A few days ago, Amazon released its 8-K financial report for the second quarter of 2018, which ended June 30. Revenues continue to skyrocket. For the quarter, revenues increased 39 percent to $52.9 billion, compared with $38 billion for the same period last year. For the first six months of the fiscal year, revenues were $104 billion, compared to $74 billion for the same period last year, an increase of 40 percent.
One of Amazon’s biggest expenses are shipping costs, which include expenses for sortation, transportation, and outbound delivery by the Postal Service, private carriers, and regional shippers. As to be expected, shipping costs increased just as dramatically as revenues.
Shipping costs for Q2 2018 were $6 billion, up 31 percent from $4.6 billion in Q2 2017. For the first six months of the fiscal year, shipping costs were about $12 billion, up 34 percent from $9 billion for the same period last year. At this rate, by the end of the fiscal year, shipping costs could jump from $21.7 billion in 2017 to nearly $30 billion in 2018.
Amazon’s financial report doesn’t say much about how these shipping costs were incurred. For example, there’s nothing about these basic questions: How many packages does Amazon ship each year? How much do these deliveries cost Amazon? And how are all those deliveries shared by the various carriers — USPS, UPS, FedEx, regional shippers, and Amazon itself?
Many people at Amazon, the Postal Service, and the private carriers know the answers to these questions. But they’ve all done an excellent job keeping the information to themselves.
Many others would like to be in the know — shipping companies, logistics consultants, e-commerce merchants, shareholders, stock analysts, government officials, journalists, and others. For them this information is relevant to stock prices and prognostications, shipping rates and discounts, directions for postal reform legislation, and public policy about the postal system and e-commerce.
The numbers are also relevant given Trump’s repeated tweets about the Postal Service undercharging Amazon. Just a few days ago, the President was back at it again with this tweet: “The Amazon Washington Post has gone crazy against me ever since they lost the Internet Tax Case in the U.S. Supreme Court two months ago. Next up is the U.S. Post Office which they use, at a fraction of real cost, as their “delivery boy” for a BIG percentage of their packages….”
The lack of transparency leads to news reports, expert analyses, and Presidential tweets that contain inaccuracies about basic facts.
In most cases, Amazon and its shipping partners allow the errors to pass by without correction — better than having the corrections reveal anything more about their operations.
This lack of transparency also invites speculation. If the information is being withheld, what might it reveal?
In this post, we’ll review the numbers reported in news articles and financial reports, try to separate the wheat from the chaff, cherry-pick a bit, and come up with some estimates for Amazon’s shipping volumes and costs and the market share for the various carriers.
Our analysis will suggest that Amazon sent out about 3.3 billion packages worldwide in 2017, with the Postal Service delivering about 33 percent, UPS about 27 percent, FedEx about 12 percent, and regional carriers and Amazon itself, the remaining 28 percent. Amazon’s outbound shipping costs totaled about $12 billion, just over half of its total shipping costs, which also include operating fulfillment and sortation centers and transportation. The average cost for outbound delivery was about $3.70 per piece.
If our estimates for 2017 are anywhere near accurate, Amazon could end up shipping 4.4 billion parcels in 2018. That’s a billion more packages to deliver.
Amazon will try to cover a lot of these deliveries itself, with programs like Flex and Delivery Services Partners. Overall, though, the number of deliveries is probably growing faster than Amazon’s capacities, and it looks like the Postal Service, UPS, FedEx, and the regional carriers will remain a significant part of Amazon’s operations for the foreseeable future.
The Postal Service appears to be delivering more Amazon parcels than ever. According to the Revenue, Piece, Weight report for Q2 FY 2018, volumes for Parcel Select (the class of Ground mail that Amazon uses) were up 5.3 percent; for the first six months of the fiscal year, they’re up 7.7 percent, from 1.46 billion to 1.58 billion. That’s over 110 million more parcels than during the same period last year. About 40 percent of them are probably Amazon’s.
The estimates in the following analysis are just educated guesses, and they could be way, way off. But puzzling out the numbers gets interesting anyway. Be warned. It just gets wonky from here out.
5 billion items shipped
One widely quoted number in the media is that Amazon sent out 5 billion packages to Prime members in 2017. A few recent examples:
- “The online retailer, which last year shipped more than 5 billion packages through its Prime program.” Washington Post, June 28, 2018
- “It’s the latest attempt by Amazon to gain greater control of the delivery network at the core of its Prime business, which ships 5 billion packages a year globally.” CNN, June 28, 2018
- “Amazon currently has 100 million Prime members globally and delivered about five billion packages through the program in 2017.” Observer, April 27, 2018
- “In his annual letter to shareholders, Amazon CEO Jeff Bezos said more than 5 billion packages had been shipped via Prime worldwide after a record year for new subscribers in 2017.” The Street, April 19, 2018
The link in The Street article goes to Bezo’s letter to stockholders in which he says, “In 2017 Amazon shipped more than five billion items with Prime worldwide.”
