BUSI­NESS Drones? Ama­zon bets on vans.

It off­loads costs, risks to de­liv­ery start-ups bal­ti­more­sun.com/busi­ness

Baltimore Sun Sunday - - NEWS - By Spencer Soper and Thomas Black

Jeff Be­zos cap­tured the world’s imag­i­na­tion when he ap­peared on CBS’s “60 Min­utes” and pledged to fill the skies with pack­age de­liv­ery drones.

Five years later, Ama­zon.com Inc.’s chief ex­ec­u­tive of­fi­cer is bet­ting on de­cid­edly more ter­res­trial tech­nol­ogy — driv­ers.

As in real peo­ple. Tens of thou­sands of them. High­tail­ing it through town in gas-slurp­ing vans to leave pack­ages on doorsteps just like the milk man, postal worker, UPS guy and pizza dude be­fore them.

Be­zos this sum­mer is­sued a call-to-arms to as­pir­ing en­trepreneurs, of­fer­ing them a chance to earn $300,000 a year by start­ing their own busi­nesses mak­ing Ama­zon de­liv­er­ies. All for as lit­tle as $10,000 up front, far less than the $250,000 it takes to open a fast-food fran­chise like McDon­ald’s or the $1 mil­lion re­quired to buy a typ­i­cal FedEx de­liv­ery busi­ness.

In­stead of chart­ing a fu­ture that makes driv­ers ob­so­lete, Ama­zon is so de­pen­dent on them it’s copy­ing FedEx Corp. to build a net­work of in­de­pen­dent couri­ers around the coun­try in a fran­tic ef­fort to keep pace with de­mand that peaks in De­cem­ber.

To en­tice in­ter­est, Ama­zon uses its bar­gain­ing power to get part­ners good deals on vans and in­surance and of­fers them a steady stream of pack­ages.

The Be­zos pro­teges take on the big­gest chal­lenge of all: re­cruit­ing and hir­ing driv­ers will­ing to meet Ama­zon’s high stan­dards for low pay. All when there are plenty of other jobs to pick from.

The ef­fort puts Ama­zon in le­gally murky ter­rain where it has to be care­ful how much con­trol it ex­erts over peo­ple em­ployed by dif­fer­ent com­pa­nies.

The com­pany al­ready faces mul­ti­ple law­suits from de­liv­ery driv­ers claim­ing to be stiffed wages by Ama­zon part­ners. Those work­ers say Ama­zon is on the hook, as well, since they toil on the com­pany’s be­half.

But the risks could be worth it if Ama­zon finds a le­gal way to add driv­ers and vans with­out spend­ing its own money. The model gives it far more ne­go­ti­at­ing power over each small busi­ness part­ner than it has with United Par­cel Ser­vice Inc., FedEx and the postal ser­vice.

So far, Ama­zon has at­tracted tens of thou­sands of as­pi­rants ea­ger for a ground-floor op­por­tu­nity serv­ing the fast-grow­ing com­pany led by the world’s wealth­i­est man. Ap­pli­cants go through phone in­ter­views fol­lowed by sev­eral days of train­ing.

In just a few months, hun­dreds of new busi­nesses have sprouted up around the coun­try that em­ploy thou­sands of driv­ers. Even more hope­fuls are on a wait­list ea­ger for Ama­zon to ex­pand fur­ther next year.

Ric­cardo Drago is among the new part­ners. He had been mak­ing de­liv­er­ies through Ama­zon Flex, an Uber-type ap­pli­ca­tion that lets peo­ple de­liver Ama­zon pack­ages in their own cars. Drago and his wife, Judy, al­ways dreamed of start­ing their own busi­ness, so they ac­cepted an of­fer from Ama­zon to help test the new de­liv­ery part­ner con­cept last year be­fore it was an­nounced.

Drago, who pre­vi­ously owned a body­guard busi­ness, was ea­ger to make a good im­pres­sion on his first day, but there was a big prob­lem. He had only two of the five vans he or­dered, and his com­pany was as­signed five routes. Ama­zon of­fered to di­vert the pack­ages, but Drago put two work­ers in each van, dou­bled their loads and did one of the routes in his own Hum­mer.

