Amazon (NASDAQ:AMZN) could soon launch a new self-pickup service called Flex across the Seattle area, according to a recent GeekWire report. This wouldn't be the first time Amazon has allowed customers to pick up orders -- it introduced its first automated pickup spot for textbooks, Amazon@Purdue, back in February.
If Amazon expands self-pickup services to its other fulfillment centers, it could reduce the need for delivery drivers. That would also be comparable to Wal-Mart's (NYSE:WMT) in-store pickups for online orders. Let's take a closer look at this shift and how it could help Amazon cut costs.
Is Amazon following Wal-Mart's lead?
Wal-Mart is fighting back against Amazon by turning its brick-and-mortar stores into "hybrid" fulfillment centers for orders. Wal-Mart claims that about a third of its online orders are now picked up or shipped from its 4,588 brick-and-mortar stores in the U.S., instead of its 42 online-fulfillment centers. It also started testing out curbside pickup for groceries in select markets last October.
By comparison, Amazon has over 60 fulfillment centers in the U.S., and Piper Jaffray estimates that those locations bring it within 20 miles of 31% of the entire population. They also come within 20 miles of over half of the "addressable market" for same-day deliveries, defined as households with annual incomes exceeding $50,000.
That gap means that lower-income households might not be interested in same-day delivery services due to the steep costs. Customers living in one of Amazon's Prime Fresh delivery areas can pay $299 per year to get unlimited same-day deliveries on orders over $50. Regular Prime members, who pay $99 annually, only get free same-day deliveries for "eligible" orders over $35. Otherwise, they need to pay $6 per order. Non-Prime members have to pay $9 per order plus $1 more per item. Amazon also recommends paying a $5 tip to the courier.
Therefore, offering a self-pickup option (which will presumably be free) could help Amazon reach customers who want to receive their orders quickly but are reluctant to pay high premiums for same-day deliveries.
How this fits into Amazon's strategy
Self-pickup options fit into Amazon's long-term strategy of reducing its dependence on human workers and automating the entire process with machines.
After Amazon acquired robotics company Kiva in 2012, it placed 1,000 of its robots in its warehouses to help move packages. By the end of last year, that number had soared to 10,000. Amazon claimed that existing employees wouldn't be replaced by the robots, but the robots obviously reduced the company's need for new workers.
Amazon currently hires a network of contract drivers to fulfill its deliveries, but some drivers aren't happy about their pay. Last April, The Huffington Post reported that these drivers earn about $1.50 per package delivered, but they aren't reimbursed for gas, auto insurance, or vehicle upkeep costs, which offset a large percentage of those earnings. Those are the same complaints that Uber faces -- Amazon treats its drivers, who are essentially full-time employees, as contractors.
That's why Amazon is eager to get its delivery drones off the ground. But since the FAA hasn't cleared them for commercial flights yet, Amazon is relying on other strategies to reduce its dependence on contract drivers. It's reportedly building an Uber-like app that lets anyone become a delivery driver for Amazon. That's also why it's testing out self-pickup services.
The key takeaway
It might seem cold and calculating to replace human workers with warehouse robots, drones, and self-pickup services, but Amazon is doing this to reduce the soaring costs of deliveries. Between fiscal 2012 and 2014, Amazon's net shipping costs rose 48% to $4.2 billion, slightly outpacing its revenue growth of 46%.
Amazon hasn't officially launched Flex yet, but it would be a logical way to reduce delivery costs, expand same-day options to rural customers, and widen its defensive moat against Wal-Mart's in-store pickup strategy. Since there's not much downside to this approach, I expect Amazon to expand self-pickup services to more fulfillment centers in the near future.