Amazon made news in Summer 2018 when it revealed Amazon Delivery Services Partners. This program, sometimes known as a “last mile delivery service,” allows entrepreneurs to run independent companies that partner with Amazon to make deliveries happen.
Although the new structure made waves (as most Amazon announcements do), this business structure is nothing new. This is how FedEx Ground delivers packages: with a network of independent service providers.
While we will monitor the Amazon route opportunities closely, we currently see no reason to consider them a threat to FedEx Ground routes. Moreover, we still strongly believe FedEx Ground routes are a better business opportunity for most investors.
Evaluating Profit Margins
Amazon’s new Delivery Services Partners website advertises an annual revenue potential of $1 million to $4.5 million. They also say that this revenue stream translates to an annual profit potential of $75,000 to $300,000.
The program is careful to note a few things: first, these estimates assume a fleet of 20-40 vans. Secondly, they admit they only estimate these numbers based on their internal research, “profit figures...are projections only and are not based on actual results of delivery companies. We do not guarantee results of any kind.”
In a FedEx Ground route business, we would expect a company with 20 vans or box trucks to generate annual revenue close to $2 million with an annual profit of $300,000.
Let’s break that down a bit more.
We base these FedEx Ground financial estimates on industry averages where FedEx Ground Independent Service Providers earn approximately $100,000 in revenue per fleet van or box truck and healthy businesses have profit margins ranging from 15-20%.
A long history of savvy entrepreneurs investing in FedEx Ground businesses gives us confidence in the financials of a FedEx Ground business.
Conversely, there are unknowns and risks associated with an Amazon delivery business at this time. Beyond the profit margin discrepancies, we think there are several other issues potential investors must consider.
With an average 20-40 truck fleet, Amazon requires larger operations: more trucks and employees with smaller profits per truck.
Importantly, Amazon requires DSPs run operations seven days per week. Without a day off, owners will need two sets of staff since, under Department of Transportation (DOT) law, employees must have a 34 hour reset after 60/70 hours on duty in 7/8 consecutive days.
Thus, Amazon DSP businesses will likely need a Monday through Friday staff and then a Saturday/Sunday part-time staff. Owners of these businesses have a tall order to fill: manage a fleet of 20-40 vehicles and staff 40-100 employees each week of the year.
Based on operations size and Amazon DSP requirements, we expect that Amazon DSP owners will need to be hands on day-in and day-out. Conversely, owners of FedEx Ground routes may choose to be very involved or operate as an absentee owner.
Amazon currently requires all new Amazon DSP owners to travel to Seattle for one week of training. Further, Amazon then requires owners to conduct two weeks of in the field training. That’s three out-of-pocket weeks where income to your business isn’t flowing yet. FedEx Ground does not have a similar requirement.
One of the biggest considerations for investors looking at an Amazon DSP business is that Amazon requires contractors to hold their own DOT number. According to the DOT, “Companies that operate commercial vehicles transporting passengers or hauling cargo in interstate commerce must be registered with the FMCSA and must have a USDOT Number.”
FedEx Ground ISPs currently use a FedEx Ground DOT number. Amazon DSPs will need their own number. This can have a significant impact on contractor’s costs and liability. The full scope of the implications of this requirement are still unknown, but buyers should be aware of this difference.
This is a game changer for the type of insurance contractors will need —it's much more expensive and riskier than being under FedEx Ground's DOT number. This will undoubtedly cut into Amazon DSP profit margins and it represents an additional barrier to entry. The one upside to this is that the Amazon structure will likely make it easier to get drivers on the road since Amazon driver applicants will only be subject to DOT requirements. FedEx Ground has more restrictive hiring policies in place currently, but recent announcements from FedEx Ground suggests they are currently reviewing this model in an effort to lessen any potential recruiting pressures on FedEx Ground CSP’s.
The high amount of publicity resulting from the Amazon DSP announcements increases the overall market interest in routes as an investment. This is a big positive for FedEx Ground routes; as more investors wake up to the opportunity to operate delivery routes, many will realize how lucrative FedEx Ground routes are for investors.