Density and delivery by Genevieve Giuliano 

It's not bricks or bytes, its both.

Amazon challenges traditional retailers by increasing choice, reducing hassles, and locking-in loyalty.  In many urban areas Amazon can also deliver purchases within one hour.

But delivering these advantages is expensive.  In an October 27 conference call with financial analysts Amazon's CFO explained,

...in Q3 we added 18 fulfillment centers and we've added five more in October. For the year we'll add 26. Most of those are in North America but that compares to 14 last year and I would look, looking back the last time we had double-digit increase in fulfillment centers was in 2012 when we added 11 in the third quarter.... The number of warehouses that we added represents a 30% increase in square footage year-over-year. Last year we increased square footage by just under 20%. The definition of square footage in this case is all of our warehouses plus our sortation and delivery centers. So it's pretty much our customer service centers. So it's pretty much our full square footage that supports operation.

So those will dissipate as as they burn in. We've talked about fulfillment centers' initial startup costs include increase in fixed costs but also variable cost as we train workers and also bring in inventory. And there's a number of transportation costs also related to the startup of a new fulfillment center, both inbound and outbound. And they're inherently less efficient than more established mature buildings, so there will be a cycle where those will be more productive next year than they are this year and more productive in 2018 than they are in 2017. 

So those will dissipate as as they burn in. We've talked about fulfillment centers' initial startup costs include increase in fixed costs but also variable cost as we train workers and also bring in inventory. And there's a number of transportation costs also related to the startup of a new fulfillment center, both inbound and outbound. And they're inherently less efficient than more established mature buildings, so there will be a cycle where those will be more productive next year than they are this year and more productive in 2018 than they are in 2017.

Costs to build this future efficiency contributed to a decline in the third quarter's profit margin and last week investors responded by punishing the Amazon stock price by about six percent. (Seems short-sighted to me.)

Another big third quarter cost was shipping.  According to Geekwire: 

Amazon’s net shipping costs soared to nearly $1.75 billion in the third quarter, the second-highest quarterly total in the company’s history and the highest ever outside of the peak holiday season... Amazon’s rising shipping costs are driven by factors including the growth of the Amazon Prime membership program, with its core benefit of free two-day shipping; the expansion of the Fulfillment By Amazon (FBA) program, requiring more warehouse capacity; and Amazon’s push for rapid delivery across its business with AmazonFresh, Prime Now, and new same- and next-day shipping options.

Meanwhile, traditional retailers are focusing more and more on omnichannel marketing and sales -- competing online directly with Amazon -- while providing discounts if the customer picks-up the product at a brick-and-mortar location.  According to the Wall Street Journal:

Wal-Mart is making more products available for same-day store pickup, staffing the pickup counter with more workers and stocking inventory closer to those workers to shorten wait times, a key consumer gripe. Pickup orders surged last holiday season and the retailer expects an increase this year... 

“The large store-based retailers realized that if they want to compete with online retailers they need to leverage the strategic asset of the store,” said Steve Barr, retail consultant at PwC...

About 21% of Americans say they use in-store pickup regularly and 48% say they use it “on occasion,” according to a PwC survey of more than 2,100 people from earlier this year. 

Getting more shoppers to pick up orders would be a welcome shift because retailers earn less when shipping directly to a customer’s home. Many shoppers also keep buying once in the store to retrieve an online order.

The pick-up option -- if adroitly played -- gives retailers with an existing network of well-placed stores a significant advantage both in terms of e-commerce cost containment and the potential for up-selling.  These existing networks are mostly suburban and exurban.  Where car-culture continues to dominate, pick-up will often be preferred.

Today Amazon's PrimeNow is perhaps most widely used in Manhattan, Brooklyn, Seattle, Dallas, San Francisco, Los Angeles, Chicago, San Diego, Austin, Atlanta, Houston, Miami, Baltimore, Minneapolis, Tampa, Orlando, Northern Virginia and Portland, OR.   The less likely the customer drives, the more likely direct customer delivery will remain the preferred option.  Density decides.

According to BraveNewCoin:

Retail giant Walmart, IBM and Tsinghua University are collaborating to improve the way food is tracked, transported and sold across China, using blockchain technology. The project creates, “A new model for food traceability, supply chain transparency and auditability using IBM Blockchain based on the open source Linux Foundation Hyperledger Project fabric,” and coincides with the opening of a new Walmart Food Safety Collaboration Center in Beijing.

