Thanks to Oliver Wyman, Fast Company and many others for this update on last post on Amazon…..my sense from reading all:
– Twitch is Amazing! Driving 40% of all internet bandwidth???? Is that even possible? With 55 million users spending an average of 100+ minutes per day??? That is enormous! Bezos obviously intrigued and willing to take a risk to get this three-year old start-up in its fold? But why exactly? Don’t know
– FRESH is moving out. Per plan, and announcement to stockholders and also per rumor, Amazon Fresh is in a soft launch mode. The big news was the launch in LA (after 7 years in Seattle tweaking), and then it was small news that they rounded out most of the the rest of California markets – that is a HUGE expansion in less than a year. Moreover, Amazon green trucks are riding through Manhattan, and a roll there is imminent. No word yet, but I really think Chicago might be next – rumors say I am right.
– Manufacturers think this isn’t their fight. Most of them are just glad they are not retailers. But the truth is that Amazon will cause a massive reduction in retailer margin, as well as many of the brand-building activities at retail that manufacturers are used to …. horrible merchandising will replace great merchandising, forget about cold beverage sales, forget about impulse sales, etc.
– the truth is that retail is not at risk – just the marginally profitable ones.
Here are the articles:
AMAZONFRESH IN THE U.S.
After years of anticipation, AmazonFresh has now expanded its U.S. home grocery delivery service beyond its home market of Seattle.
In June 2013, it launched in Los Angeles, with more markets expected to follow. From conversations with supermarket retailers all over the U.S. and globally, it is clear that online and multi-channel competitors have come into focus as a key competitive threat, and AmazonFresh is by far the most dangerous of the new breed. What is striking is the similarity between what we hear from food retailers today and what leaders of category killers were saying back in 2009 – and we know that the category killers’ fears of Amazon proved to be well-founded.
WHAT IS AMAZONFRESH?
AmazonFresh, operating in pilot mode in Seattle since 2007, allows shopping online and on mobile apps. The assortment is surprisingly broad and deep, with between 10,000 and 30,000 items, depending on the market, including (for example) 400+ produce items, 500+ meat and seafood items, 1,300+ beverage items and 4,000+ health and beauty items. Unlike the traditional Amazon model, AmazonFresh prices on consumables are currently higher than those found in local supermarkets, as promotions are mostly absent – the current customer proposition focus is on convenience.
The differences between the Seattle and LA models (different membership and delivery pricing models and different assortment depth, to name a few) seem to indicate that Amazon is still trialling many elements of the business, but the rollout to additional markets suggests underlying confidence in the economics.
When Amazon decides to move from pilot to rollout, history indicates they will move very rapidly. The company has reportedly told vendors it could roll out to 40 U.S. markets by the end of 2014!
The direct impact that Amazon had on many category killers by winning market share is obvious, as is the impact on consumers’ price expectations, but one under-reported aspect of what is happening to category killers is the channel conflict competition Amazon provokes. Not only does Amazon take share, they also force category killers to shift transactions to their own websites. But those sites are not the basket-building machines that stores are. For one major category killer, the average online transaction has only a quarter of the number of items that the average in-store transaction has. So the incumbents face a conundrum – they must grow online sales, but doing so dramatically worsens their economics.
However, Amazon will never take as much share away from food retailers as it has taken from category killers. Food retailers’ natural defenses – low gross margins, focus on fresh product, “need it now” consumption patterns, the emotional aspect of personally selecting food to feed one’s family – mean the supermarket channel as a whole will not suffer the fate of Borders or even Best Buy.
The threat is not that stores will become obsolete; such notions are alarmist and naïve. But AmazonFresh can force dramatic change in the shape of the food retail industry with even modest market share. It doesn’t take complicated analysis to prove this. The industry overall runs with about a 2% bottom line and a 20% volume variable margin. This means
a 10% sales loss would wipe out the entire industry’s profit. Any experienced food retail executive knows that most chains have a “mushy middle” of stores that generate reasonable operating income with current sales volumes, but would quickly tip into negative store profit with a modest reduction in volume. We don’t know what Amazon’s ultimate ambitions in the food space are, but if they achieve even a 5% volume share it would force significant changes. Current players would have to either raise prices – kicking off the vicious cycle of volume loss, causing deleveraged fixed costs, leading to even more price rises – or close stores to bring costs into line. A 5% volume loss to AmazonFresh would result in 10-20% reduction in store count, because not all the volume from closed stores will be clawed back by surviving stores: as supermarkets become relatively less convenient, some of the volume would go to specialists (clubs, hard discounters, premium players) and online channels. It’s too early to know the full extent of the impact, but a good guess is that around one in eight supermarkets would have to close to maintain current profitability without raising prices.
Supermarkets should not count on their ability to weather this disruption the way they weathered the last major disruption: the Walmart supercenter tsunami, in the case of the U.S. Then, the best grocers got better, slashed cost out of their networks, improved their capabilities, and prospered at the expense of weaker competitors who couldn’t adapt fast enough. They had time to pull this off because Walmart couldn’t open a thousand supercenters overnight. But this time, the starting point is much, much more efficient – there will be a lot less “fat” to cut to preserve profitability in the face of falling volume – and the weaker players that were the victims last time are already gone. Most significantly, the rate of change in the competitive landscape will not be constrained by the process of opening new stores. Amazon only has to set up distribution centers and networks. It already has a strong consumer brand. This disruption could happen much faster than anything the industry has seen before.
WHAT SHOULD FOOD RETAILERS BE DOING? AT LEAST THREE THINGS:
Build a multi-channel offering. Of course, grocers must develop their own answer to online and mobile shopping. And it is better to cannibalize one’s own in-store sales than to surrender them to the competition. That said, it is very tricky to make the economics of these models work, so great care must be taken to manage the bottom line as online and mobile sales ramp up.
