Amazon's $8 Trillion B2B Bet

May 26 -- Forget the delivery drones and TV deals. Jeff Bezos’ stealthy foray into the unsexy world of B2B distribution is likely his most disruptive move yet — and it has an $8 trillion swath of the economy running scared.

In recent months global Internet retail behemoth Amazon.com has green-lit six new original TV shows, announced an online streaming deal with HBO and tested same-day grocery delivery on the West Coast.

Up next? Possibly a smartphone. And, if billionaire CEO Jeff Bezos has his way, packages dropped off by unmanned drone.

But there’s one thing Bezos hasn’t been talking about: AmazonSupply, an e-commerce site targeting the unsexy but hugely lucrative wholesale and distribution market. His silence is especially surprising as the site has the potential to turn into the most important development in the company’s history since it started selling books. Yet Bezos has uttered only 28 words in public–ever–about AmazonSupply, describing it in passing as “an incredible category” during the company’s 2012 annual meeting.

“You can get industrial motors, flanges, valves, fasteners, materials, janitorial supplies,” he said. And that was it, before moving on to proudly tell shareholders that the world’s largest gummy bear, a 72-ounce sugary beast, was for sale on Amazon.com. Whether the lack of hype is a deliberate part of a stealthy rollout or Bezos just thinks selling rubber gloves to dentists lacks p.r. value, wholesalers are taking the threat seriously, and it’s easy to see why.

While U.S. retailers took in more than $4 trillion in revenues according to the most recent U.S. Census, wholesalers brought in $7.2 trillion selling everything from Bunsen burners to toner cartridges. Even better for Amazon: Of America’s 35,000 distributors, almost all are regional, family-run companies pulling in annual revenues of $50 million or less, and only 160 have more than $1 billion in sales annually. “The industry is largely ignored,” says Dirk Van Dongen, president of the National Association of Wholesaler-Distributors. “You can go your whole life without having a single thought about it.”

Amazon, meanwhile, booked more than $74 billion in revenues last year, selling everything from beds to server time with a virus-like strategy that values opportunity and disruption above short-term profitability. Almost identical to the company’s flagship website, albeit without ads for its ubiquitous Kindle e-readers, AmazonSupply.com launched quietly in April 2012 with 500,000 items for sale.

Two years later, with the site still officially in beta, that list of products has grown to more than 2.2 million–covering 17 product categories from tools and home improvement to janitorial supplies, stocking everything from 12-packs of Hawaiian Punch to schedule-40 stainless steel pipe. If 2.2 million products doesn’t sound like a staggering figure on its own, consider that the average wholesaler sells closer to 50,000 products online.

“The question is not whether AmazonSupply will be a threat,” says Richard Balaban, who has studied the site for management consulting firm Oliver Wyman. “Rather it is which customers, purchase occasions and categories will be attacked first.”

***

AmazonSupply’s genesis was in 2005, with Amazon’s acquisition of SmallParts.com, an online emporium that billed itself as “the hardware store for research & development.” The purchase price was never disclosed. “It was an opportunity for us to learn more about our business customers,” says Vice President of B2B and AmazonSupply Prentis Wilson. “As we evolved our selection, we launched AmazonSupply.”

He won’t say what Amazon is spending–and likely losing–on the venture, but overall the company, despite all those billions in revenue, estimates an operating loss of up to $455 million next quarter. This aversion to profits may be starting to turn off investors (the stock is down 9% since the announcement in April, though the market capitalization remains a staggering $142 billion), but it’s helped build a 125,000-employee logistics and data powerhouse that was able to process orders on 36.8 million items during peak Cyber Monday shopping last Christmas season–a staggering 426 items per second to 185 countries.

As impressive: The company earned the top score among 230 of America’s biggest companies in the University of Michigan’s annual customer service satisfaction index and has placed in the top ten for years. “We are comfortable planting seeds and waiting for them to grow into trees,” Bezos told FORBES for a 2012 cover story. “We don’t focus on the optics of the next quarter; we focus on what is going to be good for customers.”

The development of Amazon Web Services, which Bezos launched in 2006, says a lot about Amazon’s likely ambitions for AmazonSupply. Having developed the computer infrastructure needed to run Amazon.com, Bezos set up a B2B division that allowed other companies to use Amazon’s excess computing power. Web Services now dominates the cloud computing industry, hosting customers from NASA to Pfizer and ringing up an estimated $3.2 billion in revenue last year, thanks to an even faster growth rate than Amazon’s main storefront.

“If you think about where they’re making their money right now, it’s not in shipping you and me Crest toothpaste,” says Bruce Cohen, a senior partner at management consultancy Kurt Salmon. “It’s in cloud computing. It’s these vast servers. They’re not making money on the sexy part of the business–streaming video or delivering us boxes of cool stuff.”

Wilson is Bezos’ wholesale czar. The chiseled, dark-haired 43-year-old joined Amazon in 2011 from Cisco Systems, where he was responsible for sourcing materials and overseeing suppliers at the networking and data center powerhouse. Now based in Seattle, Wilson oversees industrial and scientific supplies across the whole of Amazon, as well as this new business. He wouldn’t disclose how many Amazon employees are currently working solely for AmazonSupply, but scan the division’s recruiting website and you’ll see how lofty the e-tailer’s ambitions are for its wholesale business. Under the heading “Our goal is to supply everything needed to rebuild civilization,” some 40 jobs are listed, including software-development engineers and “brand specialists” who’ll be expected to become experts on the tools of the trade for one particular manufacturer, be it a maker of plumbing or office supplies.

It’s definitely on its way. Most of the scientific and industrial equipment AmazonSupply lists for sale, for instance–items like centrifuges, micrometers and air cylinders–would otherwise be available only from specialist distributors. But few can compete with its vast inventory, not to mention the easy-to-navigate website and 24-hour delivery, all longstanding hallmarks of Amazon’s appeal. “If you have a lab scientist, someone with a Ph.D., trying to find the next cancer drug in a capital-intensive lab, any time they spend trying to find a new product is expensive,” Wilson says.

