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Costs associated with a last-mile delivery business such as Amazon

In this blog post I will attempt to estimate and understand the costs associated with operating a last mile delivery business such as Amazon. The data is from various public sources and may not always add up based on the assumptions made by each source in coming up with their numbers, but we can still take away a lot from these rough back of the envelope calculations.

To get the big picture let’s start with the retail market size first. Total retail sales in the US is approximately $5 trillion, while e-commerce sales which make up about 10 to 15 percent of the overall retail sector are about $700 billion. Amazon accounted for 38 percent of U.S. retail e-commerce sales as of 2020 according to Statista. Amazon’s annual revenue in 2019 as reported in their financial statements is $280 billion and closely matches this estimated percentage. But important to keep in mind that the annual revenue figure includes digital items as well that don’t incur any physical delivery cost. 

We would like to estimate the overall cost of delivery to the customer and according to McKinsey, for every $100 in sales, e-commerce companies spend about $20 on logistics. If we check Amazon’s annual reports again they mention that shipping costs which include sortation and delivery centers and transportation costs were $37.9 billion in 2019. This is somewhat lesser than 20% of Amazon’s total revenue. However, Amazon has many other revenue streams besides online sales, some of which include AWS, subscription services, and also sales from physical stores (since 2017 acquisition of Whole Foods). If we only consider the revenue from online stores and third-party seller services it sums up to $195 billion, and is consistent with the $20 per $100 spent that McKinsey estimates.

The $37.9 billion that Amazon spends is around 2% of the total spending on logistics in the United States. The logistics business in the US amounted to 1.63 trillion U.S. dollars according to the Council of Supply Chain Management Professionals’ annual State of Logistics report. That’s about 7.6% of US GDP of 21.43 trillion USD and includes transportation as well as inventory costs. The major costs are motor carrier costs with the trucking market close to $800 billion, which is almost 80% of the total transportation costs and airfreight is another $60 to $70 billion market.

If we go by the national numbers, two-thirds of total costs are related to transportation, and inventory carrying costs account for 30% of the total. Using the same ratios, we would get Amazon’s sortation and delivery center costs around $12 billion, and transportation costs would make up the remaining $24 billion. Amazon also reported delivering 2.3 billion of its own packages (50% of its total volume deliveries) in 2019. We don’t know the costs associated with delivering packages for Amazon, but it’s estimated that UPS made 25% of the total deliveries and UPS also revealed that the retailer spent $8.6 billion with UPS in 2019. Most of the remaining deliveries are handled by the U.S. Postal Service which generated $3.9 billion in revenue from its business with the company.
 

So approximately half of the transportation costs are external. Which means Amazon spent around $25 billion on operating its internal logistics network which includes 1,100 logistics facilities globally, 20,000 delivery vans, 40 aircraft and 200,000 sortation robots. This is excluding the capital expenditure of $10 billion in retail delivery capital spending in 2019. Amazon reported depreciation expense of about $7 billion in 2019, which is quite likely included in the overall logistics cost. That leaves $18 billion spent on operating costs which likely include wages for its estimated half a million workers, and expenses associated with operating its fleet, robots and warehouses.

Amazon’s big push towards building out its own delivery reportedly started in 2013. It’s total fulfillment costs of ~$8 billion on $60 billion in product sales has now grown to almost $40 billion on $195 billion in sales. It seems its delivery costs have grown at a much faster rate than revenue as it pushes towards single day delivery on even more items and across growing geographical locations. However, building its own logistics has definitely contributed towards reducing its overall costs and optimizing its logistics and has been crucial in making single day delivery possible.

References

https://www.emarketer.com/content/us-retail-sales-drop-more-than-10-2020

https://www.statista.com/statistics/274255/market-share-of-the-leading-retailers-in-us-e-commerce/

https://www.statista.com/statistics/672747/amazons-consolidated-net-revenue-by-segment/

https://www.statista.com/statistics/638430/us-logistics-market-business-costs/

https://www.wsj.com/articles/companies-are-spending-more-on-shipping-and-thats-not-changing-soon-1529413500

https://www.wsj.com/articles/ups-results-get-boost-from-amazon-11580388498

https://www.geekwire.com/2020/internal-documents-say-u-s-postal-service-made-1-6b-profit-amazon-fy2019/

https://www.investopedia.com/articles/investing/020515/why-amazon-needs-dump-ups-and-fedex-amzn-fdx-ups.asp

https://www.barrons.com/articles/amazon-is-a-delivery-powerhouse-look-out-fedex-ups-usps-51587403739

https://www.axios.com/amazon-race-dominate-logistics-shipping-ups-fedex-dhl-b652dbf0-abef-4505-9630-1107fdacb535.html

https://www.macrotrends.net/stocks/charts/AMZN/amazon/financial-statements

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