Get seriously good at fresh. The fresh categories represent a cushion around the rest of the customer offer. If customers believe they can’t get the same quality, freshness and selection online as they would in a store, it will be a formidable barrier to switching to on-line purchasing. So far AmazonFresh’s fresh product offering is highly variable (see Exhibit 1) but it stands to reason that they will get better with experience. And they have a built-in freshness advantage – as do all online grocers – because product take less time to go from the distribution center to the customer’s home. Most U.S. retailers are nowhere near where they could be, and the same is true in many other geographies. Getting good enough at fresh to fend off online competition means re-thinking the supply chain, store practices and merchandising standards. It means breaking the usual trade-off between availability and shrink, shifting the efficient frontier through better capabilities and greater accountability.
Prepare for a world with fewer stores. Possibly a lot fewer. Even an excellent multichannel platform and a rejuvenated fresh offer will not be nearly enough. We believe food retailers should be planning now for a world with far fewer stores. If, say, 15% of the square footage is going to have to close down, survival will depend on making sure the competition bears more than their fair share of the pain. So grocers’ competitive strategy should be focused on ensuring they get to keep more of their stores than the competition does, and being prepared to pounce when weakened competitors begin to wobble. This means understanding how to win store-by-store battles and drive maximum profit out of every square foot. To be clear, we are bullish on the supermarket industry. While the industry’s transformation will be painful for all and fatal for a few, the survivors will be better placed. Surviving stores will do much higher volume and, with higher fixed cost leverage, they could be massively more profitable. Stronger competition will force grocers to become even better operators and even more responsive to customer needs. Retailers who act fast can not only survive, but adapt their businesses to thrive in the new world.
Exhibit 1: PRELIMINARY CUSTOMER RESEARCH BY OLIVER WYMAN SHOWS a wide range of customer perceptions of the quality of AmazonFresh products
“The apples were the kind I would have hunted for and maybe not found. They looked great and the taste was fresh and sweet, the texture crisp which is exactly what I like. They were delicious.”
“The sell by date on the frozen beef says July 2013 [delivered in September 2013]. Granted it was frozen, this makes me believe it’s not fresh beef and I’m a little disappointed by that.”
“Some of the berries were very soft and leaking all over the box.”
ABOUT OLIVER WYMAN
Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation.
Copyright © 2014 Oliver Wyman. All rights reserved.
FastCompany: AmazonFresh a “Trojan horse;” 20 more markets expected
Aug 11 2013, 18:15 ET
In a cover story on Jeff Bezos and Amazon (AMZN), FastCompany’s J.J. McCorvey observes the company’s new AmazonFresh grocery service (offered via its $299/year Prime Fresh free shipping plan) is a “Trojan horse” meant to give Amazon’s broader same-day delivery efforts needed scale.
Amazon is also hoping its same-day infrastructure (replete with Amazon trucks) will increase its appeal to 3rd-party sellers (now responsible for 40% of unit sales) by lowering delivery times. Merchants already cite access to Prime as a reason for outsourcing fulfillment to Amazon (and giving a ~20% cut).
EBAY could prove a formidable same-day rival. Instead of building its own soup-to-nuts infrastructure, eBay is relying on dozens of offline retailers (inc. major national chains) to help handle fulfillment. Google is also dipping its toes into same-day.
Currently available in L.A. and Seattle, AmazonFresh is expected to expand to 20 more markets, including some international ones. SunTrust recently predicted an NYC launch will happen in 2014.
Also mentioned by McCorvey: Amazon is now able to ship items less than 2.5 hours after an order is placed; and wants to further lower than number; Prime now covers 15M+ items (up from 1M in ’05); and Amazon is still “evaluating” how to use Kiva’s robots.
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AMAZONFRESH IS JEFF BEZOS’ LAST MILE QUEST FOR TOTAL RETAIL DOMINATION
AMAZON UPENDED RETAIL, BUT CEO JEFF BEZOS — WHO JUST BOUGHT THE WASHINGTON POST FOR $250 MILLION — INSISTS IT’S STILL “DAY ONE.” WHAT COMES NEXT? A RELENTLESS PURSUIT OF CHEAPER GOODS AND FASTER SHIPPING. THE COMPETITION IS ALREADY GASPING FOR BREATH.
BY J.J. MCCORVEY
The first thing you notice about Jeff Bezos is how he strides into a room.
A surprisingly diminutive figure, clad in blue jeans and a blue pinstripe button-down, Bezos flings open the door with an audible whoosh and instantly commands the space with his explosive voice, boisterous manner, and a look of total confidence. “How are you?” he booms, in a way that makes it sound like both a question and a high-decibel announcement.
MORE ON AMAZON
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• Think Your Office Is Soulless? Check Out This Amazon Fulfillment Center
Each of the dozen buildings on Amazon’s Seattle campus is named for a milestone in the company’s history–Wainwright, for instance, honors its first customer. Bezos and I meet in a six-floor structure known as Day One North. The name means far more than the fact that Amazon, like every company in the universe, opened on a certain date (in this case, it’s July 16, 1995). No, Day One is a central motivating idea for Bezos, who has been reminding the public since his first letter to shareholders in 1997 that we are only at Day One in the development of both the Internet and his ambitious retail enterprise. In one recent update for shareholders he went so far as to assert, with typical I-know-something-you-don’t flair, that “the alarm clock hasn’t even gone off yet.” So I ask Bezos: “What exactly does the rest of day one look like?” He pauses to think, then exclaims, “We’re still asleep at that!”
He’s a liar.
Amazon is a company that is anything but asleep. Amazon, in fact, is an eyes-wide-open army fighting–and winning–a battle that no one can map as well as its general. Yes, it is still the ruthless king of books–especially after Apple’s recent loss in a book price-fixing suit. But nearly two decades after its real day one, the e-commerce giant has evolved light-years from being just a book peddler. More than 209 million active customers rely on Amazon for everything from flat-panel TVs to dog food. Over the past five years, the retailer has snatched up its most sophisticated competition–shoe seller Zappos and Quidsi, parent of such sites as Diapers.com, Soap.com, Wag.com, and BeautyBar.com. It has purchased the robot maker Kiva Systems, because robots accelerate the speed at which Amazon can assemble customer orders, sometimes getting it down to 20 minutes from click to ship. Annual sales have quadrupled over the same period to a whopping $61 billion. Along the way, incidentally, Amazon also became the world’s most trusted company. Consumers voted it so in a recent Harris Poll, usurping the spot formerly held by Apple.