Nor can small fry compete with AmazonSupply’s infrastructure and deep cache of consumer data. The company won’t disclose any details, saying only that AmazonSupply “utilizes all of Amazon’s fulfillment and logistics capabilities.” In the U.S. that’s a network of 40 U.S. fulfillment centers–and growing. And while retailers like Home Depot and Lowes (and Amazon in its earlier days) are loath to stock products that don’t sell quickly, to gain competitive advantage AmazonSupply, with its vast financial resources, has been more likely to take on inventory that won’t necessarily fly out the door. Industry experts estimate the company stocks more than 50% of what it offers on the site at any given time. “I encourage my clients to become third-party fulfillers to AmazonSupply,” says Dick Friedman, a consultant who helps traditional distributors develop strategies to compete with AmazonSupply. “Why not? The only trouble is if it sells well enough, AmazonSupply will stock it and cut the little guy out of the picture.”

“The challenge of distribution is to have orders big enough to make money,” says Scott Benfield, a B2B consultant who’s been following the wholesale and distribution game for 20 years. “It’s a very thin-margin business: 2% to 4% for traditional businesses in this sector.” Amazon’s scale is ideally suited to compete in this kind of high-volume, low-margin operation. A Boston Consulting Group study found AmazonSupply’s prices to be about 25% lower than the rest of the industry on common items.

To woo manufacturers the company has also built in the ability to show off products in Web videos, post downloadable CAD drawings and draw from user reviews. Buyers, from 3-D printing specialists to auto mechanics, avoid the human interactions–which can either be pesky or irreplaceable, depending on the rep–that remain a feature of most wholesale and distribution deals.

“It’s a very consistent message, versus 500 different sales reps,” says Wilson. He added that manufacturers have reported an uptick in sales of products that were not quite as popular before. “Just getting the product available on Amazon, people know it exists,” he says. “We aren’t afraid to put inventory on an item. That has a lot of value. It builds confidence.”

***

If there’s one company standing in Amazon’s way, it’s Chicago-based industrial supplies giant W.W. Grainger. With $9.4 billion in revenues it’s definitely the business to beat, controlling an estimated 6% of the entire B2B market. With a robust e-commerce operation dating back to 1995, its site is slick and user-friendly; it offers 24-hour delivery on most items, user reviews and suggestions based on your previous purchases and searches.

Grainger has been selling tools for maintenance and repair since 1927; since then business has grown to more than 700 regional sales branches and 33 distribution centers. It still makes much of its money offline. In 2013 its e-commerce sales surpassed $3 billion, representing 33% of the company’s total revenues.

Grainger and some of its specialty competitors – Cardinal Health, for example, in the area of medical supply–are well-established in the back offices of corporations and hospitals, where the business is deeply rooted in their processes. At the Nebraska Medical Center, for example, Cardinal picked up the initial tab for $4.5 million in inventory, freeing up financial resources for the hospital. Then it took over the center’s entire supply chain, from loading-dock workers and the accounts-payable department to administering all contracts with suppliers and tracking distribution from the truck to the bedside. Cardinal bills the hospital based on usage. “Companies have written over processes to them,” says Cohen. “Just as some organizations outsource their entire IT departments.”

But just a couple years into the game, AmazonSupply has already beaten Grainger in sheer volume of online inventory, with its 2.2 million products for sale dwarfing the latter’s 1.2 million. AmazonSupply may cut into Grainger’s high-volume, low-margin business if it hasn’t already. It’ll sell truckloads of beakers, for example, or copy paper. These are what the industry calls “replenishment items,” and they’re the lowest hanging fruit for Amazon. A pound of Gorilla Glue high-strength superglue costs $159 on AmazonSupply. On Grainger’s site the same bottle is priced at $173.25.

Grainger’s take on AmazonSupply?  CEO Jim Ryan declined requests for an interview, but a spokesperson says: “While we don’t comment specifically on other companies, it’s important to note that Grainger’s multichannel business model and our target customers differ significantly from how online-only retailers serve the market.”

Not everyone buys Grainger’s nonchalance. “They’re planning, and they don’t want Amazon to know what they’re thinking,” says Barry Lawrence, program director of industrial distribution at Texas A&M University. He expects the company to make it easier to do business with Grainger through technology like mobile apps for purchasing managers and stronger loyalty programs–just like United Airlines uses frequent-flier programs to discourage you from using Expedia. “Grainger’s going to build some firewalls up against Amazon,” he says.

***

But that’s Grainger. For the rest of the 34,000-plus wholesalers and distributors with revenues and infrastructures who deal in millions, not billions of dollars in sales each year, the future competing with a fast-growing AmazonSupply could be bleak. Providing high-touch, value-added services to customers–the kinds of things humans attuned to their field excel at–is one defense.

And industry insiders seem to take some hope from the idea that Amazon can’t–and indeed won’t want to–tackle every customer’s needs in a complex, highly segmented part of the economy. Last year management consultancy firm Oliver Wyman studied Amazon’s encroachment into wholesale. Interviewing 25 CEOs of billion-dollar distribution businesses over the course of a few months, Wyman’s Balaban found that a third were skeptical that e-commerce competition will hurt their business in part “because their product is too difficult for a new entrant like Amazon to warehouse and ship.”

For instance, will Amazon want to handle industrial gases like carbon dioxide for pubs and bars and McDonald’s soda pumps? Amazon can sell gloves and goggles, but it’s much more expensive to deliver big, ugly tanks of acetylene or 55-gallon drums of acetate.

“Businesses with products that are dangerous, exotic or require specialist handling will be slower to be vulnerable to Amazon,” says Balaban, who co-wrote the Oliver Wyman report. “Amazon won’t take business away for drills or dentists’ chairs. But dentists also have drawers full of mouthwash, dental floss, paper towels, latex gloves and those bibs that go around your neck.”

To fight back some companies are adding services they hope AmazonSupply can’t–or won’t–duplicate. Take Valin Corp., a 40-year-old San Jose, Calif. distributor that once specialized in selling computer chips. Since 2010 the company has focused on the fast-growing oil and gas sector, handling and measuring output at surface oil wells among other relatively new assembly and manufacturing revenue streams. “Amazon is never going to get into servicing oilfields,” says Benfield, the B2B consultant. “They’re not sending out engineers.”

