Home » Amazon Fulfills Kentucky’s Goal to Be World’s Logistics Leader

Amazon Fulfills Kentucky’s Goal to Be World’s Logistics Leader

By Greg Paeth

Image from a current Amazon fulfillment center. Amazon currently has 11 fulfillment, distribution and return facilities in Kentucky that employ more than 10,000. Its planned first ever Prime Air hub at Cincinnati-Northern Kentucky International Airport will add up to 2,700 more jobs and prepare Amazon to expand into new services.
Image from a current Amazon fulfillment center. Amazon currently has 11 fulfillment, distribution and return facilities in Kentucky that employ more than 10,000. Its planned first ever Prime Air hub at Cincinnati-Northern Kentucky International Airport will add up to 2,700 more jobs and prepare Amazon to expand into new services.

In the iconic, now 50-year-old film “The Graduate,” Dustin Hoffman’s Benjamin Braddock character gets one word of seemingly profound career advice from a well-meaning family friend in a man-to-man poolside chat: “Plastics.”

Today, that thoughtful, potentially life-altering guidance from Mr. McGuire probably would be a term that didn’t exist in 1967: “E-commerce.”

Especially in Kentucky. Especially in 2017. Especially when that E-commerce is being driven by Amazon.com, the explosively growing online retail behemoth that seems capable of delivering anything to the front door before your PayPal deduction clears.

And especially when there’s a wealth of speculation the $1.5 billion Prime Air hub project at Cincinnati-Northern Kentucky International Airport that Amazon announced in January, deeply delighting the business community and public officials, might actually turn out to be far more than what the company describes as its first “centralized air hub to support its growing fleet of Prime Air cargo planes.”

Amazon’s project cements Kentucky’s status as THE center of distribution-delivery logistics for North America, the world’s most important economic market. The Prime Air hub will join the massive UPS Worldport package sorting and air-freight operation adjoining Louisville International Airport and the DHL Americas Hub for air freight already at CVG. Memphis-based FedEx, the other major U.S. logistics-distribution giant, last year added a 303,000-s.f. center in Louisville.

Some perspective on Seattle-based Amazon: For just the fourth quarter 2016 the company reported revenues of $43.7 billion, which is more than double Kentucky state government’s $21.5 billion budget for the biennium running through June 30, 2018; full-year 2016 sales were $136 billon, an increase of 28 percent over 2015. The world’s largest online retailer said it ended 2016 with 180,000 employees, a six-fold increase over 2011, and that it would create 100,000 more full-time U.S. jobs by mid-2018.

Amazon is the third most valuable brand in U.S business, only fractionally behind Google and Apple, according to a March 30 news release from Brand Finance, a British brand-worth rating operation.

“As it continues to both reshape the retail market and to capture an ever larger share of it,” Brand Finance said, “Amazon could easily become the most valuable brand in the U.S. and the rest of the world in 2018.”

The company in January revealed its intention to establish a hub that will employ up to 2,700 people in a 3 million-s.f. building. However, knowledgeable people who get paid to scrutinize the company say Amazon may build a facility in Hebron that goes far beyond that – and could have far-reaching, long-term and global significance not only for the company but the package-delivery industry and retailing itself.

One theory is Amazon intends to use CVG as the launch point for its own full-scale package-delivery operations that could rival FedEx and UPS, to whom it now subcontracts much of that business. Another theory is that the Hebron airport will become the core of international shipping operations for the company. 

When Amazon made its big Kentucky project announcement Jan. 31, the presumption was Prime Air hub functions couldn’t begin until its massive building is completed. But sources familiar with company plans said Amazon will begin flying Prime Air craft at CVG in weeks rather than years, perhaps before there’s even a groundbreaking.

Amazon will start operations in May, said well-positioned business insiders, through an agreement with DHL, the Bonn, Germany-based shipping and logistics company that operates one of its three world hubs literally across the street from Amazon’s new CVG site.

