I should probably have written this blog post a year ago, when I relayed all of these predictions to my brother-in-law during a family vacation in Mexico. It is clear that many of these are starting to come to fruition, so some of you may think that these are no-brainers, but for everyone else, I hope you enjoy them.
It is probably worth mentioning that I absolutely love Amazon, and I am probably one of its highest-value customers since (based on my purchase history) I place one order every three days. In terms of units, well let’s just say I receive more than one item every day of the year. Now, granted, I buy my deodorant and dental floss from Amazon, among other things, which I have to buy in bulk in order to receive prime pricing. So, I should be good to go on dental floss for the next couple of years with the pack of 60 I purchased. But I digress. Let’s get to the subject at hand.
If you are working for or own an online retail business or any retail business that your livelihood is tied to, you probably love Amazon personally (like me) and hate it professionally (also like me). Chris Friedland (the founder of Build.com) put it best, “Amazon is the Nothing from the movie ‘Never Ending Story.’ ” If you aren’t familiar with that movie, then you must still be in your early 20s. “The Nothing” is the force that was consuming everything. If you haven’t seen it then you should, since it is quite the cult classic. There is no better way to explain Amazon’s dominance. It used AWS to scale the Netflix business and now uses that data to offer Amazon Prime video. Amazon uses the marketplace to employ 3rd-party retail data to determine which new categories to pursue from a direct retail standpoint, and then puts those retailers out of business. This is a consistent story time and time again, but what a brilliant way to build a business. They say a wise man learns from the mistakes of others, but I think an even wiser man (Amazon) learns from both the mistakes and the wins of others by having access to their complete data sets. I can hate Amazon and admire it at the same time, I guess.
Let’s get to the meat of the discussion and what you really came here (yes, you tens of subscribers who probably consist of only friends and family) to read about … my Amazon predictions.
The most important thing to remember about Jeff Bezos and Amazon is that what you think they are doing things for (short-term shareholder focus) is seldom the real reason. Jeff Bezos is long-game focused and has communicated this message to shareholders time and time again, which is why he is head of one of the only companies I know of that can announce it will be losing money for the next year and yet the stock price continues to rise. If only shareholders had as much patience with other companies because I think we would end up having much better companies and products long-term if this were the case. Here come the Amazon predictions in no apparent order.
- Build more strategically placed FCs (Amazon’s term – Fulfillment Centers)/DCs (industry term – Distribution Centers) throughout the USA
- Shareholders and analysts predicted that this was for shipping savings. Amazon has a massive prime subscription program for millions of users to receive free 2nd-day air shipping. This is just a side short-term benefit, but it interesting to note that a few months before this announcement, Amazon started to shroud its shipping labels by removing any messaging indicating whether or not something had actually gone 2nd-day air. It also changed the messaging on the site to “free two-day shipping” since if FCs are strategically located near most populous cities in the US, then one-day and two-day shipping will be possible in almost every case by simply shipping everything ground. You see, we care about Amazon fulfilling our expectations and not so much about how it does it.
- This is the first long game, and the second and how it relates to FCs I will address later. I don’t know if you noticed, but Amazon is now lobbying to have the national e-commerce tax law passed. It used to be its biggest opposition, but now that almost all its FCs are close to completion, Amazon is in a perfect strategic position to put the hurt on more businesses. Did you know that today Amazon is 12% cheaper than Walmart? So, even after the tax law passes, it will still be cheaper than Walmart. Let’s be clear, Amazon is the Walmart of today and Walmart is the Walmart of 20 years ago. The best part about Amazon is that no one will ever be able to create a site called PeopleofAmazon (peopleofwalmart.com), which does more to help its brand image than anything else. Amazon is a machine for taking orders and delivering them in a timely manner.
- The Amazon marketplace and other online retail marketplaces:
- Amazon’s retail marketplace allows any retailer or manufacturer to list its products on Amazon in exchange for paying Amazon a commission for every transaction made with one of its close to 100 million monthly visitors. Although it isn’t supposed to, Amazon retail uses the data from the 3rd-party retailers to identify new retail categories to get into, so basically it uses a data-driven approach to almost guarantee it will be successful in category expansion by using the sales data from already-established retail businesses selling via its marketplace. This is both absolute genius and absolute evil. Retailers are essentially feeding the monster that is eating them all.