According to Fortune magazine:

Paul Chang, a global supply chain lead at IBM, says that the trial represents a substantial improvement over earlier projects that solely used barcodes and radio ID tags. “The missing piece was a shared forum where companies could begin to see each others’ transactions and develop trust,” he said. “That missing piece is something like the blockchain.” 

Information to be stored on the blockchain, where fraud and inaccuracies are much harder to get away with, includes details related to farm origins, factory data, expiration dates, storage temperatures, and shipping. “We can eliminate layers that exist today that add very little value to the industry,” Chang said.

The United Kingdom's Office of Science offers this quick explanation of blockchain -- or Distributed Ledger Technology:

Ledgers have been at the heart of commerce since ancient times and are used to record many things, most commonly assets such as money and property. They have moved from being recorded on clay tablets to papyrus, vellum and paper. However, in all this time the only notable innovation has been computerisation, which initially was simply a transfer from paper to bytes. Now, for the first time algorithms enable the collaborative creation of digital distributed ledgers with properties and capabilities that go far beyond traditional paper-based ledgers. 

 A distributed ledger is essentially an asset database that can be shared across a network of multiple sites, geographies or institutions. All participants within a network can have their own identical copy of the ledger. Any changes to the ledger are reflected in all copies in minutes, or in some cases, seconds. The assets can be financial, legal, physical or electronic. The security and accuracy of the assets stored in the ledger are maintained cryptographically through the use of ‘keys’ and signatures to control who can do what within the shared ledger. Entries can also be updated by one, some or all of the participants, according to rules agreed by the network... 

Distributed ledgers can provide new ways of assuring ownership and provenance for goods and intellectual property. For example, Everledger provides a distributed ledger that assures the identity of diamonds, from being mined and cut to being sold and insured. In a market with a relatively high level of paper forgery, it makes attribution more efficient, and has the potential to reduce fraud and prevent ‘blood diamonds’ from entering the market. 

The IBM, Walmart, Tsinghua pilot is motivated by safety concerns.  Along the way to addressing these safety concerns, the relevant supply chains will be made minutely transparent.  The availability of this detail has amazing implications for issues beyond safety.

Supply chain management differs from logistics, says me, largely in terms of how information is exchanged and managed.  Logistics is about how, SCM is about where, when, and how much.  Distributed Ledgers generate the potential for precisely targeting quantity and quality to demand.

CBRE the global real-estate management company reports a continued decline in availability of US distribution center space in most urban markets. Availability of industrial space across markets tracked by CBRE declined by 20 basis points (BPs) to 8.4 percent in the third quarter from the second, extending the longest stretch of consecutive quarterly declines since CBRE began tracking the figures in 1989.

Reporting on these results, Supply & Demand Executive characterizes the situation as a "supply-chain arms race". Retailers are in an increasingly life-or-death struggle involving, "big-box distribution centers, last-mile facilities nearest population centers or reverse-logistics facilities to handle returns."

“The industrial market is running full-throttle,” said Jeffrey Havsy, CBRE’s chief economist in the Americas. “The pace of demand has been running nearly double that of supply and vacancy continues to decline in big chunks. Demand is being driven by strong growth in e-commerce, a healthy auto industry and some reshoring of certain types of manufacturing.”

According to the company and several media reports, Walmart will scale-back expansion of its store network and focus more on e-commerce.  USA Today reports that Walmart will:

Open 130 stores in the 2017 fiscal year ending in February and 55 in the 2018 fiscal year ending in February 2018. 

For a company with nearly 4,600 stores nationwide, those projections reflect relatively inconsequential growth. In the 2015 and 2016 fiscal years, the company added 198 and 316 stores, respectively, according to a securities filing. 

The planned small-format openings in the U.S. include 70 in 2017 and 20 in 2018, reflecting a sharp decline after opening 161 in 2016.

Last month Walmart completed its purchase of online retailer Jet.com.

Meanwhile, Amazon is expanding from a few brick-and-mortar bookstores to a network of grocery stores. According to Wired:

These stores are onramps to the company’s online grocery service, Amazon Fresh, which delivers stuff to your door. And they’re giant advertisements for Amazon Fresh. But they can also double as distribution centers. They additional outposts in the vast Amazonian distribution network that is slowly stretching across the planet. You need places that can move all the fresh eggs and milk from week to week, and they might as well double as stores. It’s the same logic that keeps your local grocery store open all night long as employees restock the place: if someone is there, they might as well stay open.

