Friday, August 31, 2012

Walmart’s Selection and Long Tails

Walmart has pressed hard on the selection growth lever, packing upwards of 150,000 individual items in each of its supercenters. Its ideal is getting you in the door for that one thing you want, and loading you up with a shopping cart full of stuff you didn’t know you needed…until you came through the doors. 

And that’s priority number one for Walmart: get shoppers through those doors. 

Castro-Wright’s Folly or Walmart Hits the Limits of the Pareto Principle 

Eduardo Castro-Wright, former CEO of U.S. Stores, perpetrated a great folly by reducing Walmart’s selection in an attempt to improve the aesthetic experience for the shopper and thereby compete with Target for upscale discount customers. 

His strategy made sense in theory. I’m sure his analysts poured through the data and saw clear patterns demonstrating some derivative of the Pareto Principle, something that pointed to 20 percent of the inventory generating 80 percent of the sales. You can fiddle with the ratios however you please – perhaps it was 40 percent of the inventory driving 90 percent of sales or 60 percent of the items responsible for 75 percent – the point is that the data highlighted a glut of slow-moving items. If you could just reduce the low-demand inventory you could simultaneously make the stores more spacious and stock shelves with items that sell quickly. 

And there’s a strategy an MBA could love! 

But that which sounds good in theory, to paraphrase Yogi Berra, often has a secret dark side in practice. Yes, your statistical models have blind spots. They show that you’ll create more space getting rid of those garish holiday sweaters, but it didn’t show that the lady buying those sweaters was also loading up on pallets of cat food for those dozen felines sharing her home. By reducing that part of your selection, even though the sales it generated looked miniscule in your data sets, you drove away a customer who would have otherwise filled her cart with plenty more stuff. She’s now shopping elsewhere. 

The Long Tail of Selection 

If a retailer could satisfy its druthers, it would stack high and deep only those products with the highest demand, quickest rate of consumption, and fattest margins. Everyone would sell Coke, Tide detergent, Pert Plus shampoo, and Old Spice deodorant. They would spend all their time restocking shelves because the demand for these consumables would keep the products flying out the doors. Selection would be thin, product mix easy to figure out, and all the retail battles would be waged over price. 

Alas, that is not retail reality. 

As we assume Walmart’s Castro-Wright figured out in his ill-fated tenure as U.S. stores chief, a minority of products are responsible for the majority of sales…that Pareto Principle. The curve for demand versus selection looks something like this: 

Most of the demand stacks up with a few products and then tapers dramatically into a long tail where the rest of the selection just doesn’t sell very much. 

When it comes to pressing the selection lever, Costco – with its 4,000 or so SKUs in any given store – only competes in the highest demand, fastest moving inventory items. It clings tightly to the left-hand side of the demand curve, sells in bulk, and competes on price. It’s been a good business, resonating with plenty of shoppers. (See the article, Costco and the Paradox of Choice here.) 

Walmart followed a different path and won the patronage of many more consumers by extending itself much further down the demand slope. It offers about 150,000 unique items in its supercenters. Because of this, it can’t offer the cheapest per unit price like Costco, but the tradeoff it makes with such a wider selection is that shoppers are more likely to pick Walmart as the one-stop place to take care of all their shopping needs. They go in for a festive sweater and load up their carts with everything else they need (or vice-versa). And the prices – while not the cheapest – are cheap enough that they don’t bother adding a Costco stop to their shopping errands this week. 

Why Lose Money on Groceries? 

It’s the reason Walmart introduced groceries to its product mix in the 1990’s. This is a notoriously hard business to be in, requiring a much different, more complex supply chain for sourcing, distributing and selling perishable goods (as opposed to those that can sit in a warehouse for months at a time without spoiling). The logistics of transporting ice cream are orders of magnitude more difficult than those for Old Spice deodorant. 

And it’s not like Walmart sells groceries at a premium, ringing up big margins on the sale of each bag of apples or gallon of milk. To the contrary, Walmart’s prices tend to be 15 percent cheaper* than regular grocers like Kroger. It’s even possible that groceries are a loss leader for the company. 

So why would a business invest so heavily in constructing new additions to its stores, handing over valuable floor space, and increase the complexities of its supply chain on merchandise that loses money? 

Because groceries are the ultimate consumable. People have to buy them. And if Walmart’s best competitive advantage is being the one-stop place to shop, you have to do groceries to get people in the door. 

Offering groceries was the clearest sign of Walmart’s commitment to offering the widest selection. 

As Castro-Wright discovered with his folly, this commitment creates a cascade effect with customers. The wide selection gets shoppers through the doors looking for that low-demand, slow-moving item. They then fill their baskets with more of the high-demand, fast-moving stuff. 

But if you get too fancy with your analytics, stripping out the inventory further down the long tail of the demand curve, the cascade can flow in the opposite direction, too. When shoppers can’t find that esoteric item you pulled from inventory, they might just take their entire shopping cart elsewhere. 

Stores Can Only Have So Much Selection 

But even Walmart, with its nearly 200,000 square feet of supercenter selling space stacked high and deep with 150,000 SKU’s, can only go so far down the demand curve when determining its ideal product mix. It can fit only so much in the confines of those four walls. 

This makes shelf space a valuable commodity. It cannot stuff it with slow-moving items that sit for days or weeks just waiting to be purchased. Its own feedback loop – the productivity loop – depends on high velocity selling…making a bunch of inventory turns to keep up the volume of sales and help press costs down. 

But Castro-Wright came to understand that one cannot be too aggressive in cutting out those slow-moving products either. He pushed too hard, customers left, and he soon followed. 

This is the nature of the selection game for store-based retailers. It’s defined by physical constraints. They can only stock so many items; go so far down the long tail of the demand curve. It requires constant evaluation to find the right balance of products at the right time to keep customers satisfied. Even for mighty Walmart and its commitment to providing the widest selection, it involves trade-offs in deciding what products go on the shelves and which are left out. 

These challenges do not exist for Amazon. We’ll explore that next. 

* The 15 percent estimate is pulled from Charles Fishman’s excellent 2006 book, The Wal-Mart Effect.

Thursday, August 30, 2012

When Walmart Gets Target Envy…A Selection Debacle

With the sales tax story, equating Amazon to Brer Rabbit begging the fox to spare him from the briar patch, we put a fork in our review of the convenience growth lever. We’re now onto Selection, that second of three growth levers in which Amazon – by virtue of its web-based business model – has a clear and distinct advantage over traditional retailers.

But as I’m prone to do, we’ll pick some more on Walmart (the embodiment of traditional retail success) en route to making the larger points about Amazon’s business. 

Back to the Broad Middle 

So far we’ve approached discussions of the broad middle exclusively from the left-hand entry point. This is where the right combination of investments in the growth levers (price, selection, convenience) will earn a retailer access to that middle part of the market. This is where the vast majority of customers reside, and it’s where they balance their overarching desire for low prices with their preference for convenience and a wide selection of products from which to choose. 