- Amazon’s marketplace business accounts for 40% of its revenue today, and broader online marketplace businesses account for 27% – 30% of all online retail sales. This is the combined marketplace businesses of Amazon, Walmart, Newegg, Sears, Bestbuy, Rakuten (formerly buy.com, so stupid to change this) and more every day. So the question is, what happens when all retailers have a marketplace and every retailer sells everything just like Amazon? Who do you purchase from then? Why would manufacturers need retail if they could sell directly via retail sites and control price? What value does a retailer that doesn’t have a marketplace have in this new world? The speed of shipping will probably be normalized and consistent by then as well, so once again, who do you buy from? This got me thinking about Jeff’s second long game for FCs and marketplaces. The question is, in a world where everyone sells all of the same products, who has the facilities and abilities to source and fulfill all products? The answer is, of course, Amazon, so even if marketplaces end up being the future of all retail, then Amazon is putting itself in a position to get a piece of every sale via fulfillment by Amazon whether you purchase from its website or any other … but wait, there is more. 😉
- Amazon Fresh… if you haven’t heard about it, then do your research:
- Amazon has been beta testing a grocery delivery service in the greater Seattle area. The short-term mind thinks, “I would love to purchase groceries, too, via a data-driven subscription service.” We need to remember that although this is a value add, this is far from the long game Jeff Bezos has in mind.
- Here is the brilliant part. What is the most difficult item to ship cost effectively and efficiently? The answer is, of course, perishable goods. Amazon has finally figured out a way to do this profitably by combining the food with its regular Amazon packages on Amazon delivery trucks. So, this begs a question, if Amazon just figured out the formula to ship the most difficult products profitably, then why wouldn’t it just ship everything. It has already conquered the impossible, so shipping everything else should be a piece of cake. Did you know that Amazon accounts for roughly 50% of all residential packages currently being delivered via UPS? What do you think would happen to UPS or any other business that loses 50% of its volume overnight? You guessed it, Amazon has cracked the logistics code on food delivery with its own trucks and FCs, so its long-term game replaces UPS with Amazon delivery service. Remember, Amazon doesn’t just stock its own retail products. A huge portion of its FC shelf space is for other retailers using a service called Fulfillment by Amazon, which allows a retailer or manufacturer to either sell the goods on Amazon and even do it via Amazon Prime or simply use Amazon as a warehouse to keep and deliver products. You see, everything was built for this long-term move. The good news is, Amazon will use the price savings from its own delivery trucks to pass along even better prices to the consumer and destroy even more of its retail competition as well.
- What about Amazon’s retail business long term?
- I don’t know that regular consumers know that Amazon’s retail business is mostly a loss leader. Amazon’s operates on a blended-margin business and uses other, more-profitable pieces of its business (Amazon Marketplace, Amazon Web Services, etc…) to offset the losses in retail. Please remember its internal mantra: “grow fast and worry about profitability later.” It leverages the volume of other retailers selling product through marketplaces to go directly to manufacturers and establish direct relationships to ultimately take the volume from these same retailers (genius). This is the reason other businesses hate Amazon, but there is a silver lining.
- What you don’t know as a business is that Amazon has set the standard for service in the online retail industry. It is through this standard that all other online retailers have been forced to change and innovate in order to maintain their place and match this high-cost level of service wherever and whenever they can. I think this act has done more for online retail and consumer satisfaction than anything else. This is a good thing and will ultimately ensure the continued migration to online retail and a higher expectation and realization of the new electronic retail age.
- Here is what you may not know. Amazon is starting to pull out of certain categories it originally built its business on (no, not books). In certain areas like electronics it is more profitable to exit the retail side and allow for the marketplace and the standard of service it has set to fulfill its customers’ needs. Amazon is selling direct on a fraction of the skus it was a couple of years ago in select categories like electronics. In the next five years, what does this mean and why do you care? Well, I have a sneaking suspicion that this behavior by Amazon will continue, but more importantly, I see Amazon spinning out its retail business. If it is, in fact, its loss leader and it is spun out, then its core businesses would be incredibly profitable overnight. The stock price would go through the roof, and its retail business and its profitability woes would be valued on its own two legs and would no longer impact the share price of the whole.
This is about all I can think of off the top of my head, so I am going to stop here. I am sure that a few more things are on their way: Amazon smart phone, Amazon radio (iTunes radio, Pandora, Spotify, etc, equivalent), Amazon basics private-label expansion, Amazon glass and probably many more.
I guess we need to ask ourselves, if we love Amazon personally and hate it professionally, then is it really Amazon or us as businesses that are doing more wrong? I am not going to justify this with a response, since I work for a retailer, but I am sure you’re smart enough to see where I am going. I promise I will try to get a post out every quarter from here on out.