Amazon is Now Positioning Itself as a Physical Retailing Powerhouse
After decades of getting the best of the bricks and busting them up, Amazon is getting into the brick business big time. The built-environment will never be the same.
It was beginning to be a breakout year for Amazon even before it released its big open RFP for a second, equal-sized headquarters. The clicks are breaking beyond critical mass and now busting the bricks at a record clip in a great retail calamity for the history books. Amazon’s most recent Prime Day sales smashed its old record, growing by more than 60% over the prior year with a record number of Prime members shopping across 13 countries. In fact, in only it’s third year, Amazon’s Prime Day sales this year surpassed its Black Friday and Cyber Monday.
There’s plenty of pain to go around in the old order as the status quo is realigned. But as the consumer evolves, preferences change and old guard dies—and with retail sales making their own record highs thanks to a strong U.S. consumer—there’s tremendous opportunity for new growth today and in the fight for the consumer of the future.
And while the industry didn’t get there on the back of one company, today Amazon is absolutely dominating growth and taking the lion’s share of e-commerce gains. In 2016 e-commerce sales exploded to new heights across the board, but it was Amazon that took in 53% of all growth last year. It’s a stunning figure in a year that stands out even in such a record-making, history-breaking environment.
It’s a testament to just how much build up Amazon’s managed to achieve in the post 2008 recovery period and post Shultz’ Sea-change in 2013. The company only had 30,000 full-time U.S. employees in 2011. By the end of last year, it employed 180,000 people. Based on announcements made this year, Amazon’s workforce could approach 300,000 by the middle of 2018.
Amazon is "eating the retail world," MKM Partners analyst Rob Sanderson wrote in a note this summer to clients. Sanderson’s chart (below) shows Amazon growing its market share as brick and mortar retail sales are declining. The widening gap over the past year between the two is another incredible representation of Amazon’s recent dominance.
After decades of promises made good in a space and a time of false promises (internet, 1990’s), Amazon’s is still standing and stronger than ever. It’s nearly realized the most whimsical dreams of a total and transformative technological revolution had by so many in the 1990’s. Mr. Bezos is way beyond selling books now, but his baby has a long way to go yet.
A Nickel of your Cart
Even after two decades of disruption and mountains of success, today Amazon still only captures 5% of total U.S. retail sales excluding food. Yes, only five percent.
Food is a growth business, so Amazon is getting into it too now. With its purchase of category leader, Whole Foods, the Amazonian empire grew larger still. And into a segment once thought to be internet-proof. Notoriously low margins, high labor costs and spoilage, grocery can be a grind it out business—especially in times of food price pressures.
Is Mr. Bezos appetite too large? Is entering grocery now a well considered strategy, or a compulsion to expand and expand into ever-growing number of segments?
For its timing and its choice of acquisition, Amazon’s entry in the U.S. grocery business strikes us as brilliantly strategic, as we’ve noted before. And it’s not simply because Amazon has overcome legions of doubters along the way, and its competition lay on the ash heaps on history. It’s because now Mr. Bezos has something much more valuable than first prize in a “who won the internet” contest, and something he needs to compete and win the grocery business: scale.
Scale seamlessly integrated into sales, shipping and the entire stream of commerce.
Amazon is Keeping the Prices of Most Everything Down for Most Everyone
Like a force of nature, Amazon’s deflationary power is so great, so game-changing it’s already a headache for the Federal Reserve, who targets slightly positive inflation. Amazon’s plans to cut prices at Whole Foods is great news for shoppers, and already caused cascading cuts at competitors, i.e. Target, but at this scale it’s the kind of structural adjustment that can throw off economists, or their models anyway.
