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.