So are they right? Like everything else about AmazonSupply, Wilson is cagey about what services it’ll leave to the competition and which ones it may attempt to provide. Would it start selling tanks of oxygen? Or transport lumber to construction sites? “We would explore any item to ensure that we’re able to fulfill it,” is all Wilson will say.

Besides, you don’t need to do everything to carve out a hell of a big business in a sector of the economy as large as wholesale. Rivals, Balaban says, should expect the worst. “If your business does not yet have a credible plan to survive and thrive in the new ecosystem,” he says, “there may be less time than you think.” Just ask your local bookstore.

Claire O’Connor       www.forbes.com  

Amazon, in Threat to UPS, Tries Its Own Deliveries

April 24 -- The future of Amazon.com Inc. is hiding in plain sight in a San Francisco parking lot.

Adjacent to recently closed Candlestick Park, Amazon is testing its own delivery network for the "last mile," the final leg of a package's journey to consumers' doorsteps. Trucks loaded with Amazon packages and driven by Amazon-supervised contractors leave for addresses around San Francisco. Similar efforts are under way in Los Angeles and New York.

Delivering its own packages will give Amazon, stung by Christmas shipping delays, more control over the shopping experience. It can also help contain shipping expenses, which have grown as a percentage of sales each year since 2009, according to securities filings.

On Thursday, Amazon reported another quarter of skimpy profit even as sales increased 23% to $19.74 billion. Shipping costs rose 31%, and it also spent on cloud computing and new initiatives. The company reported a first-quarter profit of $108 million, compared with $82 million a year earlier.

The new delivery efforts will get Amazon closer to a holy grail of e-commerce: Delivering goods the same day they are purchased, offering shoppers one less reason to go to physical stores. With its own trucks, Amazon could offer deliveries late at night, or at more specific times.

The move is a shot across the bow of United Parcel Service Inc., FedEx Corp. and the U.S. Postal Service, which now deliver the majority of Amazon packages. It is also a challenge to Wal-Mart Stores Inc., eBay Inc. and Google Inc., each of which is testing deliveries.

Ultimately, a delivery network could transform Amazon from an online retailer into a full-service logistics company that delivers packages for others, according to former Amazon executives. They caution that any such effort likely is years away.

Delivery is a big step in Amazon's ambitions. The largest U.S. Internet retailer has branched into original video programming, set-top boxes for streaming video, and soon, smartphones, among other things.

It is unclear that Amazon will achieve its goals. UPS, founded in 1907, has a head start of more than a century. Industry observers say it will be difficult for Amazon to match the efficiency of UPS or FedEx in more than a handful of U.S. markets, simply because it will be delivering fewer packages over a wider area.

Amazon quietly began rolling out the delivery network in the U.S. late last year, in packages labeled "AMZL" and "AMZN_US." Customer-service representatives and former employees say those codes designate Amazon's in-house delivery network. Customers who have received the packages said they appear to use a different tracking process, with no links to an outside shipper.

Next up for Amazon is Treasure Island, a man-made spit of land in San Francisco Bay. Amazon is reviewing a lease for a site on the island to house trailers and delivery trucks, according to a person familiar with the matter. From there, Amazon would dispatch trucks into San Francisco, likely late at night and early in the morning when traffic is lighter and fewer island residents would be disturbed, this person said.

Amazon offered a peek at the delivery network in a recent job posting on its website. "Amazon is growing at a faster speed than UPS and FedEx, who are responsible for shipping the majority of our packages," the posting reads. "At this rate Amazon cannot continue to rely solely on the solutions provided through traditional logistics providers. To do so will limit our growth, increase costs and impede innovation in delivery capabilities." "Last Mile is the solution to this. It is a program which is going to revolutionize how shipments are delivered to millions of customers."

As a prelude to the U.S. moves, Amazon has been testing a delivery network in the U.K. "We've created our own fast, last-mile delivery networks in the U.K., where commercial carriers couldn't support our peak volumes," Chief Executive Jeff Bezos said in his annual letter to shareholders earlier this month. "There is more invention to come."

Typically using small couriers, Amazon delivers packages under the "Amazon Logistics" moniker and recently acquired an option to invest in Yodel, a U.K.-based parcel-delivery service. Dave Clark, Amazon's vice president for world-wide operations, said in November that Amazon would use its own trucks to make Sunday deliveries in London.

At San Francisco's Candlestick Park, formerly home to the NFL's 49ers, Ryder trucks are scattered around the parking lot, amid rows of bright green AmazonFresh trucks for Amazon's same-day grocery-delivery service. Trailers arrive each morning, and their contents are transferred to vans or trucks for deliveries in and around San Francisco, said one person familiar with the operation.

The precise logistics between Amazon's "last mile" hubs couldn't be learned. Even if Amazon takes over home deliveries, it will be difficult for the company to cut the major shipping carriers out of the process entirely. Amazon still relies on them to move goods around elsewhere in its supply chain.

Planning for the delivery network began several years ago, but the project took on added urgency last winter after UPS and FedEx failed to deliver Amazon packages to some customers by Christmas, according to two people familiar with the matter. Amazon blamed the carriers, but offered $20 credits to many affected customers.

"What happened during Christmas cost a huge amount of money" for Amazon, UPS and FedEx, said Marc Wulfraat, president of logistics consulting firm MWPVL International, which tracks Amazon closely but isn't working with the retailer.

If Amazon expands its delivery network, it would likely rely initially on cheaper, more flexible regional carriers—such as the East Coast's LaserShip Inc. and the West Coast's OnTrac— as well as the Postal Service for deliveries, according to supply-chain experts and logistics consultants. That would affect package volumes at UPS and FedEx, potentially hurting their efficiency. LaserShip and OnTrac declined to comment.

Sanford C. Bernstein and Co. analysts estimate that Amazon shipped about 608 million U.S. packages in 2013. The Postal Service handled 35%, UPS 30%, regional shippers 18% and FedEx about 17%. The distribution hasn't changed much in recent years.