Bezo didn’t say Amazon had sent 5 billion packages. He said 5 billion items. Since many shipments contain more than one item, Bezo’s letter actually doesn’t tell us how many Prime packages were shipped.
Amazon also ships out a lot of items that aren’t eligible for Prime free shipping. In an August 2016 article in Bloomberg, Gene Munster, an internet industry analyst at Piper Jaffray, is quoted saying, “This year we estimate Amazon is going to sell 7.2 billion items. In 2020, which is only four years away, we expect them to sell 12.6 billion items.” Again, that’s items, not parcels.
So, it’s possible that in 2017 Amazon actually sent 7 billion items or more, and it may have sent 5 billion packages overall, Prime and non-Prime. But those news reports saying Amazon had shipped 5 billion Prime packages — and there were a lot of them — were probably just wrong.
600 million packages
A few news articles and trade publications have reported on how many packages Amazon sends out and how many were delivered by individual carriers. These reports often fail to provide a source for verification, and, due to Amazon’s rapid growth, the numbers are often out of date.
For example, a Wall Street Journal article, April 24, 2014, reported that one analyst estimated that Amazon had shipped 608 million packages in the U.S. in 2013. It sounds like a good estimate, and we’ll get back to it shortly.
Almost three years later, a February 2017 article in Business Insider cited a report by its research division, Business Insider Intelligence, saying, “Twenty different partners currently share the duties of shipping Amazon’s 600 million packages a year, with FedEx, USPS, and UPS moving the most.”
One might expect the 2017 BI Intelligence report to be citing a fairly recent number — the article says “currently share the duties” — but apparently BI was using the number for 2013, which was so far out of date by February 2017 as to be meaningless. If you’d like to learn more about how BI came up with its numbers, however, to access the BI Intelligence report costs $495.
The idea that Amazon ships 600 million packages in the U.S. comes up again in a Feb. 26, 2018 article in Forbes about the potential impacts on UPS of Amazon doing its own deliveries. Forbes bases its analysis on this: “Per estimates in early 2016, UPS is reported to handle around 30% of Amazon’s 600 million annual shipments.”
The link goes to a 2016 article in Insider Louisville (home to UPS worldwide air hub) citing the 600 million figure without attribution or reference to the fact that the number is for 2013. Still, the Forbes article is worth checking out for its very entertaining interactive dashboard where you can try out different variables for Amazon’s annual shipments, prices, UPS volume, etc.
To provide some general context, let’s look at three charts created by statista.com, all based on actual numbers in Amazon’s 10-K financial reports. Our analysis is going to look at volumes at two points in time, FY 2013 and FY 2017, to take advantage of numbers for 2013 provided by that WSJ article (which offers a rather rare glimpse of things) and to develop a longitudinal view that may lead to more accurate estimates for 2017.
Here’s a chart showing Amazon’s net sales revenues over the past 13 years. These revenues come from Prime membership fees, the fees charged to those who sell their products through Amazon, etc.
From 2013 to 2017, total revenues increased by about 240 percent, from $74 to $177 billion. One would imagine that shipping volumes and expenses went up by something close to that percentage as well. In fact, shipping costs went up way more, as seen in this second chart showing shipping costs.
From 2013 to 2017, shipping costs rose from 6.6 billion to 21.7 billion, an increase of 330 percent. Shipping costs are rising much faster than revenues, perhaps because Amazon has been investing heavily in the infrastructure of its logistic network — fulfilment centers, sortation centers, trucks, trailers, planes, workers, and all the rest.
Now one more chart, this one showing the sources of Amazon’s revenues geographically — N. America (which is almost entirely U.S.) and International.
For various reasons, domestic revenues have grown faster than international revenues. According to its 10-K report, in 2013 Amazon’s domestic revenues were $44.5 billion, and international accounted for $30 billion — about 60/40 percent-wise. According to the 2017 10-K, domestic revenues were $106 billion and international revenues were $54.3 billion — 66/33 percent-wise.
Now let’s try to figure how those costs break down in terms of volumes and carrier. Let’s begin with average cost per piece.
Parcel Select cost per piece
A large portion of Amazon deliveries are done by Parcel Select, “the Postal Service’s economical ground delivery service for packages entered in bulk, including those entered at destination facilities.” Parcel Select is used primarily by large carriers for last mile delivery.
To save time and earn the biggest workshare discounts available, these customers drop the packages, sorted and labeled, at the Delivery Destination Unit (DDU) nearest the ultimate residence or business destination. These packages can often be delivered the same day or next (whereas Parcel Select generally is 2 to 8 days).
The current public pricing for Commercial Parcel Select is shown here. For parcels of less than a pound (PS Lightweight), prices start at $1.42 for parcels dropped at a DDU. For one pound or more, the prices start at $2.85.