Is Amazon the reason inflation has been missing in action for a decade even as global central banks maintained easy money policies, e.g. quantitative easing? It’s a solid theory. Technological innovation makes things cheaper and it may be outworking the forces of inflation to keep prices down, even if economists have a hard time keeping up with it. Searching for answers to explain how inflation could remain so low even as the extremely low unemployment rate in the U.S. should be driving inflation higher, the Federal Reserve's July minutes noted: “Restraints on pricing power from global developments and from innovations to business models spurred by advances in technology.”
Last week’s report of August retail sales disappointed Wall St. analysts. They pointed the blame squarely at two forces of nature: Hurricane Harvey, and Amazon’s record Prime Day. Amazon is skewing the whole country's retail sales data and is likely behind last month's drop, they argued, noting an unusual decline in “nonstore retail sales,” most of which is internet shopping. After a huge Prime Day on July 11, which drove up sales in the month, it’s probable Amazon managed to pull demand forward—even though this was only its third annual Prime Day event.
Even monetary policy makers in Canada are also openly wondering whether Amazon is depressing corporate pricing power and inflation. And while Amazon may not be saving consumers enough money to throw off economic models, it is definitely saving us something else even more valuable: time. We’re spending so much less time shopping, there are arguments that Amazon is a public good.
The Party on Planet Amazon has just Begun
One of its moonshots, the Amazon web services (S3 server business), is a major hit and cash machine.
Now moving aggressively into grocery, Amazon’s purchase of Whole Foods—which officially won fast-track approval from U.S. antitrust authorities—is the largest acquisition in its history and comes with a substantial portfolio of very well-located real estate. 450 stores and over 90,000 employees.
And just like that, Amazon became the bricks. Big time.
Can it work? On its first day Amazon Cuts Whole Foods Prices as Much as 43%, which spiked food traffic by 25% the first Monday and Tuesday after the merger was complete and discounts were priced into items on the shelves, according to Foursquare data first reported by Bloomberg. The New York Whole Foods locations saw a lower surge— only 15%—while Chicago locations saw the highest growth in shoppers—35%.
In making the announcement that price cuts were coming, Amazon promised “more to come.” Potentially a marriage of a perfect pair, so many of Whole Foods’ flaws—like it’s bad wrap as “Whole Paycheck”—play right into Amazon’s strengths. The innovative internet retailing giant has already begun to integrate Prime into the Whole Foods ecosystem. Soon, Prime members will receive "special savings and in-store benefits,” leveraging all the power of Amazon’s own customer data and the advanced big data and analytics the continually trailblazing company has been investing in so much recently.
Consumers were extremely excited to see some of their favorite items marked down at Whole Foods stores, including avocados, bananas and various cuts of meat. A store check by CNBC on Aug. 28 found that some items had been discounted by more than 40% percent. And given Mr. Bezos drive for scale, these are just the first in a series of a strategy that could take ten or more years to mature.
Amazon didn’t just buy a brand leader in Whole Foods, it picked up a fast-growing company with a plan for 1,000 more stores. Whole Foods shelved those plans earlier this year when it realized it couldn’t sustain its high growth. Scaling its model was coming at a high cost and European competitors began entering the ever-buoyant U.S. grocery business—attracted by its relatively high growth.
While Whole Foods couldn’t really find the capital to fund its founders dreams on its own, Amazon’s founder can. And it’s easy to see how Whole Foods’ old plans could fit into Amazon’s grand vision for a technologically unleashed consumer.
If these early Whole Foods numbers hold, and if Amazon can teach Whole Foods how to scale, then the combined Amazonian Whole Foods is well placed to dominate the future. It has already put Whole Foods' private-label line, 365 Everyday Value, on Amazon.com. According to One Click Retail, Amazon placed more than 2,000 Whole Foods items on its website just in the first week.
But it’s not just about making Whole Foods more clickable. Amazon is making a structural pivot to much greater physical presence. It’s even building bookstores, emblematic of just how completely this cycle has turned.