• Retail’s Game Of Thrones: Citizens of these kingdoms know the stakes–you innovate or you die.
Amazon has done a lot more than become a stellar retailer. It has reinvented, disrupted, redefined, and renovated the global marketplace. Last year, e-commerce sales around the world surpassed $1 trillion for the first time; Amazon accounted for more than 5% of that volume. This seemingly inevitable shift has claimed plenty of victims, with more to come. Big-box retailers like Circuit City and Best Buy bore the brunt of Amazon’s digital assault, while shopping-mall mainstays such as Sears and JCPenney have also seen sales tank. Malls in general, which once seemed to offer some shelter from the online pummeling, have been hollowed out. By Green Street Advisors’ estimate, 10% of the country’s large malls will close in the next decade. It has become painfully clear that the chance to sift through bins of sweaters simply isn’t enough of a draw for shoppers anymore. “It has been this way in retail forever,” says Kevin Sterneckert, a research VP at Gartner who focuses on shopping trends, and who lays out a strategy that should blow nobody’s mind: “If you don’t innovate and address who your customers are, you become irrelevant.” And now that means fending off threats from every phone, tablet, and laptop on the planet.
Amazon’s increasing dominance is now less about what it sells than how it sells. And that portends a second wave of change that will further devastate competitors and transform retail again. It’s not just “1-Click Ordering” on Amazon’s mobile app, which is tailor-made for impulse buying. It’s not just the company’s “Subscribe & Save” feature, which lets customers schedule regular replenishments of essentials like toilet paper and deodorant. It’s not just Amazon’s “Lockers” program, in which huge metal cabinets are installed at 7-Elevens and Staples in select cities, letting customers securely pick up packages at their convenience instead of risking missed (or stolen) deliveries.
“AMAZONFRESH IS REALLY A TROJAN HORSE. IT’S NOT ABOUT WINNING IN GROCERY SERVICES. IT’S ABOUT DOMINATING THE MARKET IN SAME-DAY DELIVERIES. ”
No, it’s all this, plus something more primal: speed. Bezos has turned Amazon into an unprecedented speed demon that can give you anything you want. Right. Now. To best understand Amazon’s aggressive game plan–and its true ambitions–you need to begin with Amazon Prime, the company’s $79-per-year, second-day delivery program. “I think Amazon Prime is the best bargain in the history of shopping,” Bezos tells me, noting that the service now includes free shipping on more than 15 million items, up from the 1 million it launched with in 2005. Prime members also gain access to more than 40,000 streaming Instant Video programs and 300,000 free books in the Kindle Owners’ Lending Library. As annoying as this might be to Netflix, it is not intended primarily as an assault on that business. Rather, Bezos is willing to lose money on shipping and services in exchange for loyalty. Those 10 million Prime members (up from 5 million two years ago, according to Morningstar) are practically addicted to using Amazon. The average Prime member spends an astounding $1,224 a year on Amazon, which is $700 more than a regular user. Members’ purchases and membership fees make up more than a third of Amazon’s U.S. profit. And memberships are projected to rise 150%, to 25 million, by 2017.
Nadia Shouraboura of Hointer, a new store that represents how retail must adapt in the Age of Amazon
Robbie Schwietzer, VP of Prime, is more candid than his boss when explaining Prime’s true purpose: “Once you become a Prime member, your human nature takes over. You want to leverage your $79 as much as possible,” he says. “Not only do you buy more, but you buy in a broader set of categories. You discover all the selections we have that you otherwise wouldn’t have thought to look to Amazon for.” And what you buy at Amazon you won’t buy from your local retailer.
Prime is phase one in a three-tiered scheme that also involves expanding Amazon’s local fulfillment capabilities and a nascent program called AmazonFresh. Together, these pillars will remake consumers’ expectations about retail. Bezos seems to relish the coming changes. “In the old world, you could make a living by hoping that your customer didn’t know whether your price was actually competitive. That’s a very”–Bezos pauses for a second to rummage for the least insulting word–“tenuous strategy in the new world. [Now] you can’t convince people you have the low price; you actually have to have the low price. You can’t persuade people that your delivery speeds are fast; you actually have to have fast delivery speeds!” With that last challenge, he erupts in a thunderous laugh, throwing his cleanly depilated head so far back that you can see the dark fillings on his upper molars. He really does seem to know something the rest of us don’t. We’re still asleep, he says? The alarm clock at Amazon went off hours ago. Whether the rest of the retail world has woken up yet is another question.
Amazon’s 1-million-square-foot Phoenix fulfillment center produces a steady and syncopated rhythm. It is the turn of mechanical conveyor belts, the thud of boxes hitting metal, the beeping of forklifts moving to and fro, and the hum of more than 100 industrial-size air conditioners whirring away. This is the sound of speed–a sonic representation of what it takes to serve millions of customers scattered across the globe.
In centers like this one, of which there are 89 globally (with more to come), Amazon has built the complex machinery to make sure a product will ship out in less than 2.5 hours from the time a customer clicks place your order. From that click, a set of algorithms calculates the customer’s location, desired shipping speed, and product availability; it then dispatches the purchase request to “pickers” on duty at the nearest fulfillment center. The system directs the new order to the picker who is closest on the floor to that product, popping up with a bleep on the picker’s handheld scanner gun. These men and women roam the sea of product shelves with carts, guided by Amazon’s steady hand to the precise location of the product on the color-coded shelves. The picker gathers the item and puts it into a bin with other customer orders. And from there, the item zooms off on a conveyor belt to a boxing station, where a computer instructs a worker on what size box to grab and what items belong in that box. After the packer completes an order, the word success lights up in big green letters on a nearby computer screen. Then the package goes back on a conveyor, where the fastest delivery method is calculated by scanning the box, which is then kicked down a winding chute to the appropriate truck.
How one store merges digital and physical
If anyone can design a brick-and-mortar store for an e-commerce world, it should be Nadia Shouraboura. She used to be Amazon’s VP of global supply chain and fulfillment technology and has since created Hointer, a fully automated store run on software algorithms and machinery. She calls it a “microwarehouse” that marries digital’s instant gratification with in-store benefits. “In apparel, this will win,” she predicts. It works like this:
STEP 1. SEARCH
A customer enters the spare store, where there’s only one of every product in view. She pulls up the Hointer app, scans the QR code on a pair of jeans she likes, and enters her size.