UPS and FedEx ground rates on average have increased 3% to 5% annually in the past five years, an incentive for Amazon to develop its own delivery service, industry observers say. Amazon cited rising shipping costs in boosting the price of its Prime unlimited two-day shipping membership in the U.S. by $20, or 25%, earlier this year.

Amazon typically pays between about $2 and $8 to ship each package, according to shipping-industry analysts, with the cheapest option through the Postal Service and the most expensive via UPS or FedEx.

Amazon shipments should account for less than 1% of revenue for both FedEx and UPS, said Jack Atkins, an airfreight and logistics analyst at Stephens Inc. That suggests Amazon's delivery network would have a limited effect on the shippers' profits, at least initially.

FedEx Chief Executive Fred Smith in December said that Amazon "can unquestionably do local deliveries should they choose to do so." But he said the vast majority of packages would continue to be moved by FedEx, UPS and the Postal Service. A FedEx spokesman declined to comment further.

A UPS spokesman declined to comment.

Amazon's in-house delivery efforts have experienced hiccups. Online forums in the U.K. are rife with customers reporting missed, late or inaccurate deliveries. Several packages shipped to The Wall Street Journal's San Francisco office assigned to "Amazon Logistics" arrived several days after their guaranteed delivery dates. Customer-service representatives said that because the division is new, it is more difficult to track packages.

David Steigman, a customer in San Francisco, said two recent orders of DVDs like "The Hobbit" with tracking information for "AMZN_US" repeatedly missed Amazon's own delivery deadlines. "After the first time, I asked them not to ship me anything using that service, but they did it again anyway" said Mr. Steigman. "I don't want to be Amazon's test market for their new shipping idea—that's not what I am paying for."

www.online.wsj.com/news          Greg Bensinger, Laura Stevens

Amazon Plans Revamp of its Delivery Network

Company-controlled capacity to serve 40 largest population centers, consultant says.

March 6 -- Amazon.com. Inc. is moving quickly to revamp its delivery network to gain more control over its fulfillment infrastructure while reining in spiraling transportation costs, according to a supply chain consultant with close ties to the e-tailing giant.

James Tompkins, who runs Tompkins International, a Raleigh, N.C.-based consultancy, said Amazon has divided the nation into three segments based on population size: The top 40 markets, which comprise about half of the U.S. population; the next 60 largest population areas that account for about 17 percent, and the remaining population, which account for about one-third.

The top 40 markets will be served by a private fleet being built by Amazon to support an expansion of its online grocery business, called "Amazon Fresh," according to Tompkins. The next 60 will be served by an array of regional parcel delivery carriers, he said. The remainder will be served mostly by the U.S. Postal Service, he said.

UPS Inc., which today handles much of Seattle-based Amazon's current deliveries, will not play a prominent role in the network realignment, Tompkins said. Nor will FedEx Corp., which manages a lesser portion of Amazon's delivery business. An Amazon spokeswoman was unavailable to comment.

Orders will be routed through Amazon's 55 fulfillment centers, with deliveries made the same day, the next day or, at most, in two days, Tompkins said. Inventory will be positioned to exclusively support local deliveries. A national delivery network as operated by providers like FedEx and UPS will be rendered irrelevant because they will be considered too slow to suit the typical Amazon customer, he said.

Tompkins said that Amazon has a timeline for its rollout, but that he is unaware of the details. "They are moving on this very aggressively," he said.

Amazon two years ago seriously considered a bid for FedEx as a means of buying into an existing delivery operation, according to Tompkins. However, Jeffrey P. Bezos, Amazon's founder and CEO, backed away after determining FedEx's network structure was too national in scope to fit Amazon's strategy of local fulfillment and delivery, Tompkins said. A FedEx spokesman declined comment.

Tompkins has worked in the supply chain management field for decades and is considered one of the nation's leading authorities on its role in e-commerce. His relationship with Amazon is not clearly defined, a status seemingly more by design than coincidence. When asked to describe the nature of his involvement with Amazon, Tompkins replied that he was contractually obligated not to comment.

A "FRESH" EXPANSION

Though Amazon Fresh has been operating for five years, it is today only available in Seattle, San Francisco, and Los Angeles. However, Amazon plans to expand the grocery business to between 30 and 40 U.S. markets in 2014, according to Tompkins.

Tompkins said the private fleet network would commingle groceries with general merchandise, thus building the scale needed to make ground shipping cost-effective and to offer a compelling value to customers, Tompkins said. It would also set in motion a chain of events that would result in Amazon competing with FedEx and UPS.

The online grocery business, which is plagued with high fulfillment costs, is not considered a particularly attractive enterprise on its own. However, Bezos has used Amazon Fresh as a proving ground to test a more ambitious delivery model rather than as a way to build a national grocery footprint, according to Tompkins. By using his own vehicles to deliver groceries, Bezos has been able to fine-tune his own delivery network and understand the pros and cons of leveraging his own infrastructure than those of the incumbents, Tompkins said. Now Bezos is poised to apply that knowledge on a broader scale, Tompkins said.

Transportation costs remain a thorny issue for Amazon. Its shipping expenses in 2012, the most recent period that full-year figures were publicly available as of this writing, rose to more than $5.1 billion, up from nearly $4 billion in 2011, according to the company's 10-K filing with the Securities and Exchange Commission.

Shipping costs in 2012 exceeded shipping revenue by nearly $3 billion, according to the filing. Amazon generates much of its shipping revenue from third-party merchants who sell products through the company's site and use its fulfillment services for storing inventory, picking and packing, and shipping.

In the filing, Amazon said it expected its "net cost of shipping"—the ratio of shipping costs to revenue—to continue rising as parcel rates increase and more customers take advantage of the company's delivery offerings such as "Prime," which charges a $79 annual fee for unlimited two-day deliveries. Amazon has said it is considering a $40 annual price hike for Prime subscriptions.

