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It's Still Early for Amazon Logistics

By Adam Levy - May 7, 2021 at 7:08AM

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The online retail colossus is transforming its delivery ecosystem to cater to an important consumer decision.

Amazon.com (AMZN -1.44%) CFO Brian Olsavsky confirmed the retail giant delivers the majority of its packages through its own logistics network, Amazon Logistics, during the company's first-quarter earnings call. And after increasing capital expenditures by 80% over the trailing 12 months and growing its facility footprint by 50% in 2020, you might think the expansion will start to slow after the rush to keep up with pandemic ordering.

Olsavsky had a warning, though: "We are continuing to invest, and we'll see a large investment in this area through 2021 as well. We do think that it may also spill to 2022." Why is that, you may ask. The online retail colossus is transforming its delivery ecosystem in order to cater to an important development over the next few years.

Amazon delivery vans parked outside a delivery station.

Image source: Amazon.

From the first to the last mile

There's a lot that happens between your package leaving an Amazon fulfillment center and it reaching a delivery station where it's put on a truck or van for delivery to your house. Olsavsky noted that's a big area of investment focus right now, giving "sort centers, Amazon Air, [and] line haul trailers," as examples.

Amazon made some big investments in Amazon Air ahead of the opening of its Air Hub at Cincinnati/Northern Kentucky airport later this year. It bought several planes, leased several more, and is likely going to expand its fleet further to bring the airhub up to capacity.

Meanwhile, Amazon already has plans to add at least 15 sortation centers to its network in 2021, according to logistics consulting service MWPVL. That will expand the number of locations by more than 20%. Sortation centers accept packages from fulfillment centers, sort them by zip code, and put them on pallets for delivery to an airhub or delivery station. They may also send them to a U.S. Post Office for final delivery in areas where Amazon doesn't yet operate delivery stations.

Putting additional "middle mile" infrastructure in place now is necessary because Amazon's also planning a big build-out of its delivery stations. The number of delivery stations will expand from 337 at the end of 2020 to over 500 by the end of 2021, according to MWPVL. 

What's more, it could reach 1,500 delivery stations within three to five years. That includes plans to expand to lower-density markets where Amazon often hands off packages to the postal service.

It may not be too long before it's commonplace to see an Amazon delivery station on the outskirts of your town.

Isn't this all a bit expensive?

Amazon spent a whopping $11.2 billion in cash on capital expenditures during the first quarter, more than double what it spent during the same period last year. In 2020, cash expenditures reached $35 billion, up from $12.7 billion. On an amortized basis, expenses still increased 80% over the last four quarters, Olsavsky said.

Investors will want to see a good return on that spending. And right now, some may be wondering where the returns are. Shipping costs grew 57% in the first quarter, but paid units only increased 44%. Fulfillment costs rose 43%, so it doesn't seem to be saving Amazon much money on shipping or increasing its efficiency at its warehouses.

Olsavsky gave some assurance on the earnings call. "We actually think our cost right now is very competitive with our external options," he noted. "It certainly gets better with demand and amortization and route density."

But the real value, Olsavsky said, is that it allows Amazon to control the entire operation and retain perfect information on its packages. Instead of batching deliveries and handing them off to third-party carriers once a day, Amazon can have orders leaving its warehouses five or six times a day, Olsavsky explained. That allows it to tighten delivery windows and extend cut-off times for one-day or two-day delivery.

Ultimately, it's a better customer experience.

In other words, the return on investment comes from increased retail sales. Investments in logistics can be the difference between a shopper using Amazon or going to a brick-and-mortar competitor.

As long as Amazon can accomplish that goal while keeping its costs at a similar level as outsourcing shipping, it's a no-brainer investment. In the long run, owning a broad and deep logistics network will open up additional revenue opportunities for Amazon beyond delivering its own packages.

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 the following options: long January 2022 $1920.0 calls on Amazon and short January 2022 $1940.0 calls on Amazon. The Motley Fool has a disclosure policy.

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