Retailers that press the right combination of those levers win the patronage of the broad middle, increase their sales, and grow their businesses. 

But there’s more than one way into the broad middle. There’s also a right-hand entry point. I’m saving the bulk of that topic for explaining the ways Zappos and Quidsi posed a serious threat to Amazon, but we’ll go ahead and take a sneak peak here to setup the Selection discussion. 

Price is the lowest common denominator of the growth levers, so when all other variables are equal, we (the shoppers) tend to buy the lowest price option available. But most of us will spend a bit more if a store offers better convenience or wider selection. This defines the left-hand entry point to the broad middle. 

The right-hand entry appeals to the consumers who are far less price sensitive. They’re willing to pay a higher price for better customer service, a tailored shopping experience, or because they identify better with the brand of the store. For example, many of the consumers who wear high-end fashion are notoriously price insensitive. They’re at the extreme right of this bell curve. They have lots of money to spend, and they’re willing to pay premiums. They will pay an absurd markup to buy a handbag with the Gucci logo or sunglasses that say Chanel. 

When a retailer can offer these products and simultaneously sport economies of scale – allowing it to operate at a lower cost and pass some price savings on to customers (another feedback loop) – this creates another mix of levers in which a retailer can invest to gain access to the broad middle. 

Consider that a teaser. We’ll go in much more detail in future articles. 

How Target Competes with Walmart 

Think Walmart versus Target. Walmart earned its way into the fattest chunk of the broad middle via the left-hand side. It pressed the hardest on price but also offered a wide selection of products and enough stores to be a convenient shopping destination for much of the consumer market. Its success is undeniable, and no one would succeed by challenging Walmart on that turf. 

At some point in its history, Target came to understand this. It could not go toe-to-toe with Walmart on price and selection, but it could earn the patronage of less price sensitive customers by pressing on the right hand levers. And on brand in particular. While it will never be as big as Walmart, Target has built a strong business doing discount merchandising in its own way. 

During times of economic hardship, price sensitivity increases, pushing the fat part of the curve even further to the right (i.e., more customers begin making buying decisions based on low price). These have traditionally been good times for Walmart, bringing more bargain hunters into its doors. 

But during this most recent recession, Walmart fumbled the opportunity badly. Instead of opening its arms to the rush of new shoppers, the company decided to reverse its normal strategy, easing its investments in the selection levers and putting that cash into branding like Target. The goal seemed to be capturing more of the upscale-discount (yes, the sort of oxymoron term you get so frequently when slicing deep in the market segmentation game) shoppers. But in the process it chased its core customers into the open doors of the dollar stores. 

Eduardo Castro-Wright Gets Target Envy 

Eduardo Castro-Wright had success presiding over Walmart’s Mexico and then international divisions, overseeing tremendous growth during his watch. He was rewarded in 2005 with the plum assignment of CEO, U.S. Stores. 

In that role he developed a serious case of Target envy. He grew tired of Walmart’s reputation as the dingy bargain basement; that place where consumers hold their noses, foregoing a more pleasant shopping experience in exchange for cheap stuff. 

“Tar-jay,” on the other hand, has cachet. It is a brand that evokes some pleasant sense from customers. Though it too is a discounter, people actually don’t mind saying they shop there. Castro-Wright wanted that for Walmart. 

And so he pushed Walmart into investing billions to revitalize supercenters, to update the store-front facades, to make cheerier signs, and (most significantly) to take out inventory so aisles could be wider for moms pushing carts and lines of sight less cluttered. To achieve this, he significantly reduced selection. Targeting those items that his data analysis identified as low-demand, slow sellers…that stuff which clogged up valuable shelf space for far too long. 

For example, Castro-Wright thought Walmart should be able to sell fashionable clothes. This required no small set of changes. Rather than offer, say, garish holiday sweaters, a favorite of that elderly lady customer that shares her home with a dozen feline companions, he cleaned out that rack and decided to sell stylish skinny jeans instead. This would attract the middle-class teenage girl and her mom, introducing Walmart to a new – more affluent – demographic that would come to buy clothes and stick around to fill up her cart with all sorts of goods. Most importantly, he would be taking the shopper away from Target. 

This is not how things unfolded. No one wanted skinny jeans from Walmart. The fashion items (which Walmart sourced from a new, chic New York City office and promoted in the pages of magazines like Vogue) failed to produce new customers. Worst yet, they chased out the cat lady who could no longer get that Frosty the Snowman sweater she so desperately loved. As Walmart failed to move upstream and steal Target customers, it also sent existing customers downstream to more convenient dollar stores. The cat lady, it would seem, took her business – not just the sweaters, but all those cans of cat food as well – to Dollar General. 

This was a double-whammy failure for Castro-Wright and Walmart. Under his watch, U.S. stores had their worst decline in same store sales. Walmart had for years stood tall on the premise that its supercenters were the place for one-stop shopping; that place where a mother could reduce the burden of shopping errands by replacing her stops at several stores with one big-basket Walmart run. By reducing that selection (even though Castro-Wright thought he was only discarding low-demand, low-turn items), he was forcing all the moms and cat ladies to go elsewhere to satisfy their shopping needs. Walmart was no longer meeting their one-stop criteria. Some were leaving Walmart altogether, others were just buying less. 

The results for the business were terrible. By abandoning its commitment to carrying the deepest selection, Walmart was straying from the path that had always brought it so much success. Off in a Bentonville cemetery, Mr. Sam was rolling in his grave. 

Well, Walmart abandoned that strategy after too many consecutive quarters of poor performance. They sent Castro-Wright* over to run the much smaller e-commerce business and put Bill Simon, a retired naval officer, on a mission to get this ship back on its previous course. 

Simon was quick to bring back the selection, returning Walmart’s U.S. stores to the time honored tradition of investing hard in the levers of lowest price and widest selection. The renovations initiated by Castro-Wright have stopped, and the aisles are getting packed again with hard-to-resist bargains. 


Next: Even with all that selection coming back to its shelves, Walmart can still only fight Amazon with one arm tied behind its back. Walmart is constrained by the four walls (though large they may be) of its supercenters while Amazon brings selection down the long tail of the demand curve. 

*Eduardo Castro-Wright, it should be noted, is no longer with Walmart. He was systematically stripped of responsibility in his new role and finally ushered out the door as the New York Times exposed a history of corrupt practices in Walmart de Mexico that occurred under his watch. Don’t feel too bad for him. While his ego is bruised, financially speaking he’s quite comfortable in retirement.

Friday, August 24, 2012

Amazon’s Inflection Point and Lessons from Brer Rabbit

To close out our discussion of Amazon’s convenience infrastructure, we turn now to current events and consider how collecting sales tax might be the biggest boon to Amazon’s retail business, a body blow to the stores, and the end of the convenience barrier. 