Not everyone believes Amazon will migrate from FedEx and UPS so quickly. Scott Devitt, Internet analyst for investment firm Morgan Stanley & Co., said during a late February webcast that Amazon will continue to leverage the established delivery infrastructure and will not become a disruptive force in the delivery market. Amazon will continue to use its enormous buying power to extract favorable rates from its delivery partners and will see that as a more attractive alternative to building out its own network, Devitt said.

Frederick W. Smith, FedEx's founder, chairman, and CEO, told analysts recently that only FedEx and UPS have the delivery networks capable of efficiently handling the demands of Amazon and other e-commerce providers. Smith said his company, UPS, and the U.S. Postal Service would remain at the forefront of e-commerce shipping for the foreseeable future.

Tompkins said that Amazon has been planning its strategy long before the well-publicized delivery problems that occurred during the 2013 holiday season, when about five million of its shipments were not delivered in time for Christmas. Much of the fallout was laid at the feet of UPS, though some have argued that Amazon erred by understating how many packages were coming UPS' way toward Christmas day, thus overwhelming the Atlanta-based carrier's air network and triggering the backlog.

Amazon is still smarting from the fiasco, however. The company's fulfillment executives believe UPS and FedEx are not investing enough in equipment, infrastructure, and other resources to keep up with Amazon's growth, according to a person familiar with the matter.

These days, every move in the e-commerce space is significant because of its enormous potential. E-commerce has penetrated just 10 percent of the U.S. market, and between 6 and 7 percent of the global market, according to Morgan Stanley estimates. Based on projected annualized growth rates of 15 percent, e-commerce could be a $1 trillion worldwide business by 2016, according to the firm.

Mark B. Solomon        http://www.dcvelocity.com/    

Amazon Innovates With It's Business Model, Not Drones

January 21 -- Amazon CEO Jeff Bezos created quite the stir when he announced plans for drone package delivery on 60 Minutes. However, as exciting as commercial applications for drone technology might be, the true innovation lies in Amazon once again reinventing its business model and finding new ways to create value, conduct business and get paid for it.

The essence of business model innovation (BMI) is not a new concept. Indeed, creating disruptive new business models is at the heart of many entrepreneurial start-ups. However, in most large companies and corporations, business models take a back seat to brands. BMI should command more attention as business models, above products, services or brands, are the basis of competitive advantage in the 21st Century.

The implications to this are significant. Over time, the companies that fail to reinvent their business models to challenge outmoded assumptions about their businesses, renew their customer value propositions and change the competitive dynamics of their industries in their favor can quickly become vulnerable to commoditization, obsolescence or business failure.

The trends towards business model-driven strategy are encouraging. According to the Economist, over 50 percent of executives believe that business model innovation will be even more important than product or service innovation. Yet, the American Management Association determined that no more than 10 percent of innovation investment at global companies is focused on developing new business models.

Finding the business model sweet spot can help companies generate both incremental growth from optimizing existing businesses and transformational growth from generating entirely new sources of revenue and value creation. Rather than simply figuring out more efficient ways to operate in existing markets, the components of business models can, individually or collectively, be reinvented to create entirely new markets, new opportunities and structural competitive advantages.

Conceptualizing business model innovation in a framework of four specific actions (W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy) can allow companies to systemically scrutinize how it creates value, challenge prevailing industry logic, legacy assumptions and the existing model.

Let’s explore Amazon through this Eliminate-Raise-Create-Reduce framework and their pathway to becoming the most dominant retailer on the web.

Eliminate: Which elements are taken for granted in your business and can be eliminated?

Amazon found a new channel to the customer through technology by eliminating the traditional retail distribution channel and developing direct relationships with suppliers. Further, such features as “1-click check out” accelerated transaction times by eliminating the need for the manual input of billing and shipping information for every purchase.

Raise: Which elements can be raised above the industry’s standard?

Amazon wasn’t the first online store, but the company recognized the potential to transform the way we shop by building the next generation platform and infrastructure that gives customers unprecedented choice, scope and value. By building the online shopping platform, Amazon radically reinvented the traditional retail business model and the fundamental dynamics of how consumers shop.

Create: Which elements can be created that the industry has never offered?

The Amazon Web Service (AWS) offering, built from the company’s core technology infrastructure, makes web-scale cloud computing cheaper and more accessible. Leveraging Amazon’s vast experience, AWS is an entirely new business model that created a first-mover advantage, and the high growth that goes with it, for the company.

Reduce: Which elements can be reduced below the industry standard?

Perhaps the most controversial element to Amazon’s business model is the element that it has elected to “reduce” – its’ profitability. By design, the company has reduced its short-term profitability with the hopes of capturing the massive market share and scale that will allow them to drive down costs and increase profitability in the future. This innovative approach has the potential to create high switching emotional switching costs for customers and extremely high barriers for competitors in the future.

Amazon’s business model innovation certainly allows it to deliver a diverse portfolio of customer value propositions that serves as its main competitive advantage. Culturally, a continuous focus on business model innovation keeps the company connected to its entrepreneurial roots — an advantage that should be coveted by even the largest of companies.

At the end of the day, “It’s all about customers.” As Amazon demonstrates, even when customers have many choices, with business model innovation, it is possible for revenue and growth opportunities to flow from the basic way a business is put together — even without the use of drones.

Keary Crawford        www.wired.com/insights  

Amazon Wants to Ship Your Package Before You Buy It

January 17 -- Amazon.com knows you so well it wants to ship your next package before you order it.

The Seattle retailer in December gained a patent for what it calls “anticipatory shipping,” a method to start delivering packages even before customers click “buy.”

The technique could cut delivery time and discourage consumers from visiting physical stores. In the patent document, Amazon says delays between ordering and receiving purchases “may dissuade customers from buying items from online merchants.”

So Amazon says it may box and ship products it expects customers in a specific area will want – based on previous orders and other factors — but haven’t yet ordered. According to the patent, the packages could wait at the shippers’ hubs or on trucks until an order arrives.

In deciding what to ship, Amazon said it may consider previous orders, product searches, wish lists, shopping-cart contents, returns and even how long an Internet user’s cursor hovers over an item.

Today, Amazon receives an order, then labels packages with addresses at its warehouses and loads them onto waiting UPS, USPS or other trucks, which may take them directly to customers’ homes or load them onto other trucks for final delivery.

