An Update on Contractor Experiences and Where These Investments Will Trend
Amazon Logistics is the hot story in logistics news this past year. However, most of the news isn’t actually informative for investors. How much does it cost to buy Amazon routes? Are they good investments? What’s it like to own/operate Amazon routes?
As promised, we are keeping our eyes on this potential investment opportunity. We connected with a number of our contacts in the logistics space to ask them about the current state and future of Amazon Logistics. Most importantly, we interviewed current contractors moving freight for Amazon.
Here’s an update on what it’s like to invest in Amazon routes right now.
Amazon Logistics DSP + Linehaul
As of this writing, contractors that own DSP routes are not allowed to sell their routes. There is currently no way to invest in these types of routes without going directly through Amazon.
Amazon Logistics Linehaul Investments
Amazon linehaul contractors can sell their business and Amazon Logistics contract to another individual. However, these linehaul contracts are not appealing investments right now because they have unpredictable revenue streams and higher expenses and risk. Further, these businesses are difficult to offload if you wish to divest.
FedEx Ground linehaul operations consist of two different types of linehaul runs: dedicated runs and unassigned runs.
Dedicated runs have the same starting and stopping destination on each trip. For example, Nashville to Dallas. Your run remains Nashville to Dallas and back.
Unassigned runs have a defined starting location, but do not have a regularly assigned destination. These runs handle overflow and travel to varied destinations on an as-needed basis.
Investors typically prefer dedicated runs because they allow for more predictable income. Because of the unpredictable cash flow of an unassigned run, attractive linehaul listings will have dedicated runs comprising 60-80% of their portfolio.
With Amazon linehaul, there is no such thing as a dedicated run. Therefore, there’s no guaranteed cash flow.
Contractors secure their freight/assignments by using an app called Amazon Relay. Each contractor with an Amazon contract logs into the app twice per week to input their capacity and capacity locations. Within each location/market the Amazon Relay app ranks contractors and, based on a contractor’s rankings, assigns freight.
Rankings range from 1 (the best possible ranking) to last place amongst available contractors in a market (which can be 5, 20, 50 or more). Contractors know their ranking at any given moment, although the exact formula for the ranking system is not known. Amazon informed contractors their rankings account for their service performance history and their capacity. Generally, contractors with more capacity have a higher ranking.
The Amazon contractors we interviewed were largely dissatisfied with the process and investment. They described Amazon Logistics as “starving” its contractors. Their two primary complaints were,
Amazon Logistics has far more contractors than they currently need, and
There is no consistency in the amount of freight or destination.
One contractor told us that he earned over $55,000 for Amazon freight one week and exactly $0 the next. The contract between Amazon Logistics and linehaul contractors includes no guarantees that would allow contractors to efficiently plan for their business.
This volatility in Amazon linehaul freight means that most contractors working with Amazon Logistics do so as a supplement to other contracts rather than as a primary business.
Amazon Logistics Contractors Must Hold Their Own DOT Number
Independent Service Providers (ISPs) for FedEx Ground operate routes/runs under a FedEx Ground Department of Transportation (DOT) number. This setup has significant financial benefits for ISPs.
Because FedEx Ground holds the DOT number, they keep up-to-date with compliance issues. Most importantly, FedEx Ground carries the auto liability insurance required for each DOT number.
Amazon Logistics requires contractors to carry their own, unique DOT number and corresponding insurance. This is an incredibly costly and is a risky undertaking for an investor. If a business owner loses their DOT number, they are out of business effective immediately.
Because each contracting business must carry a unique DOT number, current Amazon Logistics business owners are unable to easily sell pieces of their business.
Insurance for logistics businesses is astronomically high in the first one to two years of business. Only after two or three years of safe driving history do rates begin to drop (by as much as 60-70% from their starting point). This makes establishing a new company and DOT number highly unsavory for potential buyers. They are going to want to buy the entire business, including the (hopefully) safe driving history and lower insurance rates.
This handicaps business owners who wish to strategically offload pieces of the business. Instead, they will need to sell the entire operation.
What’s risky about carrying your own DOT number, you ask?
Let’s say you do find an excellent buyer for your entire business. Your insurance carrier and the DOT must approve the transfer of the DOT number. This could put sales in jeopardy and/or make it hard to find buyers.
Most alarmingly, though, if you carry your own DOT number you also risk losing it.
Each safety violation or “ding” against your DOT number puts your business under a microscope. At a certain point, the DOT may decide you’ve had one ding too many and rescind your DOT number. Without the DOT number your entire investment goes up in flames.
Looking Forward: Amazon Logistics Investments in the Future
Currently, Amazon Logistics contractors cannot,
strategically sell their investment as they wish, or
have certainty that their ability to do business (via a DOT number) won’t disappear.
These are red flags for potential investors.
Don’t despair, though! FedEx Ground had a similarly rocky start with contractors in the 1980s. Today, a FedEx Ground route business is one of the strongest investment opportunities in the logistics and e-commerce space.
We predict that Amazon Logistics will evolve their linehaul contracts so that these investments become more favorable over time. That timeline, though, could be in excess of five years from this writing.
Moreover, it’s highly likely Amazon Logistics will eventually allow the buying/selling of Amazon DSP routes.
Check back with us regularly for the latest Amazon Logistics investment updates. And if you’d like to ask more specific questions of our team or learn about our Active Route Listings, connect with us.