“DHL can confirm that it has been contracted to provide a range of services to Amazon at the DHL Cincinnati Hub, including sorting operations and ground handling for the Amazon air network. We look forward to providing further support to this global customer,” said Bea Garcia, DHL media relations director for the Americas, who declined further comment.

Amazon, which is often tight-lipped about its business plans, said it would not provide any details beyond those in the January press release. It has not announced a start date or construction timetable for the $1.5 billion project.

Shot heard round the world

Nevertheless, leaders of key Northern Kentucky institutions are thrilled about the company’s decision. The worldwide business community is paying close attention also.

Terry Gill, secretary of the Kentucky Cabinet for Economic Development, said Japanese business leaders had plenty of questions and comments about the Amazon project in March when he spent a week in Japan on a trade mission.

Gill is enthused about the Amazon project, which will be the company’s 12th operation in the commonwealth.

“This is on par with UPS’s worldwide operations at Worldport (its global air hub in Louisville),” Gill said. “In that instance it created at least 170 companies that moved into that Louisville metropolitan area that were not owned by UPS; they wanted to leverage their (UPS’) investment. It created tens of millions in payroll taxes, $300 million in payroll and somewhere north of 13,000 jobs for Louisville.”

The state’s central U.S. location provides a “…unique combination of infrastructure assets that quite honestly probably will never be replicated,” Gill said. “Just as you can only imagine that there will be just one Silicon Valley, there will ever only be one concentration of global logistics competitors that have chosen one state… So that’s a pretty remarkable advantage that we have to be cognizant of.”

Kentucky Economic Development Finance Authority approved tax incentives up to $40 million through the Kentucky Business Investment program if Amazon meets job and investment targets. CVG’s board approved a 50-year lease for up to 900 acres and committed to invest $5 million in supporting infrastructure that will benefit the airport as a whole.

“It is certainly the largest project in Northern Kentucky Tri-ED’s 30-year history in terms of total capital investment announced with $1.49 billion and second largest in terms of total new employees announced at 2,700 employees,” said Dan Tobergte, president and CEO, and Kate Ferrer, director of marketing and projects for Tri-ED, which worked on the inducement packages. “The second largest project would have been the Delta Air Lines announcement for its CVG hub expansion in 1990 with $375 million in capital improvements and 2,800 employees.”

Also citing the 27-year-old Delta deal as the region’s largest previous project, Northern Kentucky Chamber of Commerce President/CEO Trey Grayson said, “This is bigger than Toyota’s initial (1985) investment in Kentucky. It’s by far the biggest investment we’ve had in a single project.”

Amazon’s decision – Grayson calls it a “trophy” economic development project – takes some of the sting out of Toyota’s 2014 decision to move 1,300 engineering and manufacturing headquarters jobs from Northern Kentucky, shifting most of them to Plano, Texas; a few hundred to Georgetown, Ky.; and others to Michigan.

“One of the toughest parts of Toyota’s departure was losing the ‘trophy,’” Grayson said. “Now we’ll be able to say for Amazon Prime logistics, we’re their hub.”

DHL’s hub, which opened in June 2013, handles about 50 international flights nightly, according to Candace S. McGraw, the airport CEO. Those planes move cargo among sites in North and South America and the Caribbean.

DHL is nearing completion of a $108 million expansion of its Americas Hub, which the company said represents a $280 million investment at CVG since 2009.

“In the interim, while they’re (Amazon) building that hub, they’re going to hire DHL to start work now,” said one source, who declined to be quoted by name in deference to Amazon and DHL’s reluctance to speak. “In May they’re going to have (Amazon Prime) jets here, and they’re going to be using the DHL facility during the daytime… DHL will still do their night-time work, but Amazon will use that (facility) during the daytime

“That’s why DHL is having a big hiring surge right now for a daytime shift,” the source said.

With 2,400 employees at the airport already, DHL earlier this year announced it is hiring another 900 – because of DHL’s own growth as well as the work for Amazon, a source familiar with the operation said.

Hubs beget a virtuous cycle?

Public officials envision a strengthening virtuous cycle.