It has been working to cut delivery times, expanding its warehouse network to begin overnight and same-day deliveries. Last year, Amazon said it is working on unmanned flying vehicles that could take small packages to homes directly from its warehouses.

In the patent, Amazon does not estimate how much the technique will reduce delivery times.

The patent exemplifies a growing trend among technology and consumer firms to anticipate consumers’ needs, even before consumers do. Today, there are refrigerators that can tell when it’s time to buy more milk, smart televisions that predict which shows to record and Google’s Now software, which aims to predict users’ daily scheduling needs.

It’s not clear if Amazon has deployed or will deploy the technique. A spokeswoman declined to comment.

But the patent demonstrates one way Amazon hopes to leverage its vast trove of customer data to edge out rivals.

“It appears Amazon is taking advantage of their copious data,” said Sucharita Mulpuru, a Forrester Research analyst. “Based on all the things they know about their customers they could predict demand based on a variety of factors.”

According to the patent, Amazon may fill out partial street addresses or zip codes to get items closer to where customers need them, and later complete the label in transit, the company said. For large apartment buildings, “a package without addressee information may be speculatively shipped to a physical address … having a number of tenants,” Amazon said in the patent.

Amazon said the predictive shipping method might work particularly well for a popular book or other items that customers want on the day they are released. As well, Amazon might suggest items already in transit to customers using its website to ensure they are delivered, according to the patent.

Of course, Amazon’s algorithms might sometimes err, prompting costly returns. To minimize those costs, Amazon said it might consider giving customers discounts, or convert the unwanted delivery into a gift. “Delivering the package to the given customer as a promotional gift may be used to build goodwill,” the patent said.

Greg Bensinger       www.blogs.wsj.com     

Another Perspective: Faltering Carriers and Web Shopping Expectations

December 26, 2013 -- After years of preaching the convenience and reliability of online shopping — shop in your pajamas, with fast, free delivery — retailers may have been too successful at spreading the message this year, contributing to the volume of holiday orders that overwhelmed delivery services like U.P.S. and FedEx.

As the companies scrambled to deliver gifts the day after Christmas, they also struggled to explain how it all happened. Some analysts wondered aloud whether it was not just logistics, but industry and customer expectations that needed to be re-examined, while one suggested the companies might have to reconsider their pricing system.

“We have this perception that anything can be delivered at any time, and that it will be super cheap and really fast — but this is not Santa Claus,” said Sucharita Mulpuru, an analyst at Forrester, the research firm. “It is an operation in which there are constraints, and there are costs associated with getting more packages than were expected to be somewhere on time.”

The volume even surprised the United States Postal Service. Officials said on Thursday that they had expected a 12 percent increase in packages during the holiday season, but package shipments jumped 19 percent, and it added Sunday deliveries to accommodate them. A spokeswoman for FedEx said this season was the busiest the company had ever seen.

But it was United Parcel Service, the world’s largest package delivery company, that was perhaps the most unprepared for the crush. The company hired 55,000 seasonal workers this year, but that number was roughly the same as last year and the year before that — not enough to keep up with rising demand.

“It hasn’t fluctuated that much over the past couple of years,” Natalie Black, a spokeswoman for the company, said of its holiday staffing. “Whether that was part of the problem, I can’t say. Right now, we don’t know what the linchpin was for the network breakdown.

“You can only fit so much in planes,” she added.

It was unclear how many customers were affected, but complaints poured in from across the country and retailers large and small were caught up in the maelstrom.

While bad weather and a short holiday shopping season were cited as possible causes by U.P.S. officials, they also said the volume generated by growth in online shopping was a likely factor. Online sales have been growing for years, and this season, the rise during the weekend before Christmas was extremely steep, up 37 percent, according to IBM Digital Analytics Benchmark. FedEx said that it had predicted it would deliver 22 million packages on its busiest day this year — double the volume in 2007. The actual number is not yet known. One way to address future demand, Ms. Mulpuru, the analyst, suggested, would be to approach the surge the same way that the airlines do: by charging more for the service.

“An airline doesn’t just buy additional aircraft so they can accommodate everyone who wants to fly the day before Thanksgiving for $300,” she said. “They just raise the price of your ticket and force people to go earlier.”

Shipping is often subsidized for shoppers, Ms. Mulpuru said, and it is retailers that have contracts with companies like U.P.S. If rates stay relatively static for retailers they have no incentive not to encourage people to buy as much as possible until the last possible moment, she added.

This year, for example, if customers ordered from Nordstrom by 3 p.m. Eastern on Dec. 23, they were eligible for arrival on Dec. 24. Amazon’s one-day shipping deadline was also Dec. 23, and it even offered same-day delivery on Dec. 24 in some locations.

Shipping has been a crucial battleground for online retailing since the earliest days of e-commerce, but it has become more important over time.

Krista Clark, an analyst with the research firm eMarketer, said services like Amazon Prime, the online retailer’s program that offers unlimited two-day shipping for $79 a year, had conditioned consumers to expect faster delivery of everything.

At the same time, customers aren’t willing to pay for it. “The thing people care about more than fast shipping is free shipping,” Ms. Clark said.

She cited a study by comScore that found that half of shoppers said free shipping was the most valuable benefit an online retailer could offer.

Some retailers have invested more in central warehouses and distribution systems to better handle online orders. Others, such as Gap, Best Buy and Walmart, have relied on their physical stores to fulfill online orders.

That allows retailers to get the goods in the hands of customers more quickly. “People have gotten crazy trying to compete with Amazon with faster delivery,” Ms. Clark said.

In the process, retailers often bypass the traditional shippers like U.P.S. or FedEx in favor of more localized delivery options — or one day, Amazon has suggested, maybe even drones.

EBay has been promoting a fast delivery service called eBay Now, which works with retailers like Macy’s, Target and Toys ‘R’ Us, to deliver orders in one hour from a store to a customer using a network of human couriers.

Although eBay typically charges a $5 fee for the service, during the holidays, it offered it free, including deliveries on Christmas Eve. (An eBay spokeswoman declined to say how many people actually used the service.)