STEP 2. DELIVER
Within 30 seconds of scanning the code, a pair of jeans in her size travels through a chute and lands in her dressing room. She can scan as many items as she likes.
STEP 3. REFINE
Inside the dressing room, she tries on the jeans, but they’re too baggy. So she chucks them down another chute and selects a smaller size from the app.
STEP 4. PURCHASE
The jeans fit! She pays on her phone or swipes her card at a kiosk, and leaves the store with her purchase. No sales clerk necessary.
The process is efficient, but still lower tech than it could be. Although Amazon shelled out $775 million last year for those orange Kiva robots, it says it’s still “evaluating” how to deploy the bots, and they’re nowhere to be seen here. “Fulfillment by Amazon” is still a very human endeavor–and the company’s creativity thrives within that limitation. A team at the Phoenix center is constantly thinking of ways to chip away at the 2.5-hour processing time. For instance, when products arrive from Amazon’s vendors and the 2 million third-party merchants who sell their goods on the site, workers now scan them into Amazon’s inventory system (again, with a handheld gun) instead of entering the details manually. Also, products have been stowed on shelves in what otherwise might appear to be a random way–for example, a single stuffed teddy bear might be next to a college biology book–because it reduces the potential distance a worker must trek between popular products that might be ordered together. Small tweaks like these have an impact: In the past two years, Amazon has reduced the time it took to move a product by a quarter. During the past holiday season, the company processed 306 items per second worldwide.
These centers aren’t just about warehouse speed, though: They’re also about proximity. Over the past several years, Bezos has poured billions into building them in areas closer and closer to customers. The Phoenix warehouse, one of four in the region, serves a metro area of nearly 4 million. Robbinsville, New Jersey, is roughly one hour from 8 million New Yorkers. Patterson, California, is an hour and a half from 7 million people living in the San Francisco Bay Area. Three locations in Texas–Coppell, Haslet, and Schertz–will serve not only the nearly 9 million citizens of the Dallas and San Antonio metro areas but also the other 17 million or so customers in the state (and possibly neighboring states too) who live only a few hundred miles away.
“What you see happening,” Bezos explains, “is that we can have inventory geographically near major urban populations. If we can be smart enough–and when I say ‘smart enough,’ I mean have the right technology, the right software systems, machine-learning tools–to position inventory in all the right places, over time, your items never get on an airplane. It’s lower cost, less fuel burned, and faster delivery.”
The holy grail of shipping–same-day delivery–is tantalizingly within reach. Amazon already offers that service in select cities, what it calls “local express” delivery, but the big trick is to do it nationally. And the crucial element of this ambitious plan is revealed by something wonkier than a bunch of buildings. It is something only an accountant could see coming: a cunning shift in tax strategy.
“”IN THE NEW DIGITAL WORLD,” SAYS BEZOS, “YOU CAN’T CONVINCE PEOPLE YOU HAVE THE LOW PRICE; YOU ACTUALLY HAVE TO HAVE THE LOW PRICE.””
If you were a competitor who knew what to listen for, you’d practically hear the Jaws theme every time Bezos said the word taxes. For years, Amazon fervently avoided establishing what is called a “tax nexus”–that is, a large-enough physical presence–in states that could potentially force it to collect sales tax from its customers, something brick-and-mortar and mom-and-pop stores had long argued would finally remove Amazon’s unfair pricing advantage. In states that dared to challenge Amazon, the company would quickly yank operations. The scrutiny even extended to its sale of products by other merchants. “We had to be very careful, even with the third-party business, about not incurring tax-nexus stuff,” recalls John Rossman, a former Amazon executive and current managing director at Alvarez and Marsal, a Seattle-based consulting firm.
But Amazon has since changed its mind. It determined that the benefits of more fulfillment centers–and all the speed they’ll provide–will outweigh the tax cost they’ll incur. So it began negotiating with states for tax incentives. South Carolina agreed to let the company slide without collecting sales tax until 2016, in exchange for bringing 2,000 jobs to the state. In California, Amazon was given a year to start collecting taxes in exchange for building three new warehouses. And at the end of 2011, Amazon even threw its support behind a federal bill that would mandate all online retailers with sales of more than $1 million to collect tax in states in which they sold to customers. In 2012 alone, Amazon spent $2.5 million lobbying for issues that included what’s known as the Marketplace Fairness Act–the same law, essentially, it had once moved heaven and earth to eradicate. The bill recently cleared the U.S. Senate and awaits passage in the House.
“The general perception is companies thinking, Oh, great, finally a level playing field,” Rossman says. “But other retailers are going to regret the day. Sales tax was one of the few things impeding Amazon from expanding. Now it’s like wherever Amazon wants to be, whatever Amazon wants to do, they are going to do it.”
There’s yet another weapon in Amazon’s offensive, and it’s ready for rollout. It’s called AmazonFresh, a grocery delivery service that has long been available only in Seattle. The site has a selection of 100,000 items, and from my hotel room in that city on a recent Saturday at 11 a.m., I gave it a try. I clicked on chips, bananas, apples, yogurt, and a case of bottled water–along with a DVD of Silver Linings Playbook and a Moleskine reporter’s notebook. After checking out and paying the $10 delivery fee, I requested my goods to arrive during the 7 p.m. to 8 p.m window. At 7:15 that evening, De, my AmazonFresh delivery woman, showed up in the lobby. She helped carry my bags up the elevator and to my hotel room, and tried several times to refuse a $5 tip for the trouble I put her through in the name of research. It was simple, easy–and for Amazon competitors, very threatening.
