everybody get their books now?” Stanforth says, grinning.

“Don’t say that,” Miller warns him again.

“Amazon,” Stanforth says.

“I knew you were going to say it,” Dixon says, shaking his head.

Two months after the Ohio announcement, Amazon leased 20 more jets from Atlas Air, an air cargo company based in Purchase, N.Y. Amazon has also purchased 4,000 truck trailers. Meanwhile, a company subsidiary in China has obtained a freight-forwarding license that analysts say enables it to sell space on container ships traveling between Asia and the U.S. and Europe. In short, Amazon is becoming a kind of e-commerce Walmart with a FedEx attached.

With any other company, an expansion like this would be preposterous. But Amazon’s growth has been preposterous. In 2010 its annual revenue was $34 billion; last year, $107 billion. In 2010 the company employed 33,700 workers. By this June, it had 268,900. To have enough office space for its swelling headquarters staff, Amazon has swallowed Seattle’s South Lake Union neighborhood, and it’s building three tree-filled biospheres in the city that will allow workers to take contemplative breaks, like so many Ralph Waldo Emersons in Jetsonian luxury. The company is the fifth-most valuable in the world: Its market capitalization is about $366 billion, which is roughly equal to the combined worth of Walmart, FedEx, and Boeing.

For years, Amazon lost money as Chief Executive Officer Jeff Bezos ignored Wall Street’s concerns and poured billions into such initiatives as e-readers, robot-enhanced warehouses, smartphones, tablets, and television shows. Yet in July, the company posted its fifth straight quarterly profit. Amazon Web Services, its cloud computing division, alone had sales of $7.9 billion last year. “We could have stuck to the knitting,” Bezos wrote in Amazon’s most recent annual report. “I’m glad we didn’t. Or did we?”

Amazon’s ambitions depend on the continued success of its Prime service. For $99 a year, Amazon Prime customers get two-day delivery at no extra charge. Those who sign up tend to spend almost three times as much as their non-Prime peers. The company zealously guards its numbers, but Consumer Intelligence Research Partners estimates that Amazon had 63 million Prime members as of late June—19 million more than the year before. Amazon keeps subscribers in the fold by lavishing them with perks such as free access to Amazon Video, the Kindle Owners’ Lending Library, and trial subscriptions to the Washington Post, which Bezos, a billionaire many times over, purchased for $250 million in cash three years ago. But more than anything, Prime members sign up for that fast shipping, which keeps getting faster. In many large cities, subscribers can now get free two-hour delivery on more than 25,000 items they might otherwise have bought at Walgreens or 7-Eleven. For an additional $7.99, orders arrive within an hour. Some company executives joked that the service should be called Amazon Magic; they went with Prime Now.

“This year we estimate Amazon is going to sell 7.2 billion items”

Providing near-instant gratification on Amazon’s scale isn’t cheap. Last year the company spent $11.5 billion on shipping—nearly twice what it did two years ago. Along with leasing jets and buying trailers, Amazon has opened more than 28 sorting centers, 59 delivery stations that feed packages to local couriers, and more than 65 Prime Now hubs stocked with best-selling items that can be rushed to customers around the world, according to MWPVL International, a Montreal-based supply chain consultant. “This year we estimate Amazon is going to sell 7.2 billion items,” says Gene Munster, an internet industry analyst at Piper Jaffray. “In 2020, which is only four years away, we expect them to sell 12.6 billion items.”

In June, Deutsche Bank released a report predicting that Amazon will eventually have a global shipping operation capable of moving goods directly from factories in China to customers in the U.S. and Europe, using not just 767s and container ships, but also self-driving trucks and drones. The report also said Amazon has a patent for “anticipatory package shipping” technology, which is just what it sounds like: When some Prime subscriber buys more deodorant, Amazon already has the box standing by, ready to label and ship. “It’s just one giant math exercise,” Deutsche Bank wrote, adding that Amazon has “hundreds of Ph.D. mathematicians” who spend their days optimizing logistics.

Others believe that Amazon will make a business out of its delivery network, as it did with Amazon Web Services, thereby challenging the world’s leading shipping companies. “I fully expect Amazon to build out a logistics supply chain that others can use,” says John Rossman, a former Amazon executive who’s now a managing director at the restructuring firm Alvarez & Marsal. “Over the next five years? I doubt it. Over 10 or 15 years? Oh yeah.”

 

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