Although eBay Now is available in only a few metropolitan areas, including New York, San Francisco, Chicago and Dallas, the company plans to expand the service more widely. Amazon and Google are also rolling out local delivery services that could divert some of the shipping volume, and revenue, away from U.P.S. and FedEx.

Though explanations were in short supply on Thursday, U.P.S. took to social media to offer abundant apologies, responding individually with direct messages to its unhappy customers on Twitter. As it apologized, it had plenty of company from retailers that were offering their own regrets, while placing most of the blame on the package carriers.

“While we are dependent on our shipping partners to hold up their end of the bargain on getting your orders to you, we also realize that we are accountable for meeting your expectations and take responsibility for what happened here,” Jamie Nordstrom, president of Nordstrom Direct, said in an email to customers. “We feel awful whenever we let a customer down, especially at this time of year.”

A spokeswoman for Kohl’s said the company was “deeply sorry.” Amazon issued gift cards to affected customers. In San Diego, even a distributor of Glock guns and parts took to Twitter to “apologize if any of your orders didn’t arrive in time for Christmas due to the holiday overload.”

On Thursday, those tardy packages began to trickle in.

Todd Sawicki, an entrepreneur in Seattle, ordered several items from Amazon on Dec. 23 and paid extra to get guaranteed delivery on Christmas Eve. On the 24th, a package arrived via U.P.S. from Amazon, and he figured it was the gifts — Legos for his son, and a bracelet and headphones for his wife.

Far from it. Inside was a toilet repair valve he had ordered earlier.

“It was the Amazon equivalent of a lump of coal,” he said.

On Christmas morning, without anything else to give his wife, he presented her with the wrapped valve.

At 11 a.m. on Thursday, he said, the valve was finally swapped out for the intended Christmas gifts.

Elizabeth A. Harris And Vindu Goel          www.nytimes.com    

Local Shops Fear Amazon's Expansion

September 4 -- Amazon's notoriously low prices have always given traditional retailers a run for their money. But as the online behemoth builds new warehouses to cut shipping times, small shops are getting even more nervous.

Amazon already has 40 massive fulfillment centers around the country, helping it provide remarkably speedy delivery. "Prime" subscribers get free shipping with even faster delivery: Two days, guaranteed.

But it's about to get even faster, as Amazon builds another five distribution centers this year. The company won't disclose where, but the warehouses are expected to be near several major cities -- including rumored locations outside of Manhattan.

Joe Perrotto owns Power Equipment Plus, an outdoor equipment retailer with three locations, including one outside of Philadelphia. He already keeps a close eye on what Amazon charges for things like lawn mowers and leaf blowers and tries to price his products accordingly. But faster Amazon delivery will squeeze him further.

"They'll have the convenience and immediacy of retail," said Perrotto. "Ultimately, it's going to erode our profitability as we try to offer a price advantage to counter their convenience advantage."

It's the latest in what some view as Amazon's war on small businesses. First came the rock-bottom prices. Then came the Price Check app, allowing shoppers to scan items and compare in-store prices to those on Amazon -- essentially turning independent shops into a showroom for Amazon.

Amazon didn't comment about its impact on small businesses, but spokeswoman Kelly Cheeseman did say new fulfillment centers have boosted local employment and increased demand at restaurants.

For example, Ziggy's Pizza and Sandwich Shop in Gladeville, Tenn., saw its daily deliveries jump 20% this year after Amazon's warehouse opened in a nearby town.

"It's definitely a positive for the community," said Ziggy's owner Adam Shireman.

Other small business owners welcome Amazon's expansion and hope to ride the wave with it.

Sara Selepouchin Villari produces her own line of handcrafted towels and sells them directly to Amazon, which stores them in nine warehouses across the country. It takes care of the orders, shipping and pays Villari a cut.

The more warehouses Amazon adds, the closer she is to her customers.

"During the holidays, it'll be awesome," she said. "When I have customers asking about expedited shipping, I'll be able to point them to Amazon. I'm going to go home and have dinner with my family."

Villari also owns a boutique in Philadelphia, Girls Can Tell, but she's not worried customers will turn to Amazon. While Amazon threatens stores that sell generic items easily found online, Villari has filled her shop with unique artisan products.

"A good boutique has been curated. You're going to stumble upon gifts you never knew existed," she said.

But benefiting from Amazon's new warehouses isn't an option for Meyer Dagmy, owner of the Mashern Army/Navy supply store in New York City. He tried selling through Amazon, but found it almost impossible to sell his goods at prices that could compete online. In some cases, he'd even lose money on a sale.

Now he just hopes Amazon stays away from his specialty: Military and tactical gear.

"Amazon's got bigger fish to fry than me. But if they get into my niche, they could take me out of business," he said. 

www.money.cnn.com

How U.S. Retailers are Building Up Their Online Muscle

MARTINSBURG, West Virginia – December 24 - The brave new world for U.S. retailers can be found in small cities like Martinsburg, West Virginia.

That's where department store chain Macy's Inc recently opened a facility the size of 43 football fields - big enough to stock 1 million pairs of shoes - just to fulfill orders made online.

The $150 million building, its third one dedicated primarily to supporting macys.com, has already been handling 60,000 orders on a busy day this holiday season. Macy's expects that figure to triple in two years.

"The customer is increasingly voting that she wants to shop both ways," said RB Harrison, Macy's executive vice president in charge of integrating e-commerce and store operations.

From Macy's to Home Depot Inc and Best Buy Co Inc, retail executives are racing to speed up order delivery and improve inventory management, which if done well, can help profit margins.

Many chains are also hiring staff, or even buying firms in Silicon Valley, to get the edge in technology.

"Today, tomorrow and going forward, you are comparing the experience in our store to the experience of sitting in your living room, in the comfort of your home, ordering something on your laptop, your smart phone or your iPad," Home Depot Chief Executive Frank Blake told Reuters.

"Your willingness to put up with rude associates, dirty stores and out of stocks is just going to go down and down and down. Our bar on performance in our stores is going to go up and up and up," he said.