De and the Kiva robots are central to what Amazon sees as the future of shopping: whatever you want, whenever you want it, wherever you want it, as fast as you demand it. AmazonFresh is expected to expand soon to 20 more urban markets–including some outside America. Los Angeles became the second AmazonFresh market, this past June, and customers there were offered something the folks in Seattle must wish they got: a free trial of Prime Fresh, the upgrade version of Amazon Prime, which provides free shipping of products and free delivery of groceries for orders over $35. Subscribers will pay an annual fee of $299. Considering that grocery delivery otherwise costs between $8 and $10 each time (depending on order size), the subscription covers itself after about 30 deliveries–which busy families will quickly exceed.
Bezos, in his cagey, friendly way, seems more excited about my Fresh experience than he is about describing Fresh’s future. He seems almost surprised that the service worked so well at a hotel, given that it was designed for home delivery. “Thank you!” he shouts. After peppering me with questions on how, precisely, the delivery went down, he finally gets around to addressing the service’s business purpose.
“WE WON’T INVEST IN A COMPANY UNLESS THEY CAN TELL US WHY THEY WON’T GET STEAMROLLED BY AMAZON.”
“We’d been doing a very efficient job with our current distribution model for a wide variety of things,” Bezos says. “Diapers? Fine, no problem. Even Cheerios. But there are a bunch of products that you can’t just wrap up in a cardboard box and ship ’em. It doesn’t work for milk. It doesn’t work for hamburger.” So he developed a service that would work–not because he suddenly wanted to become your full-service grocer but because of how often people buy food.
AmazonFresh is actually a Trojan horse, a service designed for a much greater purpose. “It was articulated [in the initial, internal pitch to Bezos] that this would work with the broader rollout of same-day delivery,” says Tom Furphy, a former Amazon executive who launched Fresh in 2007 and ran it until 2009. Creating a same-day delivery service poses tremendous logistical and economic hurdles. It’s the so-called last-mile problem–you can ship trucks’ worth of packages from a warehouse easily enough, but getting an individual package to wind its way through a single neighborhood and arrive at a single consumer’s door isn’t easy. The volume of freight and frequency of delivery must outweigh the costs of fuel and time, or else this last mile is wildly expensive. You can’t hire a battalion of Des unless they earn their keep. So by expanding grocery delivery, Amazon hopes to transform monthly customers to weekly–or even thrice-weekly–customers. And that, in turn, will produce the kind of order volume that makes same-day delivery worth investing in. “Think of the synergy between Prime, same-day delivery, and Fresh,” says Furphy. “When all of those things start working in concert, it can be a very beautiful thing.”
AmazonFresh is arguably the last link in Bezos’s big plan: to make Amazon the dominant servicer–not just seller–of the entire retail experience. The difference is crucial. Third-party sellers, retailers large and small, now account for 40% of Amazon’s product sales. Amazon generally gets up to a 20% slice of each transaction. Those sellers are also highly incentivized to use Fulfillment by Amazon (known as FBA). Rather than shipping their products themselves after a sale is made on the Amazon site, these retailers let Amazon do the heavy lifting, picking and packing at places like the Phoenix center. For the sellers, an FBA agreement grants them access to Prime shipping speeds, which can help them win new customers and can allow them to sell at slightly higher prices. For Amazon, FBA increases sales, profits, and the likelihood that any shopper can find any item on its website.
“NOW YOU HAVE SMART BRICK-AND-MORTAR STORES SAYING, ‘WHY ISN’T OUR EXPERIENCE MORE INTUITIVE, AS IT IS ON THE WEB?’”
The burgeoning AmazonFresh transportation network will help expand these numbers. In Los Angeles and Seattle, a fleet of Fresh trucks delivers everything from full-course meals to chocolate from local merchants. The bright green branded trucks–with polite drivers in branded uniforms–let Amazon personify its brand, giving it the same kind of trustworthy familiarity that fueled the rise of UPS in the 1930s. “If you have all kinds of fly-by-night operations coming to your door, people don’t like that,” says Yossi Sheffi, professor and director of the MIT Center for Transportation and Logistics. “It’s different with someone in a U.S. Postal Service or FedEx uniform. Those brands inspire confidence.”
As Amazon evolves into a same-day delivery service, its active transportation fleet could become yet another competitive advantage. By supplementing its long-term relationships with UPS and FedEx with its own Fresh trucks, Amazon may well be able to deliver faster than retailers that depend entirely on outside services. “Pretty soon, if you’re a retailer with your online business, you’re going to be faced with a choice,” says Brian Walker, a former analyst at Forrester Research who is now with Hybris, a provider of e-commerce software. “You’re not going to be able to match Amazon, so you’re going to have to consider partnering with them and leveraging their network.”
This shift could even turn Amazon into a competitor to UPS and FedEx, the long-standing duopoly of next-day U.S. shipping. “If Amazon could do it at enough scale, they could offer shipping at a great value and still eke out some margin,” says Walker. “In classic Amazon fashion, they could leverage the infrastructure they’ve built for themselves, take a disruptive approach to the pricing, and run it as an efficiency play.”
Amazon has been down this road before. Its Web Services began as an efficient, reliable back end to handle its own web operations–then became so adept that it now provides digital services for an enormous range of customers, including Netflix and, reportedly, Apple. It’s not impossible to imagine Amazon doing the same with shipping. Last year, the company cut its shipping costs as a percentage of sales from 5.4% to 4.5%. As it builds more distribution centers, installs more lockers, and builds out its fleet, Amazon is likely to drive those efficiency costs down even further.
So is Amazon Freight Services Bezos’s next mission? When I ask, the laugh lines vanish from his face as if someone flipped a switch on his back. He contends that same-day delivery is too expensive outside of urban markets and that it only makes sense for Amazon to deliver its own products within the Fresh program. In China, he explains, Amazon does in fact deliver products via many couriers and bicycle messengers. “But in a country like the United States,” he says, “we have such a sophisticated last-mile delivery system that it makes more sense for Amazon to use that system to reach its customers in a rapid and accurate way.” When I ask whether he would consider, say, buying UPS, with its 90,000 trucks–or even more radically, purchasing the foundering USPS, with its 213,000 vehicles running daily through America’s cities and towns–Bezos scoffs. But he won’t precisely say no.