Amazon is not the only e-commerce company planning retail real-estate investments.

And Walmart is not the only grocer exploring various strategies to defend market share from Amazon. Over the last year Kroger has used stores in the Indianapolis area to test and refine its ClickList program by which customers can order online and pick-up at stores.  The program is now being rolled out beyond the test-market (and here).  Online competition for grocery buying  is likely to intensify, even while some warn that technology and marketing may be getting too far ahead of customer demand.

The battle between Walmart and Amazon promises to set consumer expectations and, one way or another, shape how we shop for groceries in 2026.

[Excellent extended piece on the Walmart online grocery strategy from the Washington Post. Related piece from the Wall Street Journal.]

Matthew is now a Cat-2 storm with sustained winds in the 30s and on-shore gusts into the 70s.  Several storm surge records have been re-set north of Jacksonville.

There is still cause for serious concern depending on how riverine flooding and storm surge interacts with the urban network around Charleston and North Charleston later today. (See impact projections below.  This includes intertidal effects. Updates from NOAA at NOWcoast.)  Damage to the electrical distribution grid is widespread and will require significant time to restore.

Looking at the results in Haiti and Cuba, it is clear Matthew could have been much worse.  A few degrees more turn Northwest with a a high-power direct hit on Miami and this could have been one of the most consequential hurricanes in history.  But in terms of supply chain resilience, the effects on the US southeast are quickly recoverable disruptions.

UPDATE ON OCTOBER 12: Extensive flooding in North Carolina has shut down portions of Interstate 95. According to the North Carolina Department of Transportation, as of noon on October 12,  "I-95 South closed between Exit 56 (US-301) and Exit 13 (I-74), in Cumberland and Robeson County.I-95 North is closed between Exit 13 (I-74) and Exit 22 (US-301), in Robeson County."

According to CCJ:

Load transactions on DAT’s board show a surge in rates is already underway, particularly into and out of the Raleigh area, which is situated close to the intersection of I-95 and I-40. “It looks like the flooding is making it harder to find an available truck in the markets just south of Raleigh,” said a DAT analyst. “So far this week, most of the loads posted on the load board that are bound for Raleigh are coming from Atlanta, and the Atlanta to Raleigh lane is up 18 cents in the past seven days.” 

Truckstop.com, another load board tracking post-Matthew rates, said rates in storm-impacted states jumped last week ahead of the storm. Truckstop.com’s Roxanne Bullard said rates jumped “dramatically” last weekend, but have since fallen below the rolling 30-day average. “It will be interesting to see once all interstates open back up if that will change,” she said.

 At least twenty have died in North Carolina as a result of flooding.  The situation in Haiti is beyond description.

Estimated customers without power in Florida counties served by Florida Power and Light about 6PM Eastern on Friday, October 7.  Information provided by FP&L and USA Today.

Status of the national power grid as of 5:17 PM on Friday, October 7.  Updated information is available from the Energy Information Administration website.

As I write this Hurricane Matthew has just begun to move up Florida's Atlantic coast.  The map on the right shows projected wind speeds.  Purple indicates 100 percent probability of wind speeds above 40 miles per hour.  Gusts up to 107 MPH have been reported at several on-shore locations.

The left-side map shows grocery distribution centers for roughly 80 percent of the market in Central to South Florida and about 60-70 percent of North Florida.  I-95 is the obvious major link between supply and demand. The road network is sparse in the middle of the peninsula.

The hurricane just missed Miami and Ft. Lauderdale. As a result, supply capacity in Metro Miami will continue to be available post-disaster.  There are also significant sources of capacity in the Tampa/Lakeland corridor that should experience minimal disruption.

A Category 4 or worse storm shearing up the I-95 corridor from Miami to Jacksonville has long been a nightmare scenario.  Matthew has been a Cat-3 that began its roll north of the densest population concentration.  Moreover, so far the eyewall and has remained just enough off-shore to spare the coast the worst winds.

A 7-to-11 foot storm surge is currently forecast for Sebastian Inlet, Florida, to the Edisto Beach, South Carolina between Friday night and late Saturday.

Not a worst case (yet), but plenty bad.