Of Inflection Points 

Andy Grove’s excellent 1996 memoir, Only the Paranoid Survive, injected the term “strategic inflection point” into popular business parlance. The former leader of chip maker Intel recounts the crossroads in his company’s history where the decisions he made led to momentous, industry-altering outcomes. 

For example, since its founding, Intel had made its name by packing more space onto smaller wafers of silicone in the memory chip business. It did very well in this market until Japanese companies killed them on price and quality in the early-1980’s. They were at an inflection point. Market circumstances had changed. The dynamics of the industry had changed, and Intel simply could not compete. The company was hemorrhaging money and needed a different strategy. 

Groves led his teams to the difficult conclusion that they must get out of the memory chip business altogether. They threw themselves into becoming the leader of microchip processing technology. As the history books tell us, these decisions forever changed the trajectory of Intel as a company as well as that of the entire computer industry. 

Such inflection points are hard to identify in the real-time fog of battle. When looking backwards, however, the events stick out; the specific decisions define the future of the organizations involved. 

But every once in a while the variables line up in such a way that the outcomes seem all but inevitable. We’re now at one of those times with the retail industry…an inflection point that’s sure to force a dramatic shift in market share balance from shopping centers to online stores. 

The Sales Tax Inflection Point 

We’ve discussed in some detail the concept of the convenience barrier, that human desire for immediate gratification that keeps shoppers heading for the stores rather than buying more of our stuff online. For so much of what we buy, we simply don’t have the patience to wait a few days for our favorite web-based sellers to deliver the goods to our doorsteps. We endure the hassle of regular shopping for the pay-off of trotting out of the store with our purchases in hand. 

But the convenience barrier is not as fixed a defense as retailers like Walmart have long assumed. By continually compressing the time it takes to deliver its packages, Amazon has demonstrated a certain gratification continuum whereby any improvement in delivery time leads to more consumers opting for the online option over the tedious experience of heading out to the stores. 

The more Amazon compresses that delivery time, the more shoppers it attracts. That’s why the company invests so heavily in the delivery portion of its convenience infrastructure. By building more warehouses (and improving the efficiency of those facilities), Amazon gets closer to you – its customer – and reduces the lag time between your 1-Click purchase and that package being dropped on your front porch. Those investments to enhance customer convenience are whittling away at the convenience barrier, earning Amazon the business of more consumers in the broad middle and stealing customers from traditional retailers. 

Despite the tremendous growth these investments have wrought over the years, Amazon can do more. The convenience barrier has not yet been breached. It is holding together – albeit tenuously – by the lag between getting your stuff today at Walmart and having to wait an average of two business days when buying on Amazon. The company can do more both in terms of improving delivery speed and in taking more market share. 

What’s holding it back? Oddly enough, it’s tug-o-war with various states over whether Amazon should be compelled to collect sales tax on behalf of its customers. Amazon has long argued, with a zealot’s fervor, that a 1992 Supreme Court ruling prevents any government from forcing a business with no physical presence in the state (like a warehouse) to tag a sales tax levy onto purchases made by residents. It’s the responsibility of the shopper to tax himself, self-report it to his local department of revenue, and cut the government a check every quarter of so. Not surprisingly, only the most earnest of Boy Scouts ever follow the rules. 

Amazon has enjoyed this loophole exemption since its founding, and it has used the five, six, seven percent “rebate” as a pricing advantage over store-based retailers. This has long infuriated the stores, and they’ve lobbied the states and Congress to change the law. Amazon has fought those attempts. But with budgets in such perilous condition these past few years, states have upped the ante. They’ve been pressuring Amazon in every way imaginable to start contributing to the coffers. 

And Amazon has begun capitulating, negotiating agreements with various governments to start collecting in return for incentives to build fulfillment centers and create new jobs. In the meantime, Amazon lobbyists are walking the halls of Congress, pressing for a national, uniform sales tax

Herein lies the sales tax inflection point. Amazon wants to build those fulfillment centers. As we discussed previously, it takes the warehouses from rural areas (cheaper land, cheaper labor) and puts them right against the perimeters of the largest U.S metropolitan markets. Los Angeles, San Francisco are likely to join New York City, Philadelphia, Chicago, Boston, Phoenix, and others as cities in which Amazon offers same-day Local Express Delivery

By paying sales tax, Amazon can operate freely in states with lots of paying customers. It will be able to build many more fulfillment centers in close proximity to those customers and work hard to improve its delivery speeds. Sure, the total price of its goods will go up, but the company seems confident it can weather that problem. (Indeed, it’s not hard to imagine Amazon suffering lower margins for a time in order to minimize the impact of sales tax on its prices.) Because ultimately, these fulfillment centers will put Amazon within striking distance of achieving nirvana for web retail convenience: delivering a product to customers as quickly as they could get in the car, drive to the store, and buy it themselves. 

The sales tax inflection point doesn’t require Amazon to reach the nirvana state. The convenience barrier is breached, I believe, when a critical mass of consumers can get their orders delivered overnight. 

Brer Rabbit Begs, “Please! Not the Briar Patch!” 

The great irony with the sales tax is how hard the traditional retailers are lobbying Congress and state legislatures to bring Amazon to account. They see it as a matter of price, not of convenience. They believe Amazon will finally lose its pricing edge and hardly worry what it means in terms of Amazon taking full advantage to provide faster delivery and better convenience. 

They seen an opportunity inflict pain on their web-based foes, and they’re blind to the unintended consequences of their campaign. In particular, they’re blind to what it means for their own best competitive advantage, the convenience barrier. 

I’m reminded of the Uncle Remus story of Brer Fox and Brer Rabbit. Fox was keen on catching rabbit and teaching him a fatal lesson for outwitting him one too many times. Fox concocted an elaborate ruse involving a tar baby, and managed to snare Rabbit in the trap. Once caught, Rabbit begged for mercy: 

“Drown me! Roast me! Hang me! Do whatever you please," said Brer Rabbit. "Only please, Brer Fox, please don't throw me into the briar patch." 

Fox, imagining his enemy being torn to pieces, tossed Rabbit into the thorns with the bitterest contempt, and cocked his ear to listen for the sounds of anguish. 

He heard nothing. 

Then Brer Fox heard someone calling his name. He turned around and looked up the hill. Brer Rabbit was sitting on a log combing the tar out of his fur with a wood chip and looking smug. 

"I was bred and born in the briar patch, Brer Fox," he called. "Born and bred in the briar patch." 

And Brer Rabbit skipped away as merry as a cricket while Brer Fox ground his teeth in rage and went home.

Thursday, August 23, 2012

Amazon Whittling Away at the Convenience Barrier

Amazon’s Fulfillment Center Binge

Amazon is on a construction binge, building fulfillment center after fulfillment center in a seeming reckless abandon of its bottom line. It added 17 warehouses in 2011, a 32 percent increase that brought its global total to 70. And it’s showing no signs of slowing this year. 