The Dra­gos now have 42 vans and 70 em­ploy­ees who each de­liver about 250 pack­ages in a typ­i­cal day. Their profit is about $40,000 each month, about $1,000 per van, Drago says. The big­gest chal­lenge is hir­ing and re­tain­ing driv­ers, who earn about $150 for each eight-hour shift.

Drago says he keeps them mo­ti­vated with ges­tures like serv­ing home­made Ital­ian meatballs at the end of shifts.

Ama­zon is mostly a vic­tim of its own suc­cess. The com­pany has 97 mil­lion U.S. Prime mem­bers who pay monthly and an­nual fees in ex­change for fast de­liv­ery, ac­cord­ing to Con­sumer In­tel­li­gence Re­search Part­ners. Those cus­tomers have lit­tle in­cen­tive to con­sol­i­date their or­ders to make ship­ping more eco­nom­i­cal.

Ama­zon in­creased the yearly cost of Prime mem­ber­ship by 20 per­cent this year to $120, the first hike since 2014. Any com­pany de­liv­er­ing pack­ages for Ama­zon has to pay for ve­hi­cles, gas and in­surance.

A key way for Ama­zon’s new part­ners to keep de­liv­ery costs down while mak­ing a profit is to pay driv­ers less than the com­pe­ti­tion. UPS’s union driv­ers earn a top wage of nearly $80,000 a year, ex­clud­ing over­time, plus health-care and pen­sion ben­e­fits.

Me­dian an­nual pay for union postal work­ers is $57,000.

Most FedEx con­trac­tors pay driv­ers about $40,000 a year and some of­fer health­care ben­e­fits. FedEx driv­ers aren’t union­ized and turnover is higher than UPS, which has a wait­ing list to be­come a driver.

Ama­zon, which an­nounced in Oc­to­ber that all of its ware­house work­ers would be paid at least $15 an hour, doesn’t dic­tate how much de­liv­ery part­ners pay driv­ers. In­ter­views with two Ama­zon de­liv­ery part­ners in­di­cate full-time driv­ers earn be­tween $30,000 and $40,000 a year ex­clud­ing over­time.

Beyond sav­ing on pay, the de­liv­ery part­ner model lets Ama­zon train the owner once, who then bears the cost of re­cruit­ing, hir­ing and train­ing the rest of the driv­ers in a high-turnover busi­ness. That can cost up to $4,000 per per­son, says Atif Sid­diqi, CEO at Branch Mes­sen­ger.

Blake Vaughn jumped at the chance to start an Ama­zon de­liv­ery busi­ness in Fort Worth, Texas, this sum­mer. Af­ter a few phone in­ter­views, he was off to a week-long train­ing in Seat­tle and of­fi­cially launched Pa­triot DSP in Oc­to­ber.

He has more than 50 vans and em­ploys al­most 100 driv­ers who make at least $15 an hour plus bonuses and ben­e­fits. A Navy veteran, Vaughn re­ceived $10,000 from Ama­zon to off­set startup costs. The com­pany ear­marked $1 mil­lion to en­tice vet­er­ans to start busi­nesses.

Ama­zon pays Vaughn up to $1,800 per ve­hi­cle each month, $24 per em­ployee hour and then an ad­di­tional amount per pack­age, leav­ing it up to him to man­age the busi­ness prof­itably. Vaughn ex­pects to have a profit mar­gin of 10 per­cent to 14 per­cent on about $1 mil­lion in rev­enue in his first three months and says mar­gins should im­prove once he’s more es­tab­lished.

Vaughn spends $3,000 a month ad­ver­tis­ing job open­ings and hired a man­ager with a back­ground in re­cruit­ing and hu­man re­sources. He in­ter­views 40 driv­ers each month and hires about 30 of them.

AN­DREW HAR­RER/BLOOMBERG NEWS

Ama­zon has at­tracted tens of thou­sands ea­ger for a ground-floor op­por­tu­nity serv­ing the fast-grow­ing com­pany.

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