Amazon is paying much less than the published prices. A March 2018 research report by Morgan Stanley, discussed in a Logistics Management article (April 6, 2018), says “it believes Amazon pays in the neighborhood of 50%-to-60% costs lower per package than USPS’s average ground rates due to volume discounts.”
Amazon’s discount may be even bigger than that. According to a 2015 survey of shippers conducted by Shipware, a parcel audit and consulting firm (download the report here), some Parcel Select customers get better than a 66 percent discount. Amazon has to be one of them, and probably FedEx and UPS as well, which use Parcel Select for last mile themselves (SmartPost and SurePost).
David Vernon, an analyst at Bernstein Research who tracks the shipping industry, is cited in this Bloomberg article (Dec. 29, 2017) estimating that Amazon is probably paying, on average, about $2 per parcel for Parcel Select.
That number can also be derived from the 2017 USPS report on revenue, price, weight (RPW). It shows that Parcel Select brought in $5.7 billion in revenue, on 2.8 billion pieces, so the average price was $2.03.
Since our analysis is going to look at 2013 as well as 2017, we should note that the 2013 RPW report shows revenues of $1.9 billion on 1.3 billion pieces, for an average of $1.48.
The low cost of USPS deliveries for Amazon has caught the attention of the President, thanks to a Wall Street Journal op-ed (July 13, 2017) based on a Citigroup equities report (April 18, 2017) claiming that the Postal Service was undercharging about 50 percent on parcels. The report was serious flawed, as explained in this previous post, but it nonetheless led to dozens of news articles repeating Trump’s false claim.
Despite the low prices for Parcel Select, the Postal Service is making money off the Amazon deliveries, more than enough to cover attributable costs and to make a significant contribution to institutional costs, as explained in this previous post. Parcel Select is low cost because a postal letter carrier stops at nearly every address in the country, six days a week, anyway, and dropping off an extra package does not take a lot of extra time.
It should be noted that Amazon has invested billions of dollars in its logistics network, including hundreds of fulfillment and sortation centers, thousands of trucks and trailers, and a growing number of jumbo cargo jets — much of it in order to take advantage of the low price for Parcel Select. Some of that expense should probably be figured into the “true cost” of Parcel Select for Amazon.
Averages on the high side
While the $2 average for Amazon’s Parcel Select shipments looks like a reasonable estimate, it’s more difficult figuring an average for the private carriers, and estimates in the media vary considerably.
A Jan. 4, 2018 WSJ article says, “Parcel Select brought in $1.83 billion in revenue for the Postal Service in the fourth quarter, or an average of $2.09 per package. That compares with an average ground price per package of $8.19 at UPS and $8.64 at FedEx, where the carriers typically take the package the full distance.”
This price for Parcel Select was probably derived the same way we derived our estimate of $2.03 (total revenue divided by total volume), except that the WSJ used a quarterly report rather than the annual.
The 2017 UPS 10-K shows that the average revenue per piece on domestic Ground was $8.19, so that is presumably the source of the WSJ number for UPS. The average for FedEx of $8.64 may come from the 2018 FedEx 10-Q report for the third quarter of 2018, but the report came out in March 2018, a few weeks after the WSJ article, so it’s not certain where the WSJ came up with the FedEx average.
In any case, the 10-K per piece averages for UPS and FedEx Ground are much higher than Amazon pays, for at least three reasons.
First, unlike the average price per piece for Parcel Select, which is used almost entirely by large mailers getting large discounts, these averages for UPS and FedEx are for all Ground packages — not just those sent by large mailers but also those sent by small businesses at modest discounts and individual customers at the full retail price.
Second, Amazon is probably using, whenever possible, the least expensive class of Ground, zone 2. Zones refer to the distance between origin and destination, and zone 2 is the shortest, an area with a radius of about 100 to 300 miles, as seen in this map showing zones for a package sent from St. Louis, MO. Zones determine transit times: zone 2 is one-day, zone 3 is two-day, etc. (You can check out the zones for any zip code here.)
Amazon has enough fulfillment and sortation centers around the country to avoid needing UPS and FedEx for more expensive long-zone shipments, and with zone 2 it can ensure 2-day delivery for Prime members. (By the way, FedEx and UPS may be getting into zone-1 ground delivery, i.e., distances of less than 50 miles, which is more like “last mile” via Parcel Select.)
A third reason those WSJ estimates are too high is that, thanks to its volumes, Amazon is getting a big discount.
As for how big Amazon’s discounts with UPS and FedEx might be, a recent article in Geekwire about the new Amazon Delivery Partners program quotes analysts Jonathan Root and Robert Jankowitz of Moody’s Investor Service, in a July 2 research note, saying this: “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.”
The article doesn’t say where Moody’s came up with these numbers, but here’s one possible explanation. If one starts with the numbers in that WSJ article for average Ground revenues, $8.19 for UPS and $8.64 for FedEx, a 20 percent discount for UPS would come to $6.55, and a 15 percent discount for FedEx would come to $7.34.