In the U.S., the new FC’s are going up all over the place. A handful of them follow Amazon’s old model in which the company finds cheap land to build mammoth facilities and staffs them with an abundance of laborers desperate for any wage, no matter how low. That’s a reasonable approach for an internet retailer. Given the growing sophistication of the delivery companies – UPS and FedEx in particular – you can ship your goods from anywhere and know they’ll reach their destination within two business days. So, it would make sense to build the biggest warehouses possible in the places you can take full advantage of cheap labor and cheap wages. The bigger the FC with cheap costs, so the thinking goes, the better the economies of scale. Which is why Amazon has built clusters of warehouses in the rural, post-industrial (i.e., high unemployment) corridors of places like Kentucky and Pennsylvania. 

To be sure, Amazon continues to follow that model. Many of the newest facilities are popping up in corporate-friendly South Carolina and Tennessee after the company has extracted favorable tax guarantees and other incentives from state and local governments. It’s easy to make sense of these. They follow Amazon’s long-heeded playbook. 

But then we have FC’s going up on pricy real estate on the outskirts of Los Angeles, San Francisco, and New York City. Under the domains of the notoriously business-wary, high-tax collecting states of California and New Jersey. This is a clear departure from the playbook. Surely Amazon doesn’t need to spend the kind of cash required to build and run warehouses near major metropolitan areas. It’s already serving those markets with its popular two-day delivery services plus its overnight options. 

Unless Amazon is signaling to the world that two-day delivery isn’t good enough…that it’s investing in this portion of its convenience infrastructure because it wants us to get those boxes, adorned with the Amazon smile, much, much more quickly. 

The Convenience Barrier and Walmart’s Blind Spot 

I’m going to make a bold assumption about the minds of retail executives following the dot-com collapse of 2000 and 2001. 

They believed the online threat made its best attack in the heady days of 1998 and 1999 when every niche idea was being funded as the web’s answer to Walmart. And since it failed to take away much of their business (indeed, most of the companies were liquidated in bankruptcy proceedings…the ultimate sign of failure), the traditional retailers lulled themselves into the belief that their stores had little to fear from the internet. 

Even in the best of times, they concluded, the web guys were running into the toughest headwind a retailer could imagine. Companies like Amazon were trying to sell products with a built-in three- to five-business day delivery delay to customers who were used to walking out of a store with packages under their arms. Shoppers were used to immediate gratification, and Amazon required them to delay the pleasure of instant consumption. The web guys were running into the headwind whose force emanated from human nature. 

A heavy dose of hedonism pervades the shopping public. They want what they want, and they want it now. It’s a human nature thing. If your success depends on their patience, you’re unlikely to earn access to that broad middle part of the market. This is the essence of the convenience barrier. Despite all the inconvenience of driving to shopping centers, parking, navigating the stores, and standing in check-out lines, at the end of it all you walk out with that thing you came to buy. 

So the retail executives thought the web would be, at best, relegated to the domain of niche products that would never fit on their shelves anyway. The internet would certainly never be able to overcome all that protection afforded by the convenience barrier. As a protection against the competition, they thought the convenience barrier – because it is rooted in that human desire for immediate gratification– is as fixed as they come. 

And so, after the dot-com implosion, the retail executives stopped investing their cash and energy into game plans for competing against Amazon. They wrote-off the internet and went back to battling each other. In doing so they created a blind spot in which Amazon was able to whittle away, ever so slowly and ever so methodically, at that convenience barrier with hardly a notice from the likes of Walmart, Target, and other big-time retailers. 

The Gratification Continuum 

The teams at Amazon never saw the convenience barrier as unassailable because they never saw shoppers’ desire for immediate gratification as a simple matter of yes or no. True, shoppers have a deep streak of hedonism. They prefer their stuff sooner rather than later. But when weighing the convenience benefits of shopping online versus in-store, consumers are willing to make trade-offs. They will demonstrate some patience in order to avoid the hassles of trips to the store. 

The desire for immediate gratification existed, therefore, on a continuum. The precise amount of time Amazon made them wait was critical in the shoppers’ decision to forego traditional stores, which meant the convenience barrier was far more fungible than it was fixed. 

That digital camera you want? If Amazon takes five business days to deliver it, you would probably head over the Best Buy and get it today. But if Amazon delivers it in three days, you’re more likely to avoid a trip to the big box. 

Those diaper bin liners you need for the nursery? You’d suffer through a trip to Walmart if, otherwise, Amazon required you to wait three days. But if Amazon can get them to you in two days… 

And that bag of Starbucks French Roast coffee you need so desperately for your caffeine fix early tomorrow morning? You’ll run to the nearest Kroger to get it this afternoon…unless Amazon could get it to you before you go to sleep tonight. 

Amazon never had to match the immediate gratification shoppers get from walking out of a store with package in hand. If they met customers just part of the way on that gratification continuum, shoppers would choose them over the stores. And in growing numbers the more Amazon compressed that wait time. So Amazon whittled away at the convenience barrier, putting cash to work building more fulfillment centers, eliminating defects to speed up warehouse pick and pack routines, and working painstakingly to optimize the hand-off of goods to UPS, FedEx and other delivery partners. 

And they did much of it while still in the comfortable anonymity of Walmart’s (and other retailers’) blind spot. 

The Progress of Amazon Delivery and a Glimpse into the Future 

Over the decade, Amazon has systematically dropped the time it takes to get packages from digital shopping cart to real-world doorstep. They reduced it from five business days to a three-day standard. Then they took away delivery charges. Then they offered Amazon Prime and made two-day delivery the standard. Then they added the ability to ship overnight for a modest additional fee. 

Now Amazon has placed a box on my porch on a Saturday morning, and I’ve heard others surprised by the same thing.* And its Local Delivery Express is providing same day delivery in ten of the largest U.S. metropolitan areas that are, not surprisingly, nearest to its fulfillment centers. They’re piloting same-day grocery delivery in Seattle. And, at the extreme, they’re already managing last mile delivery in many Chinese markets. 

The ambition is mind boggling. Amazon is not satisfied with two-day deliveries. They will continue investing in this arm of the convenience infrastructure. They have benefited from understanding the gratification continuum, but they haven’t stopped compressing it. One suspects they’re pushing to hit convenience nirvana wherein Amazon can get goods to you faster than you could get in the car and go to the store for it yourself. 

So, that fulfillment center binge that has Amazon constructing on the pricey land outside of San Francisco, LA and NYC? I think we can expect many follow-on stories to the recent reports of New Yorkers ordering from Amazon in the morning and finding the packages delivered by end of day. 

Amazon is pressing the convenience lever with a mighty force as the store-based retailers watch that “unassailable” convenience barrier get slowly reduced to rubble. 

Where does it all stop? Perhaps this video gives us a glimpse into the future. Perhaps it all leads us inevitably the Amazon Yesterday program! 