To be sure, online sales to date account for just 7 percent of retail sales, according to Forrester Research. But the firm expects online sales growth to rise 45 percent to $327 billion and account for 9 percent of overall sales by 2016.

Retailers are realizing they must respond to that kind of growth.

"When I was meeting with brick-and-mortar retailers 24 months ago they weren't thinking about online," said Carlo Bronzini Vender, a senior partner at New York-based investment bank Sonenshine Partners who helped advise Drugstore.com when it was bought by Walgreen Co in 2011. "Now people are being more proactive about it."

Even if some retailers like Macy's are less exposed to the threat from e-commerce's 800-pound gorilla Amazon.com Inc than a company like electronics chain Best Buy Inc, they are all under enormous pressure to offer faster delivery times, better service and an array of products.

Already armed with 40 e-commerce fulfillment facilities, Amazon is set to open another 7 centers next year.

And by next year, Amazon could offer cost-efficient same-day shipping to every customer in the 10 largest U.S. cities, according to RBC Capital Markets.

This year, Saks Inc, Dillard's Inc and Kohl's Corp are among retailers that opened the biggest online fulfillment centers they have ever had.

And those without much of an online presence are moving quickly to get one. For example, T.J. Maxx parent TJX Cos Inc, which sells designer clothing and home goods at discounted prices, said on Friday it bought off-price Internet retailer Sierra Trading Post for about $200 million.

NOT-SO-SECRET WEAPON

Most national retailers have largely stopped opening new stores as same-store sales growth has slowed compared to online.

But the stores can be a major weapon for companies like Macy's and Home Depot as they fight Amazon.

Since this summer, 292 of Macy's 800 stores have been doing double-duty as mini-fulfillment centers that assemble, pack and ship online orders, up from 23 stores a year ago. It plans to add this function to 200 more stores next year.

Nordstrom Inc has been doing this for years, giving it a big lead over other department stores.

At Macy's, already 10 percent of orders placed online have been dispatched through stores this holiday season.

"It's a natural extension for us because of our ability to leverage the 800 stores' inventory," said Harrison of Macy's. He noted that the cost for equipping a store for e-commerce is relatively small, requiring a small space in the docking area for tables, scales, and room to pack boxes.

Saks is testing "ship-from-store" and expects to roll it out next fall. Wal-Mart Stores Inc and Kohl's are also testing it.

"Fulfilling online orders from the store is the most important thing that will change physical retailers over the next five years," said Matt Nemer, an e-commerce analyst at Wells Fargo.

The strategy is aimed squarely at boosting profit margins.

Saks CEO Stephen Sadove envisions a scenario in which a pair of shoes sitting unsold at his Saks Fifth Avenue flagship could be used to fill an online order and sold at full price, instead of ending up being sold at a discount, hurting profit.

Macy's computers have complex algorithms that scour companywide inventory, factor in distance and shipping costs to come up with an optimal way to assemble and ship an order.

Despite higher shipping costs, Macy's shipments are often split between locations if a computer determines that the benefit to margins from selling an item that a store doesn't need or has too much of outweighs the extra expenses.

Stores are also serving as pick-up spots for online orders, and many retailers are finding this a boon.Wal-Mart says customers spend about $60 in a store when they pick up items ordered online.

In November, Best Buy decided to assign additional employees to deal with in-store pick-ups since 40 percent of bestbuy.com orders are now picked up.

DANGER OF MISSTEPS

Even Amazon sees the benefits of a physical presence. Staples Inc said last month it will install "Amazon Lockers" at its stores, allowing customers to have packages sent to Staples stores to avoid delivery hassles.

The biggest reason many retailers are only now offering 'ship-from store' and in-store pick-up is that the traditionally managed store and e-commerce inventory had been handled separately.

That is changing rapidly. Saks is spending about $40 million this year to update its computer systems in part to integrate databases. Industry experts say Nordstrom's e-commerce lead over department store rivals stems in large part to technology investments it made years ago.

But there are risks.

Computer systems and staff have to be ready or else retailers can face disaster, said Forrester Research analyst Sucharita Mulpuru. The use of stores is pointless if, for example, an inventory system gives the stockroom person collecting an order incorrect information about where a coat is located, leading to wasted time.

There is also a big risk of an item in store being "shopworn," or unsuitable to be sold.

"It's smart to fulfill from stores if you can figure out a way to get your operations right," Mulpuru said, noting the potential for human error is another concern. Such problems are limited at fulfillment centers because the systems are highly automated.

Executives agree. Harrison said stores are not meant to replace fulfillment centers, with their much greater breadth and quantity of products, but are there to supplement them.

"It's always going to be more efficient to ship from a fulfillment center," Saks' Sadove told Reuters. "You're never going to be perfect in 'ship-from-store'."

SILICON VALLEY APPEAL

To support its e-commerce strategy, retailers are aggressively hiring in Silicon Valley. Nordstrom took on more than 400 new employees with software engineering and website development experience, including Kirk Beardsley, an e-commerce executive from Microsoft Corp who had been a director of business development at Amazon for over seven years.

Retailers hope to take this even further by analyzing online data. Macy's executive Harrison said data collected this holiday season will help prepare for the next steps in its online push.

Last year, Wal-Mart acquired California-based start-up Kosmix, which developed technology to filter data from social media networks. As a result, Wal-Mart's San Bruno, California-based e-commerce offices now house more than 1,000 staff.

Getting hold of the technology to back up these efforts is driving acquisitions. They are frequently small ones, driven by retailers' attempts to master the online sales process, rather than immediately boost sales.

Home Depot, which bought tech start-up Redbeacon earlier this year, is looking to acquire or partner with more companies in the Valley, according to CEO Blake.

Redbeacon, founded by a trio of Google Inc veterans, matches homeowners with the best contractors for jobs such as cleaning and home repair. That kind of innovation will send shock waves through the sector, Blake said.

"I think there is going to be as much change over the next 10 years in retail as in the last 50 years. So if you're prioritizing where you put your best people, your best resources and all the rest, for us it's on inter-connective retail," said Blake.

 Reuters