If this is how Moody’s came up with its estimates, the problem is, again, that the base numbers for the average revenue per piece are for all zones and for both retail and discounted commercial, so they’re not particularly helpful. Plus, Moody’s doesn’t explain where it came up with those discounts, and they may be way too low.
More on discounts
The FedEx website says it offers Amex corporate clients who do $55,000 & up in annual shipping a 25 percent discount on Ground, with an additional 5 percent if they create a shipping label online. Amazon is spending hundreds of millions of dollars with FedEx, and it’s doing everything it can to maximize the discount, so it has to be getting better than the 30 percent discount available to small businesses via Amex.
That 2015 Shipware survey cited above also asked shippers about the size of the discounts there were getting from the major carriers. As seen in this chart, on Ground 1 to 10 pounds, respondents reported getting discounts of anywhere from less than 29 percent to more than 71 percent. If any company is getting more than a 71 percent discount, it would be Amazon.
The same survey found that most shippers were paying a minimum ground charge of $5.20 to $6.60, but about 8.6 percent of those surveyed said their minimum charge on Ground was less than $3.69.
As a matter of fact, Amazon pay be paying as little as $2 or $2.50 for the minimum Ground charge. That estimate comes by looking at sample fees for Fulfillment by Amazon (FBA).
In this program, sellers can ship their products to an Amazon fulfillment center and let Amazon do all the rest — storage, packing, shipping, customer service, etc. Amazon publishes some examples of the prices for FBA. Since these prices also include fees for packing the box, etc., Amazon is paying the outbound carrier something less than the fees.
For a small standard-size box, 1 pound or less, the FBA fee is $2.41; the outbound cost might be about $2.00. For a large standard-size box, 1 lb. or less, the fee is $3.19, so maybe the outbound cost is about 3.00. Amazon might use Parcel Select for these small boxes, but if they were sent on UPS, the lowest Ground price is $9.43, so that cost would represent a discounts of about 68 percent (the 2018 UPS pricing is here). For a large standard-size box, 1 to 2 pounds, the FBA fee is 4.71, and the outbound cost might be about $4.20 — a discount of about 55 percent off the UPS price.
One final example. The current UPS Ground rate on a 45-pound box (zone 2) is $28.08. Amazon Prime Pantry will deliver a box up to 45 pounds for a flat fee of just $7.99 (it used to be $5.99). If that’s how much Amazon pays UPS, it represents a discount of over 70 percent.
Based on the shippers’ survey and these other numbers, it wouldn’t be surprising if Amazon were getting an average discount of 60 percent or more with UPS and FedEx. It could therefore be averaging something on the order of $4 to $5 per package. If that seems too low, here are a few more reports to consider.
Cost per piece for UPS and FedEx
An analysis in a Nov. 11, 2014 article in MWPVL International (a logistics consulting firm) did some estimating about how Amazon’s sortation network might affect UPS and FedEx, and to do so it made these assumptions:
“The average cost per parcel shipment by carrier is known only to Amazon so some assumptions are required at this point. As per a recent Wall Street Journal (which sourced shipping-industry analysts), Amazon typically pays between about $2 and $8 to ship each package, with the cheapest option being through the Postal Service, and the most expensive being via UPS or FedEx. If 80% of the small packages shipped are less than 5 pounds (as per the Amazon Drone hype), then the weighted average parcel shipment cost will tend to be on the lower end of this scale. Let us say for the sake of this discussion that the average parcel costs $5 to ship with UPS or FedEx.” (In an interview on 60 Minutes, Jeff Bezos said its drones can carry up to 5 pounds, “which covers 86 percent of the items that we deliver.”)
Along similar lines, in a Dec. 29, 2017 interview with NPR, Devin Leonard of Bloomberg Businessweek (and author of a book about the U.S. Post Office called Neither Snow nor Rain), said this: “Neither Amazon nor the Postal Service will, you know, disclose the amount [that Amazon pays the Postal Service]. But Wall Street analysts estimate it’s about an average of $2 per package, and that’s about half of what they pay UPS or FedEx.”
And finally, there’s an April 26, 2018 article in Forbes, quoting David Vernon, the analyst at Bernstein Research, cited above on the $2 per piece price for Parcel Select: “The cost of shipping a package — not counting the expenses of moving it around in a warehouse and getting it ready for the post office varies depending on the size of the package,” says Vernon. “Small items cost around $2 a package, while medium-sized boxes cost around $3 to $4.” Vernon could be thinking about Parcel Select there, but it’s also possible that UPS and FedEx can sometimes deliver at these low prices.
Overall, then, the average costs for UPS and FedEx are really all over the place, from as little as $2 to more than $8. In the following analysis, we’re going with an average 2017 outbound shipping cost to Amazon of $4.50 per piece for FedEx and UPS.
If, given all we’ve said about discounts, that seems too high, it’s also important to remember that Amazon doesn’t use only Ground with FedEx and UPS. It also uses more expensive expedited rates when necessary, and they’re part of this average, too.
