Amazon’s future might be less about drones and more about operating its own trucks

The idea of Amazon using delivery drones attracted attention but one commentator thinks owning and operating its own trucks would be more feasible and important:

Ajay Agarwal knows Amazon. As a managing director with Bain Capital Ventures, he led a big investment in Kiva Systems, the warehouse robot company that Amazon paid $775 million for last year. Agarwal says that Amazon may be taking an ever-greater chunk out of the world’s brick-and-mortar retail sales, but physical stores still have Amazon beat in one key area. “What’s the biggest negative of Amazon? Returns,” he says. “It’s a royal pain…I feel like a daily, weekly exercise for me is breaking down boxes, doing returns, printing out return labels, etcetera, etcetera.”

But a dense network of Amazon delivery trucks could make returning unwanted items as easy as taking out the garbage. Unlike electronics or books, which most people shop for sporadically, grocery shopping takes place regularly and often. If Amazon Fresh takes off, that will mean frequent, predictable trips by Amazon trucks down residential streets. For every grocery order delivered, those trucks will have room for another return. “They take packages, and they take packages back,” Agarwal says, much like the milkman who in distant days not only delivered your milk but also picked up the empty bottles. “They control the entire infrastructure.”

That deep control has been a signature element of Amazon’s operations, from the first website visit to the moment an order leaves a warehouse. But that’s when Amazon hands off that order to a third-party carrier, typically UPS or FedEx. Such a concession must drive a control freak like Amazon CEO Jeff Bezos nuts — even if those companies have helped cement Amazon’s reputation for reliability by delivering on Amazon Prime’s promise of two-day shipping. With an army of its own trucks on city streets, Amazon cuts out the middle man. Meanwhile, returns could become as easy as handing a box back to the same Amazon driver who brought it in the first place…

But, he adds, Amazon must tread lightly. For now, the company depends intensely on UPS and FedEx to make its business work. At the moment, Amazon can’t make them angry. It’s telling that a day after Bezos revealed Amazon’s flying drone ambitions on 60 Minutes, which would also be a form of direct shipping, news leaked of UPS’ own drone plans, as if the delivery company was saying: “Don’t test us.”

Companies like Amazon like having control over the whole process for several reasons. One is that everything is then under their control. (Except the production of products which still have to be designed, made, and placed in Amazon distribution centers.) From beginning to end, they can set quality standards and track information. The other important part of this is cost and I’m a little surprised Agarwal doesn’t say anything about this. One appealing aspect of drones is that they remove the need to have people involved with the delivery of packages. In contrast, trucks require drivers and maintaining equipment. (This also doesn’t account for the need for Amazon, companies, and taxpayers to also support and pay for roads.) Could Amazon do trucking cheaper?

Maybe Amazon doesn’t care. Compared to other companies, Amazon seems relatively unconcerned about its profits. For example, see this opinion piece on “Why Amazon is a Lousy Business:”

Unfortunately, it’s not a great business.  According to Yahoo Finance, the company earned only a slim 1% operating margin during the last 2 years and a not particularly impressive 4% margin in 2010.  While there’s more to a business than just the bottom line, those are worrying numbers.

Jeff Bezos insists that he can turn on the earnings spigot any time he wants and is merely plowing money back in order to grow the business, but that seems thin to me.  Last year Amazon grew its top line 27%, very good, but not unusual for a technology company (Google, for comparison, grew 32%).

Drones, trucks, or otherwise, Amazon will have some choices about how to proceed with deliveries.

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