* Just imagine how much Amazon hates that it can rarely get those boxes to you on Saturdays and Sundays because UPS just won’t run the brown trucks on the weekend and FedEx charges a huge premium for weekend delivery. But you know Bezos’ brain trust in Seattle is scheming ways around this. I was surprised several weeks ago to get a FedEx box on my doorstep late one Saturday morning. It was an Amazon package slated for Monday delivery. I suspect Amazon is testing out some ways open up this weekend window; to improve even further this arm of its convenience infrastructure. And I’m sure the tests come at considerable expense. Most importantly, until their delivery partners help open this window, you can believe that Amazon views them with the sort of contempt it reserves for any middlemen that set up roadblocks between its services and its customers. 

Monday, August 20, 2012

The Difference in Scale: More Amazon v. Walmart

This is the third post in a series about deconstructing Amazon's Feedback Loop, an attempt to understand how its components work both as individual units and together as a collective system. See the previous posts, Convenience (and Diaper Stench): Amazon v. Walmart and All Convenience Infrastructures Not Created Equal

The Feedback Loop is about pressing those levers (price, selection, convenience) for the purpose of earning the patronage of millions of shoppers that comprise the broad middle. It’s about driving growth. 

Here’s the big difference between being a web retailer as opposed to a traditional one; an Amazon versus a Walmart: 

To become more convenient and attract more shoppers, Walmart must build ever more stores. It must go where the customer is. Proximity between seller and buyer is a function of how far a shopper must drive to reach a supercenter. 

To become more convenient and attract more shoppers, Amazon benefits from more consumers being connected to the internet with each passing day. Proximity between seller and buyer is a function of how many steps a shopper must take between his seat on the couch and the nearest web-enabled device. 

The same forces that bring more people onto the internet every day bring those people to Amazon. It must simply be prepared for their business.

Scalability and the Check-Out Scenario

Those are the starkest of contrasts when considering the factors that drive convenience in the physical world versus the digital realm. And while differences in cost are big, the implications for scaling – increasing sales faster than infrastructure – are staggering. 

Consider the programming logic that turns the gears behind Amazon’s 1-Click check-out process. While that code base was enormously expensive to develop, requiring high-salaried programmers to build it, test it, and improve it over months of iterated effort, it now sits on an Amazon server. It may require occasional maintenance tweaks, but by and large that digital instruction manual can facilitate millions of check-outs each day about as easily as it can conduct just one. 

More importantly, that code can facilitate thousands upon thousands of check-outs simultaneously without slowing down the flow of commerce, the speed of transactions, or the convenience of quick turnarounds for shoppers. 

That is ultimate scalability. The kind you get when you depend on a convenience infrastructure built on technology. 

To keep picking on Walmart, let’s consider the contrast of store-based retail scalability. Its cashiers are cheap on an individual basis. Each is paid a piddling hourly wage, but each can only facilitate the check-out of one customer at a time. 

If it wants to be able to check-out 100 shoppers at the same store simultaneously, it must have 100 different check-out aisles with 100 different cashiers working 100 different cash registers at the same time. Since that’s impractical, it permits long lines to form at each register during peak hours, thereby reducing its convenience to customers. 

Scaling its convenience infrastructure is – for Walmart and its ilk – always constrained by physical world limitations. In the physical world it’s difficult to scale many of your convenience factors too far beyond that one-to-one ratio (like one cashier to one shopper). In the digital realm, scaling seems nearer to one-to-infinity (theoretically at least) than that one-to-one ratio.

The 1:1 Ratio Rears Its Head Again

Consider this other constraint of store-based retailing… 

In 2010 Walmart added about 1,400 stores to its existing world-wide base of 10,000 (give or take a few). All that additional real estate – those stores that brought Walmart closer to more shoppers – funded a nearly ten percent increase in revenue, taking the business to $447 billion in sales. If we assume each new store cost, on average, somewhere around $10 million (to build, equip and stock each), it means Walmart invested $14 billion in the main component of its convenience infrastructure. 

So, to increase revenue ten percent, it invested $14 billion and grew its number of physical locations by about 14 percent. This suggests something pretty close to a one-to-one relationship between opening new stores and growing revenue.* And while that ratio is not a precise formula for Walmart’s growth, it does highlight the natural constraints that exist for growing your business under the rules of a physical world: you have to invest significant cash to build more stores to access more customers and (finally) to grow your revenue. 

This puts to a cap on how quickly Walmart can grow because everything is governed both by how much cash it has to plow back into its convenience infrastructure and how many new stores it can possibly open in a 365-day span of time. 

It’s almost like a gravitational pull that keeps its ability to scale in check, making it difficult for traditional retailers to get much beyond that one-to-one ratio of having to increase its base of stores by (for example) ten percent in order to increase its revenue by about the same amount.

Walmart’s Rate of Growth Anchor

Those physical world limitations create an anchor on rate of growth as the base of legacy stores (those that have been open for more than a year) gets bigger and bigger. 

Let’s consider that 1,400 new store openings push the upper limit of what Walmart (or any retailer for that matter) could do in a given year. That’s a lot of construction, requiring a lot of resources in the way of cash, management attention, and use of supply chain bandwidth. They could probably do more (in fact, I believe they have done more in previous years), but I doubt they could do considerably more on a sustained basis. 

When calculating rate of growth (a percentage), new stores are the numerator and the base of legacy stores is the denominator. If 1,400 is the max new stores in a given year, the numerator is pretty much a fixed number. But the denominator grows larger with each passing year. Those 10,000 or so from 2010 become 11,400 after 2011, 12,800 after 2012, 14,200 after 2013 and so on. So, for each of those years, 1,400 divided by the growing legacy base gives us a smaller percentage (14 percent drops to 12.3 percent then 11 percent then 9.9 percent, etc.) as time passes. 

The rate of growth slows. The ability to get to ever more customers is bounded by the constraint of only being able to open so many new stores in a given year. 

Now this is mostly theorizing. I’ll grant that the numbers are likely a decent-sized understatement of reality. Walmart can probably open more than 1,400 stores a year if it wanted to. But not a dramatically higher number. So the general rule stands true: the base of existing stores creates an anchor on rate of growth. It will slow as the legacy base gets bigger. Trees can’t grow to the sky. 

Conclusion and Segue to Convenience Barriers

The point is that Walmart operates in a world of limits, and while we can quibble about the exact numbers, the facts remain that the limits approximate (at least roughly) 1.) that one-to-one ratio for new stores to revenue, and 2.) the rate of growth slowing with a fixed numerator being anchored down by an expanding denominator. 

Web retailers don’t have that same challenge. Investing in technology – those pieces of code whose logic churn across millions of server processors to transact millions of transactions – is much less expensive and much more scalable. 

Over the long haul, this scale difference has a compounding effect. Much like the difference of a few (seemingly) small interest rate points for savings accounts may not amount to much over a few years’ time, the difference is amplified to dramatic proportions as time marches on and the effects of compounding take hold. 

Amazon’s advantage of lower convenience infrastructure expense and better scalability means it can take those savings and invest them in making up for any deficiencies it might have in the competitive struggle with traditional retailers. 

