President Donald Trump has been vocal about how he feels the United States Postal Service has gotten a raw deal with Amazon (NASDAQ:AMZN), which currently relies on the USPS for last-mile delivery, i.e., delivery from its fulfillment centers to customers' doorsteps. Trump argues that Amazon's growth over the last decade or so has become more of a burden than a blessing for the government agency.
Last month, the USPS proposed a rate hike of 9% to 12% on the services Amazon uses. Earlier this year, former Postmaster General Patrick Donahoe warned that raising rates on Amazon could push the online retailer to find other solutions, taking away valuable marginal revenue from the postal service. It appears Amazon is taking matters into its own hands, hiring seasonal delivery workers for the fourth quarter, according to Business Insider. If the experiment goes well, some drivers may be asked to stay on full-time next year.
Building its own delivery network
Amazon already has a massive fulfillment network that ships items from its various warehouses to its fulfillment centers, where it awaits pickup by a last-mile delivery service such as the USPS. Amazon also partners with UPS, FedEx, and other third-party couriers for that last mile of delivery.
Earlier this year, Amazon started experimenting with new solutions. It partnered with entrepreneurs to develop dozens of small delivery businesses. These businesses will work exclusively with Amazon, and the online retailer will provide everything business owners need to get started -- including the demand for the service.
But the move to manage drivers directly is Amazon's boldest move in delivery yet. And it shows the USPS as well as Amazon's other logistics partners that the company is willing to take matters into its own hand to optimize its long-term cash flow and profitability. Amazon will surely spend heavily to get the ball rolling on its own last-mile delivery service, and its drivers will benefit from the new $15 hourly minimum wage at Amazon, and it means the company is less susceptible to rate increases from its partners.
It's about more than just responding to USPS
Developing its own last-mile fulfillment service gives Amazon a couple of big opportunities.
First of all, it could enable Amazon to provide faster and more customized fulfillment. If it controls every step in the process of getting orders from its warehouses to customers' doors, it can ensure packages are delivered faster and at times when customers are able to accept delivery. The latter may be increasingly valuable as competitors move toward faster shipping options for their customers in an effort to compete with Amazon Prime. The former may be able to reduce overall shipping costs, as Amazon can offset its reliance on UPS and FedEx for guaranteed two-day Prime shipping.
If Amazon continues to fill out a last-mile delivery network, it could eventually use its existing infrastructure and scale to offer the service to other businesses. Amazon took that approach with its cloud computing business, where it leveraged its own cloud infrastructure and expertise to offer a product to other enterprises. That's now one of its most profitable businesses. It also did the same thing in its retail business as it built out its warehouse footprint and improved its technology to offer fulfillment services for other merchants. Now it could offer competitive last-mile delivery services.
Amazon is flexing its muscle with USPS. If the latter insists on raising rates, it could have serious consequences that ultimately lead not only to losing Amazon's valuable business, but to creating an entirely new competitor for the part of its business that produces real profit.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends FedEx. The Motley Fool has a disclosure policy.