Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Amazon is all-powerful in the digital world, where millions of people love one-click buying from Jeff Bezos's shopping bazaar. But where the digital world meets the physical reality of packing, sorting and delivering those orders, Amazon's might turns meek. 

The challenge of physical delivery is the biggest barrier between Bezos and domination. And that's why Amazon is trying an array of tactics to tackle the delivery bottleneck.

Bloomberg's Spencer Soper reported the latest Amazon effort is an experiment to take over more package pickups from product warehouses of the merchants who sell roughly half the goods sold on Amazon. Those duties are now often handled by United Parcel Service Inc. and FedEx Corp. The idea is that Amazon -- and not the seller -- will decide which shipping company should deliver the package to a customer's door.

All this is in keeping with Amazon.com Inc.'s myriad attempts to handle more of its own package-handling duties to make deliveries more efficient and improve customer service. The company has also been testing package delivery by drones, leased its own cargo planes, started using private delivery trucks and drivers, registered to provide ocean freight services and built a growing number of warehouses to house inventory and handle package sorting. 

And it's no wonder Amazon is trying everything it can to exert more control over its deliveries. The challenges of managing Amazon's order are costing a fortune. Amazon in the last year spent $18.5 billion -- a record 12.3 percent of its revenue -- on sorting packages, transporting them and handling other shipping-related tasks. Amazon shipping costs were about 8 percent of revenue in 2012.

Speedy Delivery
The popularity of shopping on Amazon has driven up the company's costs to handle package shipments
Source: Amazon

Shipping costs are also climbing faster than Amazon's sales, and so are its expenses to operate and staff the company's growing network of package warehouses. Investors are growing anxious about those climbing expenses, which have squeezed Amazon's puny profit margins to almost nothing. Amazon's e-commerce business in North America posted an operating income margin of 2.4 percent in the first half of this year. 

Amazon's rising costs to handle orders is also a consequence of the popularity of its program that allows independent merchants -- from big brands like Nike to a dad selling fidget spinners from his garage -- to sell their products on Amazon.com and have the option to stow their inventory in Amazon's warehouses.

About half of the orders on Amazon now come from these independent sellers, and Amazon said recently that the number of orders it handled for those merchants was growing nearly 40 percent a year. The downside is that as these sales grow, Amazon needs to employ new tactics to manage the complexity of deliveries originating from an array of sellers. 

Teeny Tiny
Amazon's costs to manage its warehouses and handle deliveries has dragged down the company's profit margin
Source: Amazon

This is a good problem to have, mind you. Amazon's delivery challenges are a consequence of its incredible growth. The company just needs to try any trick it can to ensure it isn't crushed by people's eagerness to shop from their sofas. 

For the foreseeable future, Amazon must continue to rely on delivery partners including FedEx, UPS and the U.S. Postal Service. Those companies have rewired their own delivery systems to cater to Amazon and other e-commerce companies. But everything Amazon does to bring more of its package handling duties in-house is at the very least a prod to keep those companies catering to one of their biggest customers.

But no one discounts the possibility that Amazon might slowly take over more and more of its package delivery needs to the point where it cuts out those delivery companies entirely. That's why shares of FedEx and UPS are dipping on Thursday.

There are precedents that should spook investors in the professional shipping companies. Amazon many years ago stopped using the same inventory management and package-sorting technology as everyone else and decided to create systems tailored to Amazon's needs. Creating its own physical delivery networks is even tougher than inventing in-house software, but it's unwise to underestimate Bezos's ambitions.

Amazon's zeal to win the war to customers' doors is also a reminder that success in the technology industry often depends on mastering rather dull things. Apple Inc. wouldn't be the world's most valuable public company if it hadn't expertly managed the army of companies making iPhone parts. Google and Facebook created world-changing technologies, but they've also honed the same business Henry Luce was in: selling advertisements for soap and soft drinks.

Technologists get a lot of credit for fulfilling great feats of imagination, but there are a lot of boring nuts-and-bolts to winning the future, too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net