“What we’re trying to do now is use the fact that UPS made their decision years ago, Amazon made their decision in January 2017, DHL made their decision in the past few years, and they made those decisions for a reason,” Gill said. “It wasn’t random. It wasn’t serendipity. They looked at all of their available options, and this is what makes the most sense in terms of leveraging each state’s infrastructure.”

There’s an expectation these economic large planets create a gravity that will attract many others into the region’s orbit.

“I think with DHL and Amazon here together in a right-to-work state, we can anticipate additional new businesses to locate here,” said Tobergte, whose agency focuses on economic development in Boone, Campbell and Kenton counties. 

“We are not sure of the magnitude of these businesses in comparison to Worldport in Louisville,” he said. “Every industry is increasingly reliant on just-in-time delivery, and our location has now become exponentially more competitive and attractive for businesses that need heavy-duty, global logistics partners.”

“Amazon’s Prime Air hub promises to revolutionize the fulfillment industry worldwide, and Kentucky is excited to partner with them as they embark on this disruptive, transformative and exciting venture,” Gov. Matt Bevin said when the announcement was made. “Kentucky’s ideal location, proven workforce and an already extensive shipping and logistics industry have been the backbone of our relationship with Amazon for nearly 20 years.”

Although precise employment figures for Amazon in Kentucky are elusive and vary seasonally, the company says it already has 10,000-plus employees at 11 fulfillment, distribution and returns operations in the state, including four near CVG.

The Cabinet for Economic Development ranks Amazon fifth in the state with 7,232 full-time jobs in its list of Kentucky’s largest manufacturing, service and technology firms, but omits several Amazon locations that did not provide the state with information.

The cabinet list is led by UPS, which has nearly 13,000 full-time employees. Including part-time workers, UPS has 26,800 employees in Kentucky, according to Jim Mayer, UPS public relations manager in Louisville. He said 49 percent of the employees are full-time.

The logistics industry emerged in recent years as the second largest employment category in Kentucky with more than 59,000 jobs. Only automotive-related jobs, where there are about 90,000 workers, rank ahead of logistics, which is broadly defined as moving, distributing and delivering goods and materials.

By contrast, some 6,400 people had coal mining jobs in Kentucky at the end of 2016. For decades one of the state’s signature industries, coal mining last year lost more than 2,000 jobs, about a fourth of its workforce, according to a January report from the state’s Energy and Environment Cabinet.

To help land Amazon’s hub operation, KEDFA in January preliminarily approved a financial incentive package worth up to $40 million in tax abatements over a 10-year period if the company hits and maintains investment and hiring targets. Additionally, the General Assembly passed legislation providing tax credits that kick in after a company’s jet fuel sales and use taxes top $1 million in a year.

About three weeks before the Amazon announcement, Bevin and the new Republican-majority state legislature made the commonwealth even more alluring for business when the governor signed right-to-work legislation that eliminates mandatory union dues payments by employees who don’t want to support a union in their workplace, a move Republicans and most economic development officials have advocated for years.

“It clearly signals to businesses that we have a welcoming climate in the state and I think that helped,” Gill said.

Fulfilling Amazon’s ambitions

Analysts who follow the company say the Hebron project could become ground zero for Amazon’s full-throttle foray into the package delivery business, slicing current ties to FedEx, UPS, DHL and the U.S. Postal Service, which haven’t demonstrated they have the capacity to keep pace with the company’s spectacular growth, especially during the holiday season in November and December.

Another theory, tangential to speculation about the package delivery business, is that the hub will become the company’s primary U.S. terminal for shipments destined to and from markets in Europe, Asia and beyond as Amazon continues to expand outside of the United States. The agreement with DHL in Hebron lends some support to the international shipping theory.

The company’s most widely publicized service meltdown occurred just before Christmas 2013, when UPS and FedEx proved to be incapable of on-time delivery of millions of last-minute Amazon orders.

At the time, the two U.S. shipping companies and the U.S. Postal Service handled most or all of the company’s deliveries, according to Marc Wulfraat, president and founder of MWPVL International, a supply chain, logistics and distribution consulting firm in Montreal.