Cost per piece for other deliveries
In addition to the Postal Service, UPS, and FedEx, Amazon also uses Deutsche Post’s DHL, various regional carriers in the U.S., and many others around the world, including the national post of each country, like Canada Post and Royal Mail. These deliveries may average more than $4.50 a piece.
Over the past few years Amazon has also developed its own capacity to deliver directly, such as Amazon Flex, the Uber-like program in which individuals deliver for Amazon as private contractors. It’s likely that deliveries done by Amazon itself average less that $4.50 a piece.
An increasing number of deliveries are also being done “indirectly” by Amazon. Several companies around the world, which are included among the “regional carrier” category, basically just manage these private contractors. Examples include LaserShip, OnTrac, and Scoobeez, all of which use the contractor-based model to deliver the last mile. Some of these companies have ended up in court because their workers claim they’re actually Amazon employees, not “private contractors,” and entitled to protection under labor laws.
As for how many deliveries Amazon is managing itself, directly and indirectly, specific estimates are scarce, but according to research done by Deutsche Bank, cited in a report by the Institute for Local Self-Reliance, between 2014 and 2016, Flex drivers and regional couriers that contract with freelance drivers saw their share of Amazon deliveries triple from 5 percent to 15 percent.
In the U.K., as CEO Jeff Bezos told an industry conference in 2016, Amazon now uses its own trucks for around half of its household deliveries because, he claims, the Royal Mail has run out of capacity, especially at peak times.
Since it’s impossible to get a good sense of the various costs with the regional shippers and Amazon’s own deliveries, our estimate uses the same number we’re using for UPS and FedEx, $4.50 per piece.
Now let’s look at volumes and costs, starting with a possible scenario for 2013.
Estimating 2013 volumes and costs
We’re starting our analysis of volumes and costs with a picture of 2013, largely to take advantage of what seems to be a reasonable set of numbers from that Wall Street Journal article, April 24, 2014, saying total domestic volumes were 608 million.
Here’s a table showing how things might break down, followed by notes about how we came up with the numbers.
Cost per piece (row 1): While our estimate for 2017 uses $2 for Parcel Select and $4.50 for all other carriers, there have been several price increases since 2013, so our analysis for 2013 uses lower numbers. According to this USPS report, the average price per piece for Parcel Select in 2013 was about $1.50, so we use that number. The UPS 10-K for 2013 shows an average ground revenue of $7.96 in 2013 compared to $8.18 in 2017. So, for UPS, FedEx, and the other shippers, the 2013 analysis uses $4.25 instead of $4.50.
U.S. volumes and expenditures for 2013 (rows 2-4): According to the April 2014 WSJ article, “Sanford C. Bernstein & Co. analysts estimate that Amazon shipped about 608 million U.S. packages in 2013. The Postal Service handled 35%, UPS 30%, regional shippers 18% and FedEx about 17%. The distribution hasn’t changed much in recent years.” These numbers, by the way, have been repeated in numerous media reports, and they have the ring of accuracy to them (row 3).
The actual volume numbers can be derived from these percentages, as done by an analysis appearing in a Nov. 11, 2014 article in MWPVL International: 213 million pieces with USPS, 182 million with UPS, 103 million with FedEx, and 109 million with regional shippers (row 2).
There’s further evidence for the FedEx number of 103 million pieces in a June 23, 2014 DC Velocity article in which SJ Consulting says that Amazon ships about 400,000 parcels per day with FedEx. Presumably that number was for the previous fiscal year, 2013. FedEx operates about 255 day a year, so that comes to 102 million.
It should also be noted that in some cases a parcel is handled by both the Postal Service and UPS or FedEx, since they use the Postal Service for “last mile” delivery (SurePost and SmartPost).
The expenditure numbers are the volumes x cost per piece (row 4).
international volumes and expenditures for 2013 (rows 4-7): Our analysis assumes that outbound shipping costs are roughly in proportion to revenues. In 2013, Amazon’s domestic revenues were $44.5 billion, and international accounted for $30 billion — 60/40 percentage-wise.
So, if total US shipping costs were about $2 billion (cell G4), international costs might be about $1.4 billion (G7). These costs have been distributed among the private carriers based roughly on their market share of domestic costs (row 6). The volume numbers (row 5) are then derived from these cost numbers using the average price per piece.
Global volumes and expenditures for 2013 (rows 8-10). The numbers for worldwide shipping costs are the sum the estimates for domestic and international volumes and expenditures. According to this analysis, Amazon sent out 930 million packages in 2013, about 600 million in the U.S. and 300 million internationally.
Total shipping costs and averages (rows 10-14): Amazon’s 2013 10-K report says that it spent $6.635 billion on shipping costs, which includes sortation, delivery center, and transportation costs, as well as outbound shipping costs with the USPS and private carriers. According to our analysis, about half of total costs went for outbound shipping and half for all other shipping costs.