Amazon’s new physical bookstores aren’t exactly a book lover’s paradise. The New Yorker lamented “Amazon’s brick and mortar bookstores are not built for people who actually read” and its “new bookstore at Columbus Circle has a bewilderingly small selection and, in some sections, seems organized like an ill-advised dinner party.” Alongside the usual bookstore categories like “Science Fiction” or “Mystery,” you’ll also find sections like “Books People Finished Within Three Days on Their Kindle” or “Books Rated 4.8 Stars or Above.” And when deciding what books to stock, Amazon uses a combination of “customer ratings, pre-orders, sales, popularity on Goodreads, and our curators’ assessments,” Amazon told New York Magazine.
Part of the move is a response to e-book sales declining for the first time, while physical book sales are on the rise. But the idea of behind these new “Amazon Books” stores, as New York Magazine put it, “work as a way to lure people into Prime memberships, to sell them a gadget or book, or just establish a deeper relationship with a customer.”
Amazon’s bookstores have integrated Prime directly into store transactions and there’s also a different pricing structure for Prime customers. One analyst told Bloomberg that “[i]t doesn't even make sense to purchase in an Amazon bookstore unless you have Prime.” “I doubt they'll be quite that drastic with Whole Foods but I do think they'll incentivize shoppers quite a bit to associate their Prime account with their Whole Foods transaction,” Sucharita Mulpuru continued.
There are currently only eight Amazon Books locations, but the company is adding six more. How many more Whole Foods it might build is the billion dollar question. The original plan was for at least 1,000 additional Whole Foods, but Amazon may have larger ambitions still.
This isn’t a new intention. Amazon’s actually been experimenting with brick and mortar formats for years. Amazon has opened 22 locations for same-day pickup since 2015. Amazon Go, still in beta, is a completely cashier-less store. And more recently it’s introduced pickup points where shoppers can retrieve items immediately after ordering. Hundreds of fast-selling items are stock at each location and can be purchased from Amazon’s mobile app. Employees then load orders into lockers within two minutes and customers receive barcodes to access. These “Instant Pickup” points have debuted on five college campuses and Amazon already has plans to add more this year.
So, Amazon just isn’t building bricks to replace the ones its help destroy. It’s building different bricks distributed throughout the built-environment. And in the case of Amazon’s Instant Pickup, it puts the omni-channel retailer into competition with vending machine companies. It’s not alone in innovating in this segment. The startup Bodega recently raised $2.5M to build a smart store kiosk in your apartment building. Farmer’s Fridge, a Chicago-based company that sells salads out of vending machines, plans to add another 200 locations. Founded in 2013, the fresh vending company currently has 75 locations in the Chicago area and recently added ~20 employees to bring its total workforce to 60—slightly less than one per machine. Farmer’s Fridge will expand into Milwaukee and then other Midwest markets.
How soon before Amazon’s fleet of drones are taking off from Whole Foods rooftops and delivering items to kiosks outside or atop apartment and condo buildings? It’s a questions we’ve considered before. With Amazon drones already making delivers in the U.K. and U.S., that future seems a lot closer than it did even just a few quarters ago.
Amazon is Hiring
Hiring at Amazon has been at a fever pitch since the company announced in January that it planned to add 100,000 full-time positions in the following 18 months. It’s already announced 900 jobs in Boston. 1,500 jobs in a new fulfillment facility in Orlando. 1,600 Amazon jobs in Michigan.
New York is getting its first Amazon distribution center, after being serviced by locations in nearby New Jersey for many years. A 975,000-square-foot fulfillment center in Staten Island will be the first of four warehouses on the site in a facility that might eventually employ 3,000 people. According New York Post reports, “Longstanding squabbles with state officials over taxes had hampered Amazon’s New York expansion, but an even bigger roadblock has been the sky-high price of real estate.”