“That’s the part of the supply chain they don’t control because there’s a third party involved, and that’s the part of the supply chain that can break just like in 2013 at Christmas when a whole bunch of stuff didn’t get to customers… (They) didn’t fulfill their promises,” said Wulfraat, who stresses that he has no business relationship with Amazon.

“Since then, I believe there’s been a declaration internally that we (at Amazon) want absolute control over our transportation outbound, and the way we’re going to do it is to set up a network that allows us to control the movement of goods and that’s what’s been transpiring since about 2013,” Wulfraat said.

“They are scared that if they rely on a third party to handle that (delivery), disasters will happen and they don’t want that,” he said.

A prescient story on the Wired magazine website five days after that Christmas pileup suggested Amazon seemed to be positioning itself to compete in the package delivery business.

“In the long term, it’s not hard to see the company … with its own shipping and logistics, eventually creating its very own alternative to UPS and FedEx,” the article predicted.

If Amazon delivers, when would it be?

Colin Sebastian, an equity analyst who focuses on internet companies, including Amazon, in the San Francisco office of Robert W. Baird & Co., said he believes the Northern Kentucky hub – at least for the “near term” – is “really geared toward its own business.”

“They have run up against capacity constraints among the shippers like FedEx and UPS … so Amazon has done a lot of different things to open up capacity. They have their own delivery last-mile drivers, and of course now they’re building air cargo (facilities) as well. But I think over the long term what’s likely to happen is that Amazon will gain a lot of competency, a lot of knowledge and expertise in shipping and transportation, and when Amazon gains that kind of knowledge they tend to start offering that as a service. Given how fast Amazon is growing, they probably need all the capacity they can build for their own business.”

It might be three to five years before Amazon could compete in the $400 billion U.S. logistics industry against UPS and FedEx and other package delivery companies, he said.

One question industry watchers consider is whether CVG might become Amazon’s primary terminal for overseas shipping.

“The hub that they’re setting up in Cincinnati will ultimately be connected to other airport hubs around the world that Amazon will control eventually,” Wulfraat said. “The next step is to connect the U.S. to Europe, China, India” and elsewhere. Five years down the road “they can connect it all into a small village … make the world a small village.”

Brian Clancy, managing director of Logistics Capital & Strategy in Washington, D.C., was quoted by Reuters as saying the DHL-Amazon proximity in Cincinnati might lead to some cooperation on international shipments. He could not be reached for further comment.

Even when Amazon completes its Prime Air hub and moves out of the DHL facility, it will be impossible for the two shippers to ignore one another at the airport.

“They will literally be across the street from one another,” said McGraw, referring to Wendell Ford Boulevard, which will be all that separates DHL from the 400-acre tract where Amazon will build its hub.

Lots of logistics projects at CVG

The Amazon hub, for which a total of 900 acres have been leased, is not the only recent logistics project at or near the 70-year-old airport, McGraw said.

CVG has a $4.4 billion impact on the Greater Cincinnati economy, according to a January report by the Center for Economic Analysis and Development at Northern Kentucky University. Fulfillment and delivery are growing rapidly.

Aeroterm, owned by Realterm Airport Logistics Properties of Annapolis, Md., is building a 132,000-s.f. multitenant warehouse for which FedEx will be the primary tenant, McGraw said. A few miles southeast, FedEx Ground is moving ahead with a 355,000-s.f. building on 80 acres, and that site is adjacent to its existing sorting center in Independence that employs 500, according to Jack Mazurak, communications director for the economic development cabinet. The FedEx Ground project is budgeted at $200 million and expected to create 62 full-time jobs.

Wayfair, the Boston-based online retailer of home furnishings and décor items, recently opened a 900,000-s.f. distribution center on 52 acres of airport property. Dermody Properties, headquartered in Reno, Nev., built that facility. A second warehouse with 264,000 s.f. is under construction and should be completed in May, according to Dermody.

Van Trust Real Estate LLC of Kansas City is building a 511,000-s.f. warehouse and distribution center on 41 acres of airport land, McGraw said.