The average cost per package for all carriers was about $3.60 — as one would expect, somewhere near the middle of the Parcel Select price and the UPS-FedEx pricing. The average cost per package for total shipping costs was about $7.
That number jibes with Amazon’s shipping charges for typical purchases on the Amazon Marketplace that aren’t eligible for Prime free delivery. These are purchased fulfilled by the seller or by Amazon (FBA), which include the packing charge. As seen on this Amazon rate page, “domestic expedited” rates are about $4.50 to $6.50 plus $0.99/pound.
Now let’s turn to our hypothetical scenario for 2017.
Estimates volumes and costs for 2017
Based on the data for 2013 and some other information, we can now make some estimates for 2017. Here’s a chart showing one possible scenario, followed by explanatory notes.
Costs per piece (row 1): As explained above, we’re estimating $2 per piece on Parcel Select and $4.50 for all other carriers.
U.S. volumes and expenditures (rows 2-4): These numbers are based, first of all, on reported estimates for Parcel Select (cell C2). A Feb. 9, 2017 article in DC Velocity, citing data from SJ Consulting, said that 1 billion Amazon packages were sent via USPS Parcel Select in 2016.
USPS total Parcel Select volumes grew by 18 percent from 2016 to 2017, so it’s possible that in 2017 as many as 1.2 billion Amazon parcels went out under Select. Amazon’s total shipping costs rose from $16.2 billion in 2016 to $21.7 billion in 2017, an increase of 33 percent. If Amazon’s Parcel Select volumes grew at the same pace, maybe 1.3 billion pieces were delivered by the Postal Service.
A similar number can also be derived from that Morgan Stanley research report, which says that Amazon comprises around 24% of total USPS package volume. According to the USPS revenue, piece, weight report total volume for USPS shipping services (competitive products) in 2017 was 5.1 billion; 24 percent would be about 1.3 billion. According to the 2017 10-K, volumes for “shipping and packages” were 5.7 billion; 24 percent would be about 1.4 billion.
We’re thus looking at a range of 1 to 1.4 billion Amazon Parcel Select deliveries in 2017. Our analysis uses a conservative estimate of around 1.1 billion. (That’s about 40 percent of total Parcel Select volumes in 2017, around 2.8 billion pieces.)
If the USPS delivered about 1.1 billion Amazon parcels and that represents 45 percent of Amazon’s total US volumes (see below on row 3), total US volumes would come to 2.4 billion — the number we’re using for our estimates (cell G2).
Here’s another piece of evidence suggesting that this estimate may be in the right ballpark. A July 30, 2018, article in strategy+business, citing data from Strategy&, PwC’s strategy consulting business, says this: “The number of packages delivered annually in the U.S. is expected to rise from 11 billion in 2018 to 16 billion by 2020.” So perhaps domestic package volumes for 2017 were about 9 billion. The article goes on to say that Amazon “accounts for 25 percent of all U.S. packages today, on track to reach 50 percent by 2020.” If Amazon sent out one-fourth of those 9 billion packages, it would come to 2.25 billion domestic shipments, just short of our estimate of 2.4 billion.
The volume numbers for the private carriers (row 2) are derived using the percentages of market share (row 3).
Percentages for domestic market share (row 3): There are several estimates in the media about the market shares of each delivery company:
- An AP report, August 2017, estimates that 40 percent of Amazon’s packages are delivered by the Postal Service, compared to 20 to 25 percent by United Parcel Service and 15 to 20 percent for FedEx.
- A July 2015 Bloomberg article also cites the 40 percent for USPS, so the number may be out of date for 2017.
- A NY Times, April 4, 2018, stated: “By one estimate, about 40 percent of Amazon’s orders are delivered by the agency, with the rest handled by U.P.S., FedEx and a hodgepodge of other carriers.”
- As noted above, the Morgan Stanley study estimated that USPS delivered 45% of Amazon’s domestic volumes in 2017.
- A Logistics Management, July 2, 2018 article says, “the Big 3 delivered approximately 83% of those (with the USPS delivering nearly 50%).”
- A July 2, 2108 article in Bloomberg stated, “For now, Amazon relies on the post office, UPS and FedEx to deliver about 90 percent of its packages, said Satish Jindel, founder of SJ Consulting.”
Based on these reports, our analysis uses the 45 percent figure for USPS, 25 percent for UPS, 13 percent for FedEx, and the remaining 17 percent for regional and others. The UPS and FedEx numbers are partly determined by reports about the total share of their revenues derived from Amazon (see below, row 15-16).
International volumes and expenditures for 2017 (rows 5-7): As with 2013, estimates for International volumes and expenditures for 2017 are based on the assumption that shipping costs are proportional to geographic revenue source. According to the 2017 10-K, N. American (nearly all US) revenues were 106 billion and international revenues were $54.3 billion — 66 percent domestic, 33 percent international. Our estimate for international costs is thus about half of domestic. Figured that way, for international we estimate 850 million pieces at a cost of $3.8 billion.