And Amazon has been very disciplined in making these investments both in the other growth levers (lower prices and wider selection) and also in attacking the bulwark of the best convenience defense store-based retailers retain against web competitors; namely, the ability to satisfy customers’ desire for immediate gratification, that ability to walk out of a store with purchase in hand. 

That’s the convenience barrier, and Amazon’s has been whittling away at it over the years. 

* Note that this is the roughest of calculations on several fronts, the most important of which is that Walmart’s revenue growth does not only come from new store sales. In most years, the lion’s share of growth comes from selling more through its existing base of stores (a better scaling proposition because they don’t have to invest much more in the existing stores to drive more sales volume through them). However, given how anemic same store sales growth was in fiscal years 2010 and 2011, it’s fair to conclude that new stores were responsible for most of its added revenue. 

The bigger point is, however, that there exists some sort of gravitational pull – governed by the natural constraints of a physical world – that pulls store-based retailers back toward that 1:1 limitation on scale. Even if they do better than 1:1 for some time (say a ten percent increase in number of stores increases revenue 50 percent), gravity will pull down that ratio over the long haul. 

Wednesday, August 15, 2012

All Convenience Infrastructures Not Created Equal

This is the second post in a series about deconstructing Amazon's Feedback Loop, an attempt to understand how its components work both as individual units and together as a collective system. See also the previous post, Convenience (and Diaper Stench): Amazon v. Walmart.

All retailers must invest in a convenience infrastructure, plowing cash into those components of their businesses that make it easier for consumers to shop with them. 

But not all convenience infrastructures are created equal. 

For traditional retailers like Walmart, that infrastructure is composed overwhelmingly of stores. And to enhance the convenience it offers customers it must build more and more stores plus staff them, stock them, and maintain them to some reasonable aesthetic and hygienic standard. While this has been a lucrative business for Walmart investors over the years, having an infrastructure rooted in real estate – an inflating asset whose costs increase over time – is pricey. Especially when compared to the alternative. 

For web-based retailers like Amazon, convenience is a much different proposition. It’s driven by technology (software, hardware, internet connectivity, etc.) and the speed with which it can deliver packages to shoppers. 

To build on our Amazon Feedback Loop schematic, here’s the convenience infrastructure addition: 

With such a chunk of its convenience being based on technology, Amazon has a tremendous cost advantage over retailers that are forced to plow so much cash into real estate in order to grow. As we’ll discuss in this article, a convenience infrastructure that depends on technology investment is inherently less expensive and much, much more scalable. 

Convenience through Technology 

We outlined in the previous article how web retailers (and Amazon specifically) use technology to enhance the convenience of their services to shoppers. In my close call with being overwhelmed by diaper stench, I needed bin liners quickly to stave wafting odors from my daughter’s nursery. Amazon made the process of buying them convenient, using technology to: 

1. Provide quick ACCESS to Amazon’s website through various internet-enabled devices. 

I just grabbed the Kindle Fire, pressed the “on” button, slid the Android hibernate bar across the screen, and clicked on the Amazon shopping app icon. This all took about three seconds. 

Amazon could just as easily (and almost as quickly) grant me access through my laptop, iTouch, smartphone, and a host of other devices that connect to the web. Therein lies its commitment to providing the easiest access to its products by taking advantage of any one of the host of rapidly proliferating devices that connect to an ever-faster moving internet. 

A few years ago, the only option would be booting up a computer, clicking on a browser, and typing in the Amazon URL. Which is pretty fast, too, but Amazon wants access to its shopping experience to move as quickly as the fastest device available. And it has spent years investing in that convenience factor. 

To that point, Amazon’s commitment to providing access through a wide variety of internet-connected devices is nothing new. Anyone remember the Palm VII? (Um, for that matter, I should ask whether anyone even remembers Palm now.) It was a digital handheld organizer, a clunk of gray plastic – in terms of design aesthetic, decidedly unsexy – with Palm’s calendar and contact features. This particular model happened to have a flimsy antenna that, when flipped upright, provided spotty mobile access to the web using an even spottier browser. Well, way back in 1999, Amazon was stretching its innovation muscles with a service called “Amazon Anywhere.” (You can read the Amazon press release about it here.) You could actually log-on to Amazon and place a mobile order more than thirteen years ago! 

Amazon has long been prepared for this concept of shopping its stores using apps on mobile devices. 

2. Quickly SEARCH Amazon’s wide catalog for the specific product I needed. 

I knew I needed those specific diaper bin liners, and all I had to do was type the brand name into the search box and hit “Go.” Even with a product catalog that easily tops many millions of items, Amazon served back the option I wanted with sub-second speed. 

One might assume that whether the search results come back in one second or a half-second wouldn’t affect the shopping experience too much either way. Amazon disagrees. The company has invested countless resources organizing its catalog, streamlining its databases, and increasing its server processing power for the sole purpose of shaving milliseconds off your search. It deems search speed that important a convenience factor. 

In 2004, Amazon showed the world how serious it was about investing in heavy duty search capabilities. It took all the algorithms it had built for searching on its site, and offered a service for searching the full web. A9, as it was called, was among Amazon’s first attempts to spin-out its internal innovations for use by wider audiences. It wanted to test whether that market so dominated by Google and Yahoo! was open to an alternative. It wasn’t successful outside of Amazon, but those investments continue to reap benefits by enhancing the convenience factor for customers searching for products on (You can read more about the A9 launch here.)  

3. CHECK-OUT quickly and easily. 

When Amazon sent my Kindle Fire several months ago, the company did me the favor of pre-connecting it to my account. I take it this adds layers of complexity to the various steps of prepping and shipping each of these devices to customers. And while I won’t suggest Amazon is benevolent for choosing to do this, it sure made my life easier. More importantly for them, it reduced the likelihood that I (or any Kindle Fire buyer) would be too lazy (or so lacking in technical skill) to make that connection myself. 

In buying those liners, it made the check-out process quick and easy. Once the product was in my cart, I had maybe two additional clicks until the transaction was complete. No delays, no extra steps, and therefore fewer chances for me to change my mind. 

That’s present day e-commerce shopping. Let your mind wander back nearly 20 years to the dawn of web retailing. While internet usage was famously growing at the breakneck annualized rate of 2300 percent, it was far from clear that it would be a medium consumers would trust for shopping. At that point, shoppers guarded their credit cards as if they were cash. I remember traditional stores often required an ID for a credit card purchase, verifying the identity of the buyer each time out of fear of penalty from Visa or American Express if fraud occurred on its watch. This paranoia with person-to-person transactions was amplified when making a catalog purchase over the phone. It was not at all clear that consumers or card issuers were going to be comfortable with the risk of punching their credit information into a keyboard, transmitting them across a dial-up modem into the great unknown of the internet. 

What nefarious agents might be lurking in the web’s shadows, eager and ready to nab your credit card digits and run up a big bill on your tab? 

