Low Start Up Costs are the Attraction, but Profit Margins May be Thing, GeekWire Finds

Amazon made big news in recent weeks with the announcement it was looking for local entrepreneurs to build their own delivery businesses with a relatively low initial investment.

Entrepreneurs can start with one truck for as little as a $10,000, Amazon says, and build to a maximum fleet size of up to 40 Amazon Prime branded trucks, and make up to $300,000 in annual profits.

So is that an attractive deal? Maybe not, found the editors at Geekwire.com, who did an in-depth analysis of the Amazon opportunity, consulting with some parcel industry experts as part of the process.

Supply Chain Digest Says... The DSP program only makes sense to Amazon if it can reduce net shipping costs – though capacity may also be a factor – and at a level that delivers those savings to Amazon may leave little profit for DSPs. What do you say? Click here to send us your comments Click here to see reader feedback

The program runs under the name of Amazon Delivery Service Partners (DSP). DSPs business will build and manage a team of 40 to 100 of their own employees, with fleets of 20 to 40 vans delivering packages seven days a week, 365 days a year.

Forget the Christmas day off thing.

Amazon materials says daily duties will include scheduling drivers, setting up routes, rallying the team in a morning huddle, tracking progress throughout the day, working with Amazon to troubleshoot problems, debriefing drivers upon their return, and making sure vans are properly fueled and parked at the end of the day.

Let's just say you'll be busy.

While Amazon will provide start-up assistance, there is still a lot that needs done to get the business off the ground. That includes securing the required licenses; vetting and hiring employees; arranging key business services; setting up a pay structure and benefits, etc.

We'll note that Amazon insists hired drivers will be employees of the DSP companies, not contract workers. That will add extra costs and headaches.

And while you start with one daily route, Amazon expects DSPs to ramp up fast from there.

"Successful owners add five additional routes in their 5th, 9th, and 11th week, bringing their business to 20 or more routes after three months," Amazon says.

The good news: Amazon says its program will allow DSPs to get into the business for as little as $10,000. That is possible Amazon has negotiated special deals on van leases; data plans; mobile devices; insurance, HR, legal and accounting services; vehicle maintenance; and other programs for new delivery business owners.

Also part of the deal is three weeks of initial training, a comprehensive playbook to run a delivery business, driver assistance on the road, and ongoing support from an account manager.

Delivery Service Partners will also get the benefit of operating out of one of some 75 Amazon delivery stations across the US, reducing or eliminating the need to operate their own facilities.

What's more, Geekwire says Amazon is promising its delivery partners a fixed monthly payment based on the number of vehicles they operate with Amazon, a separate rate based on the length of their routes, and a per-package rate based on the number of packages they deliver successfully.

Amazon says the total revenue potential will be $1 million to $4.5 million once a company reaches critical mass. And that comes direct from Amazon as part of the deal, so no sales and marketing appears needed.

That all sounds pretty good, right?

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Not so fast.

Once established, a delivery business could realize annual profits of $75,000 to $300,000, Amazon says, if it's successful, and if Amazon's projections are accurate.

But that's actually not much profit based on the revenue numbers. At 40 routes and $300,000 profit, it means just $7500 in profit per route. By comparison, Geekwire says, contractors operating independent FedEx Ground delivery businesses can make $25,000 to $30,000 in annual profits per route, more than three times as much.

However, start up costs are much higher at FedEx, average between $700,000 and $950,000 to buy a business consisting of multiple FedEx Ground routes. Geekwire also notes that there is no clear definition of "route," which can make comparisons between the Amazon and FedEx programs a bit fuzzy.

In the end, it appears that "Amazon is following its tradition of asking its partners to be comfortable with lower profit margins to take part in its meteoric growth," Geekwire writes.

The reality is that the economics of Amazon's last-mile delivery are likely to pose a challenges for the DSPs. UPS and FedEx are already discounting heavily in rates for Amazon. That leaves little room for further savings for the company, if Amazon wants its delivery partners to be profitable, wrote analysts Jonathan Root and Robert Jankowitz of Moody's Investor Service, in a recent research note assessing the impact of the new Amazon program.

"Assuming discounts of 20% and 15%, respectively, we estimate that Amazon pays a per-package rate of about $6.50 to UPS and about $7.35 to FedEx for Ground services," they wrote. "We believe these rates would leave little profit margin for other vendors if Amazon seeks to improve its net shipping cost by lowering the per package fees it will pay to its local delivery contractors."

In other words, the DSP program only makes sense to Amazon if it can reduce net shipping costs – though capacity may also be a factor – and at a level that delivers those savings to Amazon may leave little profit for DSPs.

And of course, the DSPs will only be paid what Amazon is willing to pay them at any point in time. That may or may not be enough to make a reasonable profit on the investment and time. DSPs using the Amazon branded trucks will only be permitted to carry Amazon parcels. And who knows how things like rising fuel costs might be handled over time.

"We do not guarantee results of any kind, including that what a delivery company earns will exceed the owner's investment in his or her business," the DSP materials note. "Each delivery company's results will differ, and results will depend on a number of factors, including the owner's efforts and management of expenses as well as the size of the company."

Based on Amazon's projections, "there's a real possibility that people could find themselves working twice as hard for half the pay vs owning a FedEx route," said DiNitto, a FedEx delivery business broker. "We won't know for sure until we see the program flesh out a bit more to see how much time and stress it takes to successfully operate an Amazon logistics business."

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