CVG officials do not yet know who will occupy the Dermody and Van Trust buildings.

McGraw, Wulfraat and Randy Woods, editor of New York-based Air Cargo World, which tracks the air cargo industry, all said the Amazon operation at the Cincinnati-Northern Kentucky airport will be a hub-and-spoke operation that duplicates what UPS, FedEx and DHL do in Louisville, Memphis and Cincinnati, respectively.

Once an Amazon item has been “picked, packed and shipped” at a fulfillment center, Wulfraat said, several things can happen depending on the distance between the customer and the fulfillment center. Customers within a five-hour drive can be handled through a local “sortation” or delivery center.

In the future, however, when customers order products housed in distant fulfillment centers, the package will be loaded on a plane and shipped to CVG for sorting to as many as 40 U.S. regional destinations, Wulfraat said. After planes return to a region sortation center, he said, packages would go on trucks for “last mile” delivery to a customer.

In a year-end report, Air Cargo World called 2016 the “Year of Amazon” for a variety of reasons, including the company’s air transport business experiment in March 2016 in Wilmington, Ohio, where it leased 20 Boeing 767 cargo planes from Air Transport Services Group. When it unveiled that fleet in August, Amazon announced it had contracted for another 20 planes and planned to operate a hub-and-spoke operation from Wilmington, less than 50 miles from Cincinnati and roughly 65 miles from the Hebron airport.

Kentucky amassing logistics assets

Amazon’s January announcement became the second instance of Wilmington losing a big tenant to CVG. In 2008 and 2009 in a strikingly similar move, DHL moved its package and sorting operations from Wilmington to create its Americas Hub in Hebron.

The January announcement dwarfs the entire total for new business development and existing business expansions that were reported for all of 2016 by Bevin’s Cabinet for Economic Development.  Last year, 33 companies said they planned to invest nearly $542 million in the state and created 1,850 new full-time jobs, according to a mid-February report from the cabinet.

About 90 percent of that total – roughly $488 million – was companies that are in the warehousing, order fulfillment or distribution business, the state said.

The Amazon announcement bolsters Bevin’s contention that Kentucky is a major player in moving products across the country and around the world.

Evidence of that status can be found at the UPS Worldport in Louisville, which the company describes as “its only all-points hub: Packages can come from anywhere and go to anywhere.” Worldport handles 300 flights each day, said UPS spokesman Mayer.

Since 1999, the company has invested $2.4 billion in its Louisville facilities, which include the 5.2 million-s.f. Worldport, the separate Worldport Freight Facility and its Louisville Centennial ground hub. The company announced in August 2016 it would spend $300 million to nearly triple the size of its ground hub to about 840,000 s.f. and add 300 jobs.

Amazon at least partially drives that growth.

“Amazon continues to be an important and valued UPS customer. They, like many other UPS customers, are controlling some portion of their logistics network,” Mayer said.

Whether apple or orange, it’s big

It’s tricky to compare a $1.5 billion investment in 2017 to one that was made some 30 years ago, but it’s safe to say that the Amazon project ranks as one of the single largest business investments in Kentucky history.

By comparison, when Toyota announced in 1986 that it would build Camrys at an assembly plant in Georgetown, the company said it would spend $800 million and create 3,000 jobs, according to Rick Hesterberg, a spokesman for the automaker.

Today, after multiple expansions, Toyota’s 7.5 million-s.f. plant makes the Camry, Avalon and Lexus and has about 8,000 full-time employees, Hesterberg said.

Toyota’s investment in the Georgetown plant – including expansions, retooling and technology updates – comes in at $5.9 billion, he said.

In its “Global Powers of Retailing” report for this year, the consulting firm Deloitte ranked Amazon as the tenth largest retailer in the world based on revenues reported for the 2015 fiscal year, when Amazon reported sales of $79.2 billion. Deloitte’s report, which ranks the 250 largest retailers in the world, said Amazon ranked 186th when it was first listed in the “Global Powers” report in 2000.

Greg Paeth is a correspondent for The Lane ReportHe can be reached at [email protected]