• Condoms, iPads, And Toilet Paper: A Day In The Life Of An Ebay Now Deliveryman
Rivals aren’t waiting for an answer. EBay has launched eBay Now, a $5 service that uses its own branded couriers in New York, San Francisco, and San Jose, to fetch products from local retail stores like Best Buy and Toys “R” Us and deliver them to customers within an hour. Google, fully aware that Amazon’s market share in product search is substantial (now 30% to Google’s 13%), has launched a pilot service called Google Shopping Express, which partners with courier companies. Walmart–which has booted all Kindles from its stores–started testing same-day delivery in select cities during the last holiday season, shipping items directly from its stores. (Joel Anderson, chief executive of Walmart.com, even suggested paying in-store shoppers to deliver online orders to other customers the same day. Come for a handsaw, leave with a job!)
These are the sort of ideas that retailers–both e-commerce and physical, large and small–will have to consider as Amazon expands. Guys like Jeff Jordan, partner at well-known venture firm Andreessen Horowitz, will make sure of it. His firm follows and invests in direct-to-consumer businesses. “We won’t invest in a company,” he says, “unless they can tell us why they won’t get steamrolled by Amazon.”
Given the astounding growth of Amazon, and the seemingly infinite ways it has defied the critics, Bezos may have proved himself the best CEO in the world at taking the long view. But he doesn’t like talking about it. “Did you bring the crystal ball? I left mine at home today,” he quips. He does, however, like discussing what the future might bring for his customers. In fact, he likes talking about his customer so much that the word can seem like a conversational tic; he used it 40 times, by my count, in just one interview. “It’s impossible to imagine that 10 years from now, I could interview an Amazon customer and they would tell me, ‘Yeah, I really love Amazon. I just wish your prices were a little higher,'” he says. “Or, ‘I just wish you’d deliver a little more slowly.'” In Bezos’s world, the goal of the coming decade is a lot like the goal of the past two: Be cheap. Be fast. That’s how you win.
There is, naturally, no guarantee that Bezos will simply win and win and win. The bigger Amazon gets, the greater the number and variety of stakeholders required to make the Amazon machine hum. Many seem to be getting increasingly frustrated. Consider Amazon’s third-party sellers–that group making up 40% of the company’s product sales. Earlier this year, Amazon issued a series of fee hikes for use of its fulfillment services, ranging from as low as 5 cents per smallish unit to as much as $100 for heavier or awkwardly shaped items (like a whiteboard, say, or roll-away bed). Many sellers took to Amazon’s forums to complain, and others threatened to go to eBay, which mostly leaves fulfillment to its sellers. “I think Amazon is a necessary evil,” says Louisa Eyler, distributor for Lock Laces, a shoelace product that sells as many as 3,000 units per week on Amazon. After the price hike, Eyler says her total fees for the $7.99 item went from $2.37 to $3.62. She says Amazon now makes more per unit than she does.
Or consider the frustrations of Amazon employees, who are striking at two of its eight German facilities in an effort to wrest higher wages and overtime pay. At the height of the conflict, on June 17, 1,300 workers walked off the job. (It is one of Amazon’s largest walk-offs in its biggest foreign market, and could result in shipping delays.) Meanwhile, Amazon workers in the U.S. have filed a lawsuit claiming that they’ve been subject to excessive security checks–to search for pilfered items–at warehouses. The suit alleges their wait could last as long as 25 minutes, an inconvenience Amazon would never subject its customers to. “It means there’s a broken process somewhere,” says Annette Gleneicki, an executive at Confirmit, a software company that helps businesses capture customer and employee feedback. “[Bezos] clearly inspires passion in his employees, but that’s only sustainable for so long.”
The company could be vulnerable on other fronts as well. Target and Walgreens have “geo-fenced” their stores so their mobile apps can guide customers directly to the products they desire. Walmart and Macy’s have begun making their stores do double-duty, both as a place to shop and a warehouse from which to ship products. (The strategy seems to be paying off for Macy’s, which recently reported a jump in first-quarter profit and is now fulfilling 10% of its online purchases from its stores.) They’re proving that retail won’t go away–it’ll learn and adapt. “Now you have smart brick-and-mortar stores saying, Why isn’t our experience more intuitive, as it is on the web?” says Doug Stephens, author of The Retail Revival: Re-Imagining Business for the New Age of Consumerism. “We should know a consumer when they walk in, and what they bought before, in the same way as Amazon’s recommendation engine.”
Bezos won’t admit to any deep concern. While Amazon’s paper-thin profits continue to perplex observers (the company netted only $82 million in the first quarter of 2013), the three primary weapons in its retail takeover–fulfillment centers, Amazon Prime, and now AmazonFresh–are coming to maturity. If the next year tells us anything about Amazon’s future, it should reveal whether Bezos’s decision to plow billions back into these operations will give the company an end-to-end service advantage that might be nearly impossible for its competitors to overcome.
The sun seems to be setting on Bezos’s big Day One. Before we part ways in Seattle, I ask him what we can expect to see on Day Two. “Day Two will be when the rate of change slows,” he replies. “But there’s still so much you can do with technology to improve the customer experience. And that’s the sense in which I believe it’s still Day One, and that it’s early in the day. If anything, the rate of change is accelerating.”
Of course, Bezos is the accelerator.
Amazon Buys Twitch For $970 Million In Cash
AUG. 25, 2014, 4:03 PM 13,994 21
Patrick T. Fallon/Getty Images
Twitch CEO Emmett Shear.
Amazon said on Monday it would pay $970 million in cash for Twitch, a live video-game-streaming site with more than 55 million users that’s like YouTube for video games.
As of July, Twitch had over 15 billion minutes of content, and users were spending more than 100 minutes a day on the site, on average. Twitch users can host live streams of their gaming sessions and broadcast them to the world. They can also chop up their sessions into segments for streaming later.
It’s also a resource for gamers who like to show off their unique skills. For example, there’s an entire community on Twitch dedicated to doing weird stuff like beating Zelda games in under 20 minutes or playing massively collaborative games of Pokemon.
A Twitch streaming session.
Twitch is a huge part of the internet, and it accounts for nearly 2% of all traffic in the U.S. during peak hours, according to a report by The Wall Street Journal. Only Netflix, Google, and Apple account for more traffic. In that respect, Twitch even streams more video than Hulu.
