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.