6/26

The Amazon River, photo by NASA

According to Bloomberg, sometime in May Amazon will host several of the biggest providers of consumer-packaged-goods at a three-day event designed to "persuade them that it's time to start shipping products directly to online shoppers and bypass chains..." (Recode has a great piece putting the May event in broader context, including a similar Walmart summit in February.)

The invitations are being sent out even as serious questions percolate regarding the sustainability of the current direct-to-consumer distribution model. DCVelocity reports, that "free" shipping has cut deep into the margins of both retailers and distributors, so deep that some major players are announcing significant changes in their game-plans.

Memphis, Tenn.-based FedEx and its chief rival, Atlanta-based UPS Inc., have had enough. They recognize it is impossible to turn their backs on business-to-consumer (B2C) volumes given their growing relevance, and they are reconfiguring their networks to handle the business more cost-effectively. At the same time, though, the giants are signaling to retailers that they should begin accepting compensatory rates, or they should find another carrier.

And... earlier today UPS announced expanded Saturday deliveries.

The US Census Bureau estimates that in the last quarter of 2016 e-commerce accounted for 8.3 percent of overall retail sales. This is widely considered a conservative estimate. Clearly in some specific retail sectors online is at par or better with in-store sales. Writing at pymnts.com, Karen Webster notes, "Books, office supplies, apparel and sporting goods show online sales that approach 30, 40 and even 60 percent for those same categories in retail sales." Music has been so decimated, it is no longer even mentioned.

The big retail sector that has probably been most resistant to online purchasing is grocery. But both online and offline, the competition is heating up. Walmart, the number one grocer in the United States, is rapidly deploying a click-and-collect capability. (Amazon is experimenting with a similar service.) Number two, Kroger, is "testing sensor-laden interactive shelves that detect shoppers in the aisles via their smartphones to offer them personal pricing and product suggestions as they walk along." German grocers Aldi and Lidl are making a big push for US market-share.

 According to reporting by Bloomberg, Amazon intends to be among the top five US grocers by 2025.

That would require more than $30 billion in annual food and beverage spending through its sites, up from $8.7 billion — including Amazon Fresh and all other food and drink sales — in 2016, according to Cowen & Co. Reaching that milestone would require a new wave of store and warehouse investments around the country, costing billions of dollars. That’s an existential change for Amazon, which initially stayed away from perishable goods and has mostly avoided the overhead of physical stores since it started in 1994.

Notice the report's focus on supply.  Big challenge, no doubt.

But Amazon has never given priority to supply. Instead it is tightly organized around owning -- and fulfilling -- demand.  Walmart destroyed Sears (and others) with state-of-the-art supply chain management.  Inditex has driven extraordinary growth with profoundly innovative and effective supply chain management.

Not Amazon.  Whenever possible Amazon has outsourced distribution. Amazon wants to be the platform where others sell and then supply. It will distribute when it must. But Amazon wants to own the demand signal. Jeremy Hanks explains, "Amazon only focuses on directly selling and fulfilling high-demand products and leaves long-tail merchandise for its independent sellers to fulfill. In its electronic category, for example, Amazon only sells 7 percent of the products while the remaining 93 percent are sold by third-party merchants..."

Earlier today (Tuesday, April 4) BMO Capital Markets advised its clients that Amazon's stock price could see a forty percent increase in coming months, largely on the strength of its "sponsored products" advertising program.  As the Amazon website explains,

Amazon Sponsored Products is an easy way for you to advertise your listings. Ads appear right where customers will see them, such as the first page of search results or product detail pages. You place bids on relevant keywords, and if your bid wins and your ad matches the search, it gets displayed to shoppers. These targeted ads can bring your products to a new audience and help you maximize your sales.

The targeted ads can, of course, be integrated with Amazon's one-click ordering application... everyone wins.  Especially Amazon which becomes the ubiquitous intermediary

More seamless -- even seductive -- is Alexa, Amazon's personal assistance technology.  Alexa is designed for others -- outside Amazon -- to develop new "skills". Amazon technology provides the interface -- brokers the deal, we might say -- but others deliver the product.

Amazon pulls consumers toward it by understanding and shaping the consumer experience.  Once Amazon receives the consumer's pull signal -- and its cut of the transaction -- the company is just as happy to leave to others the problems of pushing the product.

I do not know much about gods; but I think that the river
Is a strong brown god... conveyor of commerce...
The problem once solved, the brown god is almost forgotten...
Unhonoured, unpropitiated
By worshipers of the machine, but waiting, watching and
     waiting...
The river is in us, the sea is all about us...

T.S. Eliot, The Dry Salvages (with apologies)