In this brave new world, Amazon managed to convince shoppers to store their credit information on its servers, to link it to their usernames, and to keep a shipping address on file. Amazon called it the “1-Click” process, launching it in 1997 and patenting it in 1999. (Reference Amazon's press release about it here.) All so Amazon could help them check out more quickly, thereby increasing the convenience factor and losing fewer sales to the dreaded abandoned cart. 

How Moore’s Law Makes Amazon More Convenient for Less Money 

Despite all these investments in technology improvements to make the shopping experience more convenient, the very nature of technology as a driver of convenience (and hence a driver of growth) makes the process of growing much, much less expensive. 

Convenience is different for web retailers than it is for traditional stores. As we’ve discussed, stores rely so heavily on location to customers as their primary means of being “convenient.” Real estate is inherently expensive, its price tag tends to expand with time, and each new store brings with it the need to constantly stock it, staff it, and maintain it. 

Not so on the internet. 

For web retailers, convenience is more a matter of the factors we explored above. How quick and how easy it is to access the web store? How quick and how easy is it to search for the product the shopper wants? And how quick and how easy is it to check-out? 

Each of those is a function of technology, and herein lies an advantage for web-retailers over those operating out of stores. While traditional retailers are pouring cash into real estate as they push the convenience growth lever and seek more shoppers, web-retailers are enhancing their convenience factors by investing in technology. 

To that point, Jeff Bezos sat down with Charlie Rose in 2001 and had this insight to share: (You can watch the interview here.) 

One of the things that’s totally different about e-commerce from physical world commerce is that real estate doesn’t obey Moore’s Law. Moore’s Law says that microprocessor performance doubles for the same price point every 18 months. That’s held true for more than a decade. What you’re finding now is disk space is getting twice as cheap every 12 months. And bandwidth is getting twice as cheap every nine months. So if you take the bandwidth doubling rate of nine months and assume it holds constant for the next five years, that means that we can spend the same amount of money on bandwidth per customer that we spend today five years from now but use 60 times as much bandwidth. That’s a big deal!* 
As microprocessor speed doubles every 18 months, it powers the Amazon technology for even easier product searches and faster check-outs. As disk space is getting twice as cheap every 12 months, Amazon can provide more rich content supporting its products and still help customers search through all the information quickly. And as bandwidth is getting twice as cheap every nine months, Amazon is ensured that more customers get online and get easy access to its website. No matter if they’re at home, work, or out about, the internet is nearly ubiquitous and fewer shoppers are ever without some sort of device that connects them to the web. 

To harness technology, Amazon must invest in software developers, database designers, system architects, and the like. These professionals are expensive. But the work they do is scalable. A single piece of well-written code can perform its function for all of Amazon’s 200 million customers with the same amount of effort and investment as it could to do the same thing for one customer. That makes the first customer very expensive to Amazon, but the additional 199 million quite cheap. 

Contrast that to traditional retailers. While Walmart’s hourly workers at each store might be inexpensive on an individual basis, the company requires a lot of them in order to serve customers. And a single worker can only help so many customers in any given period of time. Unlike that piece of code sitting on an Amazon server, that worker is decidedly un-scalable. 

It’s a big deal, indeed, when an asset that helps drive growth depreciates in cost over time (technology) rather than appreciates (real estate). To reach more customers, retailers like Walmart must constantly build new stores. The cost of which only grows over time. For Amazon to reach more customers, it must only make sure the bandwidth is sufficient, server processor speeds fast enough, and disk storage space deep enough to handle the exchange of data. That particular cost of growth is significantly lower for a web-based retailer. 

But Wait, Says Walmart, We Have an Ace up Our Sleeve…the Convenience Barrier 

In my experience shopping for diaper-bin liners, I mentioned one convenience advantage that Walmart held over Amazon: If I wanted those liners immediately, if I couldn’t postpone the gratification of holding my new purchase in my hands immediately, then Walmart would have won my business. 

This is the convenience barrier, and it has been the most important piece of protection the traditional retailers have had to keep Amazon and its ilk at bay. The need for immediate gratification – to get what you want now versus waiting three to five business days – is a big deal to shoppers. 

Amazon, however, has counted delivery time as part of its convenience infrastructure, investing heavily in it over the past several years. In the next article we’ll discuss how these investments have whittled away at Walmart’s convenience barrier advantage and what that might mean for the future of both companies. 

* For an interesting read on Moore’s Law, see the article Was Moore’s Law Inevitable? 

Monday, August 13, 2012

Convenience (and Diaper Stench): Amazon v. Walmart

This is the first post in a series about deconstructing Amazon's Feedback Loop in an attempt to understand both how its components work as individual units and together as a collective system. 

We’ll begin deconstructing the Amazon Feedback Loop by focusing on the Convenience Growth Lever.

When retailers invest in the Convenience Growth Lever, we’re talking about the infrastructure that makes the shopping experience as quick, simple, and hassle-free as possible for customers. The better job you do taking away the headaches of shopping, goes the logic, the more consumers will want to spend money with you. And you grow. 

The convenience infrastructure for traditional retailers revolves around placing stores as near as possible to the greatest mass of shoppers and then supporting those stores with staff, stock, and maintenance to keep them in good working order. It’s largely steeped in real-estate, an asset that tends to get costlier with time. 

For web-based retailers, it’s a different set of variables based largely on technology and the ability to deliver goods to customers as quickly as possible. Technology tends to cost less through its cycles of innovation, allowing users to do more with it at a cheaper price as time marches on. 

Let’s start the convenience discussion with a contemplation of diaper stench. 

Walmart vs. Amazon: A Case Study in Convenience and Diaper Stench

It’s Monday afternoon and my wife informs me that we’re running low on those special fresh-scented garbage bags that line the sides of the diaper-genie device in the baby’s nursery. Given that we’ve recently introduced our seven-month old daughter to the pleasure of solid foods, that they often don’t agree with her little system and therefore wreak havoc on her little outputs, we’re going through a lot of diapers. And keeping those liners in stock is of some importance to our family’s collective olfactory wellbeing. 
Stench Defenders
Walmart is only a ten minute drive away. But I severely dislike going to Walmart. I can only tolerate it if I know we’re going to fill the cart to its brim and thereby not have to go back for several more weeks. But to buy just one item? This could put me in an ill mood for hours. 

So I grab the Kindle Fire, do a quick product search, and buy exactly what we need from Amazon. For a reasonable premium, I get it delivered the next day. The stench crisis is averted. The nursery shall remain an inviting environment for all. 

Herein lies a crucial tension between web and physical retailers when it comes to convenience. I prefer not to step foot in a store at all. And though my wife doesn’t fully concur, she’s quickly learning the advantages of an Amazon Prime membership. Where we find common ground is in some rough calculus of how many items we need at the moment, multiplied by the number of miles we must drive to get to the shopping outlet, times the traffic at the moment, raised to the power of the number of different stores we’ll have to visit to check all the items off our list. 