This estimate might be on the low side. According to this chart from statistic.com, Japan accounted for about 23 percent of international revenues ($10.8 billion out of 45.6 billion) in 2016. According to a June 2017 article in Nikkei Asian Review, Amazon sent 300 million parcels in Japan (presumably in 2016). If 300 million represents 23 percent of the total, those total international volumes might have been 1.2 billion in 2016 and maybe 1.4 billion in 2017.
Global volumes and costs (rows 8-10): Our analysis shows that in 2017 Amazon may have sent out about 3.25 billion packages worldwide, distributed among the various carriers as shown in this chart.
Total shipping costs and averages (rows 10-14): Amazon’s 2017 10-K report says that it spent $21.7 billion on shipping costs. According to our analysis, a little more than half of total costs (55 percent) went for outbound shipping and the rest for all other shipping costs (45 percent).
The average cost per piece for total shipping costs was $6.68, with about $3.67 going for outbound shipping and the other $3 going for sortation, warehousing, transportation, etc.
Those numbers are roughly inline with industry-wide averages. According to Satish Jindel, president of ShipMatrix, a shipping operations consulting company, as quoted in a June 6, 2017, article in SupplyChainDive, the minimum any retailer can charge and break even for shipping and handling (outbound delivery and fulfillment processing) is $5.99 per shipment. Of that cost (or fee to customers), about $2.50 to $5 goes for shipping per se, and the rest goes for the pre-shipping fulfillment costs.
Changes from 2013 to 2017 (col. H): From 2013 to 2017, total shipping costs, as reported in the 10-Ks, went from $6.6 billion to $21.7 billion, an increase of 327 percent (cell H12). To reflect the fact that Amazon’s domestic revenues increased more than international revenues did, our analysis has domestic costs and volumes increasing by about 400 percent and international by about 270 percent.
Percent of carrier’s total revenues and volumes (rows 15-18): The numbers on total revenue come from the 10-K reports, and the percentages of revenues are row 10 divided by row 15.
Various estimates in the table are constrained by numbers in media reports about how much of UPS and FedEx revenues come from Amazon (row 16):
- An article in Forbes, Nov. 22, 2017: “FedEx recently stated that only about 3% of its revenues are derived from Amazon, while an estimated 7% of UPS’s revenues come from Amazon.”
- An article in Time, Feb. 10, 2018: “Analysts estimate that UPS gets up to 6 percent of revenue from Amazon deliveries compared to about 3 percent for FedEx.”
- An article in Bloomberg, Oct. 5, 2017: Amazon accounts for 5 percent to 10 percent of UPS revenue, according to analyst estimates, while FedEx has said the e-commerce giant accounts for less than 3 percent of its sales.
Based on these reports, our analysis limits Amazon revenues for UPS to 6 percent and FedEx to 3 percent of each company’s total revenues.
While Amazon revenues represent a relatively small percentage of each carrier’s revenues, Amazon’s parcels make up a much larger portion of their volumes. That’s simply because the average revenue per piece for Amazon’s packages is lower than for most other customers.
The volume number for the Postal Service comes from its 10-K. In its 10-K, UPS reports average daily package volumes of 20.03 million, 252 operating days in the year, for a total of 5.1 billion pieces. This FedEx fact sheet reports 14 million shipments each business day, which comes to 3.57 billion in 2017.
Another scenario: That Citigroup report, again
One of the few reports to say much about Amazon’s shipping costs and the market share of shippers was done by Citigroup. This is the report that gave birth to Trump’s tweets, and as explained in this previous post, it is extremely flawed in its justification for why the Postal Service is undercharging on parcels. But the report does have an interesting scenario on Amazon shipping costs. Here’s how Citigroup explains its methodology:
“We start by carving out U.S. Shipping costs from worldwide shipping costs. To do this, we prorate our CY17 WW shipping cost estimate by the percentage of retail sales from North America, and then the percentage of North America sales in the U.S (this assumes the shipping costs are allocated proportionately to retail sales). We arrive at an estimate of $12.6bn for 2017 U.S. shipping costs. From there, we leverage our framework in the New Package Paradigm note which isolates shipping costs by provider. While our shipping cost forecasts have changed since its publication, we believe the percentage distribution of shipping costs among internal and external providers (and the breakdown b/w outbound service providers) remains fair. Our estimates suggest that ~49% of shipping costs are tied to the USPS/Other regional carriers, 15% is to UPS and 11% is to FedEx. These are the “affected costs” in this analysis.” Using this methodology, here’s the chart that Citigroup produces.
Citigroup starts with the assumption that 75 percent of shipping costs go to outbound expenses with the USPS and private shippers, based on its “New Package Paradigm,” which is not available online. According to revenue numbers available at the time (before the FY 2017 report came out), Citigroup projected total shipping costs of $19.7 billion, not too far off the actual number, $21.7 billion.
