BUSINESS Drones? Amazon bets on vans.
It offloads costs, risks to delivery start-ups baltimoresun.com/business
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.
Amazon has attracted tens of thousands eager for a ground-floor opportunity serving the fast-growing company.