Twitch also accounts for 40% of all live-streamed internet content, according to Business Insider Intelligence:
What’s really impressive is that Twitch was able to become so big after just three years.
You can see Amazon’s purchase of Twitch as a play to take over the future of TV. More and more content is being streamed online, and more and more hours of video watching are being done on sites like YouTube, Netflix, and Hulu. Amazon has its own streaming video service called Amazon Instant that comes with Amazon Prime memberships. Amazon Instant includes thousands of streaming movies and TV shows, including original shows like “Alpha House.”
Alpha House is an original Amazon show.
Earlier Monday, multiple reports indicated Amazon was in late-stage talks to acquire Twitch. The news came as a big surprise because just last month it was reported that Google had agreed to acquire Twitch for about $1 billion. That deal, however, was never officially confirmed.
The Google-Twitch deal felt like a natural fit, since it would’ve been a good way for YouTube to expand its video offerings. Yahoo also tried to buy Twitch for $970 million, but Amazon swooped in and got it instead.
It’s unclear what had caused the Google-Twitch deal to fall through, but one possible reason is over antitrust issues. Since Google already owns YouTube, the world’s largest video streaming site, acquiring another massive video streaming site like Twitch could raise antitrust issues. According to Forbes, the two sides couldn’t agree on the potential break up fee.
Here’s the official announcement from Amazon:
Amazon.com, Inc. (NASDAQ: AMZN) today announced that it has reached an agreement to acquire Twitch Interactive, Inc., the leading live video platform for gamers. In July, more than 55 million unique visitors viewed more than 15 billion minutes of content on Twitch produced by more than 1 million broadcasters, including individual gamers, pro players, publishers, developers, media outlets, conventions and stadium-filling esports organizations.
“Broadcasting and watching gameplay is a global phenomenon and Twitch has built a platform that brings together tens of millions of people who watch billions of minutes of games each month – from The International, to breaking the world record for Mario, to gaming conferences like E3. And, amazingly, Twitch is only three years old,” said Jeff Bezos, founder and CEO of Amazon.com. “Like Twitch, we obsess over customers and like to think differently, and we look forward to learning from them and helping them move even faster to build new services for the gaming community.”
“Amazon and Twitch optimize for our customers first and are both believers in the future of gaming,” said Twitch CEO Emmett Shear. “Being part of Amazon will let us do even more for our community. We will be able to create tools and services faster than we could have independently. This change will mean great things for our community, and will let us bring Twitch to even more people around the world.”
Twitch launched in June 2011 to focus exclusively on live video for gamers. Under the terms of the agreement, which has been approved by Twitch’s shareholders, Amazon will acquire all of the outstanding shares of Twitch for approximately $970 million in cash, as adjusted for the assumption of options and other items. Subject to customary closing conditions, the acquisition is expected to close in the second half of 2014.
Here’s a letter from Twitch’s CEO:
Dear Twitch Community,
It’s almost unbelievable that slightly more than 3 years ago, Twitch didn’t exist. The moment we launched, we knew we had stumbled across something special. But what followed surprised us as much as anyone else, and the impact it’s had on both the community and us has been truly profound. Your talent, your passion, your dedication to gaming, your memes, your brilliance – these have made Twitch what it is today. Every day, we strive to live up to the standard set by you, the community. We want to create the very best place to share your gaming and life online, and that mission continues to guide us. Together with you, we’ve found new ways of connecting developers and publishers with their fans. We’ve created a whole new kind of career that lets people make a living sharing their love of games. We’ve brought billions of hours of entertainment, laughter, joy and the occasional ragequit. I think we can all call that a pretty good start. Today, I’m pleased to announce we’ve been acquired by Amazon. We chose Amazon because they believe in our community, they share our values and long-term vision, and they want to help us get there faster. We’re keeping most everything the same: our office, our employees, our brand, and most importantly our independence. But with Amazon’s support we’ll have the resources to bring you an even better Twitch. I personally want to thank you, each and every member of the Twitch community, for what you’ve created. Thank you for putting your faith in us. Thank you for sticking with us through growing pains and stumbles. Thank you for bringing your very best to us and sharing it with the world. Thank you, from a group of gamers who never dreamed they’d get to help shape the face of the industry that we love so much. It’s dangerous to go alone. On behalf of myself and everyone else at Twitch, thank you for coming with us. Emmett Shear, CEO
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.
SEE ALSO: Here’s Why Amazon Just Paid Nearly $1 Billion For A Site Where You Can Watch People Play Video Games
Read more: http://www.businessinsider.com/amazon-buys-twitch-2014-8#ixzz3BSBNYa53
Amazon Is Turning Into Google
AUG. 25, 2014, 7:15 PM 1,038 3
Amazon CEO Jeff Bezos.
Tell me which company this sounds like:
A company that…
• Has its own mobile operating system for tablets and smartphones.
• Has its own app store.
• Sells digital music, books, movies, and TV shows.
• Will soon have an online ad network.
• Created a way to accept payments with a smartphone.
• Owns the servers that act as the backbone for several major apps and startups and even parts of the CIA.
• Is experimenting with drones.
It’s not Google. It’s Amazon.
But just like Google has expanded beyond search into everything from finding ways to cheat death to making cars that can drive themselves, Amazon has been increasingly expanding beyond its core e-commerce business.
And in recent months, that only seems to be speeding up.
Amazon’s $970 million purchase of Twitch, a site that lets you watch people play video games via a live stream, is its latest push into original video content and a move to transform itself into part media company. It’s a longer-term bet that the trend of watching stuff online versus cable will continue.
Add that on top of the stuff listed above, and Amazon suddenly sounds less like an online store for buying books and gifts and more like a company trying to insert itself into everything you do online. It sounds very Google-y.
There’s experimentation with same-day delivery, grocery delivery, and point of sale systems for brick-and-mortar retailers. Those are all things Google is working on or has at least experimented with.
The only difference, of course, is that Google is wildly profitable while Amazon continues to post losses each quarter. (Next quarter could be a doozy. Amazon said to expect at least a $410 million operating loss.)
