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Amazon Widens its Moat


By Bill Davis, Director, MB&G Consulting

Last Christmas Eve, Amazon received a patent for “anticipatory package shipping” that describes a method for shipping a package of one or more items to the end destination’s geographical area without specifying the delivery address at time of shipment, but the final destination is defined en route. While last Christmas may have been good to Amazon on several fronts, combined with some other actions they are pursuing, it doesn’t appear this patent is going to be good for many retailers as Amazon really starts to showcase how focused it is in terms of widening its already sizable moat.

Delivering Competitive Advantage

One of those other activities involves opening 15 sortation facilities across this U.S. this year. Each of these new facilities enable Amazon to exert more influence over the final mile of the delivery process, including enabling Sunday deliveries, which no other retailer can currently offer. Whereas before Amazon packages would be picked up by either UPS or FedEx at one of their fulfillment centers, many will now be delivered by Amazon to the relevant sortation center where they are organized by ZIP code and then delivered to the respective post office by no later than 8 a.m., for delivery on the same day.

And beyond facilitating Sunday deliveries through the U.S. Postal Service (USPS), these facilities also enable later ordering times for two-day delivery, or as little as nine hours for both Prime and regular customers who have to pay for the privilege, as well as the ability to hedge Amazon’s exposure to both UPS and FedEx, where the company experienced several challenges last holiday season in getting packages to customers on time. Finally, this helps lower shipping costs, which is key for Amazon. The possibility exists Amazon could start delivering directly from the sortation centers, bypassing third-party shippers.

Wait a minute! Amazon could start making its own deliveries bypassing UPS, USPS, FedEx, etc.? While this has been a hypothetical topic of conversation for quite some time, it now appears to be emerging as reality. Besides the issues last holiday season, I would also suspect this is being driven by UPS’ and FedEx’s move to dimensional pricing after the 2014 holiday season. The net effect of this should be increased shipping costs for most retailers, which means either limits on/the elimination of free shipping and/or higher prices. In contrast, Amazon has been pursuing ways to lower its expenses over the long haul for the better part of at least a year.

Say what you want about their ongoing infrastructure investment strategy, but Amazon is clearly focused on a different end game than any other retailer. And this comment, “It’s unlikely any other (online) retailer has enough volume to even try its own sortation center,” further highlights this. If Amazon can succeed at lowering its costs by taking on more of its own logistics, the company will have addressed several issues previously highlighted as well as extended their moat in such a way that it’s hard to imagine another retailer even attempting to cross it, let along succeeding.

Mobile POS and More

And now for what could be the coup de grace. Amazon recently announced a mobile POS solution for brick & mortar retailers where the initial carrot is lower costs than other vendors. While this may initially seem unrelated to the logistics challenges that Amazon is addressing above, au contraire. It would appear the mobile POS solution, besides trying to drive more business to Amazon as well as gain better visibility into merchants’ transactions, is also an attempt to co-opt the omnichannel efforts of brick-and-mortar retailers.

While helping Amazon increase its sales volume through Marketplace, this could eventually enable it to offer buy online and pickup in store without having to own the physical store. Think of the one thing Amazon lacks today, a physical presence for picking up orders, and then envision Amazon possibly having hundreds if not thousands of locations courtesy of the Marketplace merchants. While maybe a stretch, if Amazon can make this worthwhile for the merchants, it would create a distribution network of locations throughout the country without having to invest in building them. Add in Amazon’s efforts to control more of their logistics and the bigger picture starts to emerge.

The End Game

As was previously mentioned, Amazon is playing toward a different end game than anyone else. The goal is to dominate retail like no other company and right now it’s hard to see anyone getting in the way. If I were a brick & mortar retailer or e-tailer, I would be highly concerned about these developments and be taking steps to mitigate them. The one thing outside retailers’ control that can possibly help them are Amazon’s recent challenges in the cloud. As one of Amazon’s key profit drivers, this helps sustain the infrastructure investment, but with Google and Microsoft pressuring Amazon, the company has to respond by lowering costs.

What do $8 billion, $58 billion and $85 billion represent? Amazon’s, Google’s and Microsoft’s respective cash positions. While $8 billion is nothing to sneeze at, it pales next to Amazon’s main competitors, so if I am a retailer, one way I can help myself is by supporting Google’s and Microsoft’s cloud efforts because the more of that $8 billion Amazon has to spend defending its Web Services turf, the less it has to spend on that unrelenting infrastructure that serves to widen its moat.

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