Based on the proportion of revenues that were domestic (about 65 percent), Citigroup figured how much might have gone to domestic shipping costs (that’s the same assumption we make in our analysis). Here’s a comparison of the key numbers from the Citigroup report and our analysis:
The main differences in the two analyses are that Citigroup attributes a much larger share of total shipping costs to outbound expenses and a larger amount to costs with USPS/other. In Citigroup’s analysis, outbound delivery accounts for about 75 percent of total costs, while in our analysis, these costs represent about half of total shipping costs. Here’s why Citigroup may be wrong on this.
While it’s difficult to compare Amazon’s shipping costs to other carriers, for the Postal Service and private shippers, last mile delivery usually represents about half of total costs.
The PRC’s Financial analysis of the Postal Service says that in 2017, delivery services required 53 percent of total workhours. A 2016 report on parcel delivery by McKinsey & Co., refers to, “the last mile’s hefty share in total parcel delivery cost – often reaching or even exceeding 50 percent.” And an analysis done by Honeywell, reported in Modern Materials Handling, shows that last mile accounted for just over half of total delivery costs:
Looking at last mile costs is not a definitive way to estimate how Amazon’s total shipping costs get allocated, but this may give some indication why outbound costs could account for about half of Amazon’s total shipping costs rather than 75 percent. It’s also important to recognize just how rapidly Amazon is expanding its own logistics infrastructure and the costs incurred by doing that.
More alternate scenarios
Despite the specificity of the numbers in our hypothetical analysis, our estimates could be way off — and in either direction.
For example, if Citigroup is right that 75 percent of shipping costs go to outbound delivery, it would mean we’ve underestimated worldwide delivery costs by about $4.4 billion. If our estimate of $3.70 per piece is near right, we’ve underestimated worldwide parcel volumes by about 1.2 billion.
Along similar lines, the Morgan Stanley research report cited above says that the Postal Service delivered 23 percent of Amazon’s total volumes. If the Postal Service did in fact deliver about 1.1 billion Amazon parcels in 2017, total volumes worldwide would have been about 5 billion — 1.7 billion more than our estimate.
As noted above, according to the July 30, 2018, article in strategy+business, citing data from Strategy&, about 11 billion packages will be delivered in the U.S. in 2018; that might mean about 9 billion in 2017. But according to Pitney Bowes Parcel Shipping Index, the U.S. had parcel shipping volumes of 13 billion in 2016; that would mean about 15 billion in 2017. If PB is right about the volumes and stategy+business is right that Amazon sent out one-fourth of all U.S. packages, it would come to 3.75 billion domestic shipments and 5 billion worldwide.
There have also been published reports that suggest much lower estimates than we’ve come up with.
That April 13, 2018 article in the Wall Street Journal cited above reported, “The Postal Service delivers about half of Amazon’s packages every day, according to analyst estimates. Last year, Amazon shipped an estimated 1.22 billion packages in the U.S., according to MWPVL International, a supply-chain consultancy.” (It’s possible MWPVL meant that Amazon sent out 2.4 billion packages in the US, and the Postal Service delivered half of them, about 1.2 billion, but we can’t find anything on the MWPVL International website to check further.)
Along similar lines, a July 2, 2018 article in Logistics Management quotes John Haber, CEO of Spend Management Experts, saying, “Amazon ships over a billion packages a year, and current estimates have the Big 3 delivering approximately 83% of those (with the USPS delivering nearly 50%).”
If Amazon is shipping 1.2 billion packages domestically, it may be shipping another 500 million internationally, for a total of 1.7 billion — about half of our estimate of 3.3 billion.
These high-ball and low-ball estimates are difficult to reconcile with many of the numbers in the news reports we used to develop our scenario for 2017.
For example, given that total shipping costs in 2017 were $21.7 billion, if Amazon did send out 5 billion packages in 2017, the average cost per piece would be about $4.34, and the average outbound delivery cost would be about $2.20 (or $3, using Citibank assumptions). That seems pretty low.
Or, at the other extreme, if total shipping volumes worldwide were 1.7 billion, the average cost per piece for total shipping costs would be about $12.75. That’s more than twice the amount — $5.99 — that the article in SupplyChainDive (cited above) said a retailer needs to charge for shipping and handling and still break even. It would mean that Amazon is paying, on average, something like $7 per piece for outbound shipping (or more, using Citibank assumptions). These costs just seem too high.
Given the wide range of the possible estimates, it’s really hard to know what to make of things. At least our estimates appear to be in the middle of the extremes.
Until someone reports on the actual numbers, the public is pretty much in the dark on Amazon’s parcel volumes and costs and the market share of each carrier. That may be good for business, but it hinders public policy debates over issues like whether or not the Postal Service is undercharging Amazon. And one wonders why stockholders of Amazon, UPS, and FedEx aren’t more inclined to demand the answers.
(Photo: USPS truck, Huffington Post, Onnes via Getty Images)