But it’s also a changing company, one that’s no longly simply “the everything store,” but an entity creeping its way into everything we do from shop to play games to run our small businesses.
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.
SEE ALSO: 9 impressive stats about Twitch
Read more: http://www.businessinsider.com/amazon-is-google-2014-8#ixzz3BSE4Hglt
Bezos Confirms AmazonFresh Expansion Plans, Says Drones Are for Real
April 10, 2014, 9:15 AM PDT
By Jason Del Rey
Grocery delivery fans outside of Seattle and California, rejoice: Amazon plans to expand its AmazonFresh offering beyond its current three markets, CEO Jeff Bezos confirmed in his 2013 letter to shareholders published today.
“We’ll continue our methodical approach — measuring and refining AmazonFresh — with the goal of bringing this incredible service to more cities over time,” he said in the letter.
For five years, Fresh was only available in Seattle, before the company launched the program last year in Los Angeles and, six months later, San Francisco. Several reports over the past year have said Amazon plans to expand the delivery service into 10 to 20 more new markets this year, but this may be the first time Bezos has publicly acknowledged the expansion plans.
Through Fresh, shoppers can order deliveries of groceries and hundreds of thousands of other items, from TVs to toys, that arrive either that same day or the following morning. Industry observers believe that part of Amazon’s reason for delivering groceries is that it will create enough sales volume and delivery demand to justify delivering all other Amazon merchandise within one day.
Another highlight from the letter: Drones.
“The Prime Air team is already flight testing our 5th and 6th generation aerial vehicles,” Bezos wrote, “and we are in the design phase on generations 7 and 8.”
Is it possible that drone delivery is still a marketing stunt? Sure. If so, Bezos is sticking to the script.
More from this story
Headed your way: AmazonFresh widens range of grocery deliveries
Doorstep delivery: Our reporter gives AmazonFresh grocery service a whirl
BY NANCY LUNA / STAFF WRITER
Published: June 20, 2014 Updated: June 23, 2014 11:44 a.m.
STEVEN GEORGES, CONTRIBUTING PHOTOGRAPHER
VONS VS. AMAZONFRESH
Here are a few price comparisons based on items found online this week:
1 gallon of Alta Dena fat-free milk: $5.49 Vons vs. $4.99 AmazonFresh
59-ounce jug of Simply Lemonade: $2.50 Vons vs. $2 AmazonFresh
5 ounces organic baby romaine: $3.90 O private-label Vons brand vs. $3.39 Earthbound brand at AmazonFresh
24-pack of Aquafina 16.9-ounce bottled water: $5.49 Vons vs. $4.29 AmazonFresh
Tide Free and Gentle (100 ounces): $11.99 Vons vs. $11.97 AmazonFresh
20-pack Coke Zero: $8.29 Vons vs. $6.99 AmazonFresh
Winder Farms: A Utah-based delivery service in California, Utah and Nevada. Delivers roughly 300 farm fresh items. Delivery in Orange County and parts of Los Angeles County. winderfarms.com
Good Eggs: Delivery of locally grown, sustainable goods from stores or farmers’ markets. Los Angeles County only. goodeggs.com/about/mission
Vons: Traditional market with home delivery in Orange County. shop.safeway.com
Instacart: Delivers from local stores like Whole Foods, Ralphs and Bristol Farms. Limited to a few ZIP codes in Los Angeles County. instacart.com/store/whole-foods
Deliveer: Personal shoppers deliver groceries from Whole Foods Market, Trader Joe’s, Vons and Costco in Pasadena, San Marino, South Pasadena and Altadena. Expansion to other parts of Los Angeles County coming soon. deliveer.com
As Amazon’s fledgling grocery service in Southern California widens its reach, some boutique food suppliers say the experiment has proven to be a boon for business.
Huntington Meats saw sales go from single-digit growth to double digits after the first month of partnering with AmazonFresh, a doorstep food service that launched last summer in Los Angeles.
The 30-year-old butcher shop, known for its top-grade meats and wild game, partnered with AmazonFresh last summer. Co-owner Jim Cascone said his meat market sells the “whole store,” or 175 items, through the online site, from free-range chickens to ground elk.
Demand for his specialty goods continues to soar and was boosted in recent weeks when the company expanded its service to most of Orange County.
“We’re very pleased,” said Cascone. “We’re definitely getting a lot of business out of it.”
For other Amazon partners, the impact has been much less dramatic. Greg Daniels, executive chef-partner at Haven Collective, has been working with AmazonFresh the last six months. The company’s Provisions Market bottle and cheese shop in Old Towne Orange offers Amazon shoppers specialty cheeses, cured meats, chocolate and a wide selection of craft beer.
“Cheese is popular, and beer not too much yet,” said Daniels. “It’s definitely brand exposure more than money.”
Amazon’s doorstep service initially was limited to Los Angeles, four cities in Orange County and parts of Long Beach. Shoppers choose from a wide selection – some 500,000 items – of merchandise, groceries and specialty foods.
In recent weeks, AmazonFresh has expanded to Orange, Tustin, Garden Grove, Aliso Viejo, Santa Ana, Laguna Niguel and Mission Viejo in addition to Irvine, Anaheim, Huntington Beach and Newport Beach. All of Long Beach is also eligible for delivery, a company spokesperson said.
The expansion comes as Amazon sees positive results in the greater Los Angeles area.
“While I can’t share specific numbers, we are very pleased with the response from our customers so far,” AmazonFresh said in a statement.
AmazonFresh’s grocery delivery expansion comes as doorstep food services experience a resurgence after failing years ago.
In 2013, revenue from online grocery sales reached $6.5 billion, according to market research firm IBIS World. By 2018, sales are projected to reach $10.1 billion as time-strapped consumers seek convenient ways to shop through mobiles devices and home computers, IBIS said.
AmazonFresh entered Los Angeles last summer after testing its grocery service near its home turf in Seattle. The service is also available in San Francisco and Berkeley.
Other food delivery options in the region include Winder Farms, Good Eggs, Deliveer, Instacart and Vons.
AmazonFresh rolls into San Diego
By Katherine P. Harvey2:08 P.M.JULY 29, 2014Updated5:36 P.M.