Amazon delivery firms are bailing amid rising costs, meager profit

(Bloomberg/Spencer Soper) — In 2022, Jake Clay started an Amazon delivery firm in Odessa, Texas, after hearing about the company-sponsored program from a friend. He sank $75,000 into the business and earned more than $200,000 in the first year. An Air Force veteran, Clay, 50, felt like he’d joined an elite unit.

The feeling didn’t last. Before long, rising insurance and other costs began eating into his profit. One of Clay’s drivers was badly bitten by a dog and went on workers compensation for a year, while his annual vehicle insurance rates soared fivefold to almost $500,000. Clay mulled laying off all his managers and running the business on his own, figuring he would clear about $75,000. In the end, he decided it wasn’t worth it. He quit last month.

“I earned significantly less as I got more seasoned, which is the most upside-down business I’ve ever heard of,” Clay said. “Amazon wants a bunch of pawns and they keep a bunch of extra pawns on the bench to replace anyone who leaves.”

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Clay said he rejected an offer to sign an exit contract with Amazon that would have paid him $75,000, but ban him from speaking publicly about the program.

Amazon.com Inc. launched its Delivery Service Partner program in 2018, offering aspiring entrepreneurs an opportunity to run their own businesses. The world’s biggest online retailer pledged to use its negotiating clout to help them lease vans and hire drivers. All they needed, the company said at the time, was can-do spirit and as little as $10,000 up front to earn as much as $300,000 (now $400,000) in yearly profit.

Today, some who answered the call fear the best days are behind them. While many prospered during the pandemic-era e-commerce boom, they say their profits are dwindling owing to rising costs for insurance and vehicle maintenance even as Amazon tightens performance metrics that determine how much they earn. Like Clay, several delivery owners told Bloomberg that making money has become so hard they’re getting out — a wrenching decision with the economy slowing and unemployment rising.

Amid the mounting discontent, Amazon recently announced a 20% hike to 12 cents for each package the firms deliver. It was the first such increase since the company launched the Delivery Service Partner program and an acknowledgement that inflation has driven up costs. But many contract delivery firms said the gesture was too little, too late. And because it doesn’t take effect until January, some saw it as a carrot to keep them working through the holidays when Amazon needs them most.

Still, they recognize they have little leverage because Amazon can simply replace them. Last month, during the annual Ignite conference for delivery service partners, the company touted its “Road to Ownership” program, which is designed to persuade drivers to start their own delivery companies. Many owners saw the presentation as a reminder that there are plenty of people eager to step in. And a number of newbies attended the Las Vegas conference, looking for tips on how to run their businesses.

Bloomberg interviewed 23 delivery partners who operate in 11 states around the US. Five said they quit the program because they were making less money each year, and several others are contemplating getting out. Four owners said they were happy with the program and that their income was growing. In online forums, delivery contractors have debated how to negotiate larger exit packages with Amazon and tried to establish how many have already quit. One chat room was set up specifically for contractors thinking of shuttering their firms and features more than 100 mostly anonymous members.

Most of the delivery partners interviewed, including those who quit and one who liked the program, spoke on condition of anonymity because they feared repercussions from Amazon.

“The anecdotes shared by a small number of DSPs don’t reflect the experience of the vast majority,” Amazon spokesperson Dannea DeLisser said in an emailed statement. “Interest in the program continues to grow as entrepreneurs recognize the opportunity to build their own businesses with Amazon’s support, and we’re proud of the thousands of DSPs that are doing well and making a positive impact in their communities.” Amazon has invested $16.7 billion in the program, which currently encompasses more than 4,400 firms — most of them in the US.

Inflationary Pressure

Contract delivery firms have tangled with Amazon for years, often over what they consider unreasonable delivery targets that are monitored by artificial intelligence. Those concerns remain, but business owners trace their current woes to the inflationary environment and the company’s unwillingness to provide sufficient support at a time when Amazon is focused on cutting costs and boosting profits.

Tension between the company and its delivery businesses flared earlier this year when the company passed along big bills to repair aging delivery vans. Some contractors said they were getting hit with repair bills of up to $20,000 per vehicle that they couldn’t afford to pay. The delivery firms used an app called Pave to estimate damages based on photos of the vehicle, but Amazon instituted a more rigorous inspection process this year that resulted in repair bills as much as 10 times higher than the app estimate.

With delivery contractors balking, Amazon in September backpedaled and told them it would cover 20% of van repairs estimated in the Pave app going back to April and that it would send out revised invoices this month.

The delivery firms are also grappling with the rising cost of insurance. Typically when they start out, insurance rates are reasonable. But the longer they are in business, the more chance there is for accidents, dog bites and other issues, which in turn push up the costs of covering their operation.

One owner who started an Amazon delivery business in 2019 blames skyrocketing premiums for slashing his annual profit from $400,000 to $150,000. He mostly employs young male drivers, who insurers consider high-risk. His premiums soared after one driver was involved in a crash with serious injuries. When the case settled out of court for $1.4 million, the owner realized the risk wasn’t worth the reward.

He went to the Amazon delivery station one Saturday evening to tell them he’d cease operating the next day, leaving the company scrambling to reassign thousands of packages to other firms. “They weren’t happy,” he said.

Another delivery contractor who started when Amazon launched the program in 2018 said his yearly profits have been trending downward from about $200,000 to $160,000, which he expected to continue. His problems started when Amazon switched 10-hour delivery routes to begin later in the day at 11 a.m., meaning drivers made more deliveries in the dark when it’s harder to see street signs, addresses and potential hazards like muddy puddles on dirt roads. That drove up his costs since he had to pay drivers overtime to complete routes and hire tow trucks to free vans stuck in mud. Amazon never increased his payments to reflect the increased costs associated with later deliveries.

Amazon said it conducted a financial performance of 648 delivery contractors last year and found that about 80% of them generated annual profits of at least $100,000. The company said their profits, on average, increased each year. The average business has been operating for five years and fewer than 10% of them quit the program, according to Amazon.

Some owners accept that running an Amazon delivery firm isn’t necessarily a long-term bet and prepare by diversifying. One delivery contractor in the Midwest started a plumbing franchise and encouraged his hardest-working delivery drivers to work there and learn a trade. Fred Vernon, 36, said starting an Amazon delivery business in 2019 in Houston has been life-changing. It’s hard work and he emphasizes driver safety to keep his insurance costs in line. Meanwhile, Vernon is using his proceeds to pay for law school.

“We’re doing very well and I’m grateful for the opportunity to pursue other goals,” he said.

Amazon delivery contractors quickly learn that bailing is no panacea. Unlike many small business owners, they have no hard assets to sell. They lease the vans, and the packages are stored in Amazon facilities. They could try to sell the business but it’s tied to a one-year contract with Amazon, which has veto power over any prospective buyer. So they can either quit with nothing or keep limping along with the knowledge that they could be replaced once the contract expires — perhaps with someone like Shannon Joseph.

A former driver, Joseph launched her own delivery business in Austin in 2022. She says her experience hauling packages has helped build rapport with her 92 employees. Joseph has heard the complaints from other delivery firms, but is confident she’ll keep making money and growing by outperforming the pack.

“I want to be one of the delivery partners who makes it for 10 years,” she said.

–With assistance from Matt Day.

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