The bigger the number, the more likely we are to just buy what we need online. 

Convenience for traditional retailers is largely a function of proximity to their shoppers (and number of parking spaces available immediately next to the door). For traditional retailers to grow, gaining access to more customers, they must invest in more and better locations. It is indeed about location, location, location. 

Of course there is a limited supply of good places to build stores, so that real estate becomes a hot commodity, appreciating in value in direct proportion to the number of companies bidding on the spot. 

And stores are costly to staff with workers, stock with inventory, and maintain to reasonable aesthetic and hygienic standards. 

It’s different on the web. Consider these major drivers that define convenience for shopping on the web (and contrast it with the alternative of having to go to Walmart) in context of my own experience buying diaper bin liners for my daughter’s nursery: 

1. Convenience in accessing Amazon’s web site. 

I picked up the Kindle Fire, turned on the screen, and was shopping. Convenience in this sense is a function of proximity to an internet-connected device. I used the Kindle, but I could have just as easily used the iPhone with its Amazon app, my wife’s iTouch, or my laptop. We have an abundance of options for connecting to the web in my house, and that’s a characteristic shared by more and more shoppers. 

Contrast this to the alternative of getting in the car, driving ten miles, parking, walking from the car to the front door, traversing the aisles in search of a specific product, waiting in line at checkout, walking back to the car, and driving home. 

Even if Walmart decided to be more convenient to me specifically, building a full-service store only a mile from my house, I would still have to go through all these steps. My drive would be shorter, but it hardly reduces the overall effort. 

2. Convenience in finding the liners with ease. 

In the search field of the Amazon shopping app on the Kindle, I typed in the name of the liners. In less than a second I saw the specific product I needed along with several alternatives for my consideration. 

Contrast this with the alternative experience at Walmart. I must navigate the store by department, understanding from experience (this is my second child after all) that diaper bin liners are NOT with regular trash bags, they’re with the baby things. Walk to the back corner of the store to find that department, then walk up and down its six aisles until I spot the specific item. It’s not there. There seems to be a generic alternative. Will that work? I better ask a worker. But none are close. Ah, there’s one! She says she has no idea. Great. Guess I better buy it, try it, and if it doesn’t work I’ll return it (another trip to Walmart). 

Amazon seems to know that you buy diaper liners on a repeat basis. While its awareness of my purchase needs can be a little creepy, it’s also convenient that Amazon reminds me of these liners a few months later, right when it’s time to stock back up. This makes the search process even more convenient by eliminating it altogether. 

3. Convenience of my speedy purchase transaction. 

My Kindle Fire came pre-loaded with my Amazon account information, its direct link to my credit card, and the shipping address for getting the order to me. So when I bought the liners, I clicked one button to complete the transaction. The whole thing, from turning on the Kindle to searching for the product to receiving confirmation that my order was received took maybe three minutes. Had I gone through my laptop, it might have taken an additional moment or two. 

If there are more than two people in front of me in a Walmart check-out queue (and there always are more), I’m anxiously scanning all the other lines in search of a faster path to buy my stuff and get out of the store. My blood pressure remains elevated for hours after waiting in those lines. 

4. Convenience of how quickly the liners are delivered. 

I placed the order on Monday, paid a few extra bucks, and had it delivered to my front door by the end of day Tuesday. 

Walmart is open early in the morning, late at night, and all times in between. Had I needed those liners any more quickly, Walmart would have won the convenience battle and earned my business. For customers that need (or want) immediate gratification – and there are many – Amazon and web retailers will never satisfy that need. Indeed, our family shopping trips to Walmart are defined more and more by our own procrastination, putting off buying something until it’s urgent and requires that inconvenient trip. 

Here the point goes to Walmart and store-based retailers in general. They have been protected from web shops taking over more of the turf by what we’ll call the Convenience Barrier: I need those liners, I drive to Walmart, I buy them, and I walk out the door with liners in hand. No delay. Instant gratification. 

Only a few years ago, Amazon would have required three to five days to get the liners to me. Now I can get them next day, and there are reports of people placing orders early in the morning and having the stuff delivered by the time they get home from work. (See a story about that here.) Amazon and its web-based compatriots are clearly making progress here. Though they’ll never provide the instant gratification of store-based retailers (unless they begin to offer that option, too…of opening physical stores), it’s clear they’re working hard to get orders processed and delivered as quickly as possible. 


So, Walmart’s convenience is driven largely by real estate and location and it must therefore invest in more stores to increase the convenience factor and grow. (And even then, there are pretty much the same steps required to get to the store one mile away as to get to the one ten miles away. The convenience is enhanced over other store-based retailers that are farther away, but building a store nearer to me has only marginal additional convenience when I’m comparing it to a web-based shopping experience.) 

Three of the convenience factors listed above for Amazon are driven by technology (access to its website, ease of searching for products, and speed of transaction). The fourth – how quickly the product is delivered to you – is largely a function of real estate in that Amazon can improve delivery speed by building fulfillment centers nearer to its customers. 

In the next couple of articles we’ll dig deeper into Amazon’s convenience factors by breaking them down between technology and the speed with which it delivers orders to your doorstep.

Thursday, August 9, 2012

Deconstructing Amazon’s Feedback Loop...A New Series

So far I’ve put the feedback loop out there (twice!) with no real explanation. What a tease! Okay, we’ll dedicate this post to deconstructing that schematic at a high level in preparation for building it back up in greater detail.  This is the first article in what's bound to be a longer series than I currently intend. Unfortunately for readers, the Bard's words are lost on me - brevity is the soul of wit - as I clearly lack both. 

Amazon's Feedback Loop

The nature of a feedback loop is that its outputs don’t escape from the system. They get recycled back in, and this creates a compounding effect as they become the fuel to churn the loop and create even more outputs. Which are again recycled back into the system, and the loop churns ad infinitum. 

It’s recursive. It feeds itself. It’s a perpetual motion machine. 

In the Amazon Feedback Loop, the fuel is cash. And in the simplest sense, it runs like this: 

Amazon feeds cash into the loop, investing in the growth levers – lower prices, wider selection, and enhanced convenience. This earns it a greater portion of the broad middle, bringing more customers to Amazon, producing more sales growth in the form of higher volume (more overall sales) and faster velocity (selling its inventory at a quicker rate). The combination of volume and velocity generate more gross profit dollars (cash) as well as negative working capital dollars (cash) which Amazon can then use as fuel to feed back into the loop. 

And the feedback loop churns and churns. Unless competitors can keep up (unless they can BOTH create cash AND make the decision to invest it in the growth levers), Amazon pulls further away with each repetition of the cycle. 

We’ll spend the next several articles reviewing the individual components as we deconstruct Amazon’s Feedback Loop. Next, we’ll focus on convenience, that growth lever which provides the greatest distinction (in a good sense and a bad sense) between web retailers and traditional retailers.