In Illinois Amazon is the gift that keeps on giving, or more appropriately, the employer that keeps on growing. Just in Will County, Illinois, in just the past two years, Amazon has announced five planned facilities. Now it’s the county's largest employer and developed more than 56 football fields' worth of land—again just in Will County. "Amazon is the biggest brand in the world, and everybody wants an Amazon in their community these days," Crest Hill's economic development manager told the Chicago Tribune. Amazon announced its first Illinois warehouse in 2015 and will employ more than 8,000 people in the Land of Lincoln by the end of 2018. Five Amazon distribution centers already operate in in Illinois and four others have been announced.
This wave of expansion will add to a massive buildout of industrial scale infrastructure to accommodate Amazon’s ever-growing pipeline of shipped packages and satisfy its quest to cut delivery times to as short as possible. Introducing freely-shipped products within two-days of purchase to Amazon Prime members shook the retail world forever. Now a growing number of products in a growing number of locations are being delivered within one day or within hours. As BL has covered previously, drone deliveries have already begun in the U.K. and the U.S.
With the large bones of a continental logistics system in place, Amazon’s strategy is to move inventory closer to where its customers are located is able to deliver lightning results. It’s beginning to push ever smaller footprint distribution centers into denser locations with tighter geography. And every time it does, more customers will be counting delivery times on their purchases in hours and minutes instead of days.
Over the Horizon of Amazon’s Thriving Jungle Ecosytem
With so many high quality Whole Foods locations now in hand, and a heavy-built backbone of logistics, Amazon is setting its sights on your front door. Last year the company started delivering its own packages after the full acquisition of a French package-delivery company. Now it’s Amazon Flex package delivery service promises workers to: “Make $18-$25/hour delivering packages with Amazon. Be your own boss. Great earnings. Flexible hours. Make more time for whatever drives you.”
Just imagine Whole Foods popular prepared foods—that delicious Chicken & Dumplin’ soup, for example—delivered fresh to your home or office in under an hour, like any restaurant. But now at Bezos scale, speed and sophisticated simplicity. It’s already patented its own ready-to-eat meal packages it will roll out, much to the chagrin of new startups like Blue Apron.
And what about booze delivery? Regulated tightly and much, much differently city to city and community to community, alcohol delivery businesses were often cited as an Amazon-proof local segment. But at the end of August Amazon quietly expanded the cities included in the alcohol delivery service through Prime Now, one of its subscriber services that is already delivering groceries—Amazon Fresh.
It’s also working with its competitors in interesting ways. Just today Amazon announced Kohl's will start packing and shipping eligible items back to an Amazon fulfillment center for free starting next month in 82 Kohl's stores across Los Angeles and Chicago.
Amazon isn’t afraid to try new things. That’s how it’s managed to develop big, cash-generating hits like its Amazon S3 server business. And it’s how it managed to win Academy Awards for its own original content, and is gaining on Netflix in its original content investment.
Amazon is so unafraid, it dares to test its mettle in the ruthless fashion and apparel industry. It recently launched its own label and a try-before-you-buy subscription-based box shopping service. Amazon is even experimenting with one-hour catwalk-to-doorstep deliveries at Nicopanda show in London on Saturday night. Partnering with former Diesel creative director Nicola Formichetti for the “see now, buy now” event, Amazon Prime members in London will be able to choose from a collection of six-pieces of unisex streetwear.
How's that for "experiential retailing"?
But like so many other segments, Amazon isn’t the only one experimenting with the new fashion delivery format. Big labels like Burberry, Topshop and Tommy Hilfiger all experimented with similar strategies during London Fashion week. The question has been ‘can Amazon do it bigger, better, faster and cheaper’, or some winning combination of those. Now that Amazon is building its physical retail presence and going small with last-mile delivery, instant pickup kiosks and vending machines, and completely closing vertical loops with its own labels and content, the question is how big going small will be.
At this scale, aimed at full spectrum retail dominance, signs point to truly “disruptive."
Instant stock price reaction (link to video)(above).
Kroger vs. Amazon stock prices in the months following the Whole Foods-Amazon merger announcement (below).