How does Amazon deliver the best customer experiences?
Wide selection, low price, and convenience make Amazon the default online shop for most people. The high volume order makes it easier for Amazon to centralize its fulfillment management and automating its processes to reduce cost and serve its customers better.
Amazon’s business model is to “serve consumers through [its] retail websites and focus on selection, price, and convenience.” (Amazon’s 2014 10-K). Amazon solely interacts with customers through its website so it can avoid store occupancy cost. Its websites list millions of unique products sold by Amazon or third-party sellers and very easy to navigate. Amazon is not merely an online store, it is a market place. It leverages third-party sellers in order to create the indirect network effects (more sellers => more supply => lower price). Wide selection, low price, and convenience make Amazon the default online shop for most people. Having top-of-mind awareness gives Amazon necessary volume to execute its operating model efficiently, resulting in low cost. Amazon’s top-of-mind awareness also keeps online competitors from gaining enough volume to operate efficiently.
Amazon’s operating model is all about gaining high enough volume per fulfillment center and automating processes. The introduction of Prime membership reduces hurdle to purchase resulting in more purchases per customer and generate even more volume for Amazon. High local volume justifies investment in fulfillment center in each local area. Putting warehouses closer customers allow for same-day delivery in many areas, thus reinforcing its “convenience” proposition. Its system is specifically designed to ship small orders to consumers. Amazon already has more than 90 warehouses across the country. Meanwhile, its biggest competitor Walmart is spending $1 billion a year to bolster its e-commerce infrastructure but still only has 5 warehouses.
Amazon centralizes inventory management and order fulfillment at its warehouses. Thanks to huge volume, it can invest to automate processes at its warehouse and reduce labor costs. Walmart’s business activities are spread over thousands of stores so each store doesn’t have as high volume as a giant warehouse and therefore can’t be automated. So, order fulfillment activity at Walmart store network can’t be as efficient as that at Amazon’s warehouse network. Amazon invests about $100 million in a fulfillment center. In Amazon warehouses, machines help employees to package orders as quickly as possible. Labeling of each package is done automatically. In the old days, employees walked around the center to collect items for each order and Amazon used radio frequency technology to help employees locate items quickly. Amazon built proprietary algorithm to organize items so that items that were often purchased together were put near to each other in the shelves. Today, robots walk around to collect items and employees just need to stand at one place to put items collected by robots into boxes. Automated processes allow for quick order fulfillment with low defect rate to satisfy its promises of bringing convenience o customers. In this case, since capital cost and depreciation cost of the system is lower than employees cost savings, it is justifiable for Amazon to invest in the automation of the fulfillment center, which eventually results in low cost for Amazon and low price for customers.
It would be incomplete to not mention the last mile delivery logistics that Amazon is trying to develop in order to fulfill the promises to its prime customers. Amazon has largely been dependent on traditional logistics providers like Postal Services, UPS and Fedex to deliver its packages. Recently, there are many on-demand delivery startups like Postmates and Instacart that can poke customers away from Amazon. As Amazon does not want to peg its growth to others’ delivery capabilities, give up the cost control, and lose customers to emerging startups, Amazon is quietly building its own fleet of trucks to deliver same day grocery service and to take the pressure off the delivery providers during busy season.
The company goes a step further by developing commercial drones to deliver packages. Amazon has named the new service Amazon Prime Air and said its drones are ready as soon as they get regulatory support.
The ecommerce landscape is definitely crowed and vast but no one can deny Amazon’s competitive moat thanks to its visionary and revolutionary business and operating model and its relentless obsession with delivering the best customer experiences.
Sources:
Inside one of Amazon’s busiest days: https://www.youtube.com/watch?v=Z2Bs0nqVyqs
A Day in the Life of an Amazon Package: https://www.youtube.com/watch?v=8-DgmfMa5Zk
Meet the robots making Amazon even faster: https://www.youtube.com/watch?v=UtBa9yVZBJM
Amazon’s New High-Tech Distribution Center: https://www.youtube.com/watch?v=Y55HJE9RRg0
Amazon Ramps Up $13.9 Billion Warehouse Building Spree: http://www.bloomberg.com/news/articles/2013-08-20/amazon-ramps-up-13-9-billion-warehouse-building-spree
Amazon plans to employ 1,000 at new distribution center in Shakopee, seeks tax breaks: http://www.startribune.com/amazon-plans-to-employ-1-000-at-new-distribution-center-in-shakopee/300852681/
Amazon Is Still King of the Online Retail Jungle: http://www.reuters.com/article/2015/11/19/us-usa-holidayshopping-online-idUSKCN0T81JV20151119#XiiGISp6EZ2k1iiF.97
Amazon, in Threat to UPS, Tries Its Own Deliveries: http://www.wsj.com/articles/SB10001424052702304788404579521522792859890
Very interesting article, Anh. I am curious to know what challenges you see Amazon facing in the future. Do you think Amazon Prime has been a huge success for the business, or is the subscription not expensive enough to bring in a profit? Do you see Amazon needing to create a tiered pricing strategy for those who order more and get more goods shipped?
Also, do you think Amazon has more competition now that companies are starting up there own eCommerce websites? How will Amazon be able to compete with the new digital stores?
Some estimated that 45% of Amazon’s customers in the U.S. have Prime membership. So, prime revenue is about 62% of total revenue because prime members spend more than twice non-prime member. As Amazon’s average gross margin is 29%, it’s likely that sales prime members has 26% gross margin and sales to non-prime members has 34% gross margin. So, on average, each prime member brings in $348 gross profit and each non-prime member brings in $221 gross profit. In other words, prime helped Amazon improves gross profit per member by 57%
I’m not sure if tiered pricing is a good idea. Tiered pricing would help Amazon gets some more shipping revenue, and may encourage shoppers to buy more in order to get into lower tier price. But it complicates the marketing message. I don’t think Cosco has a tiered pricing for its membership.
Amazon Prime is big, but how big?: http://www.usatoday.com/story/tech/2015/02/03/amazon-prime-10-years-old-anniversary/22755509/
What Do 50 Million Amazon Prime Members Mean for the Company?: http://www.fool.com/investing/general/2014/09/22/what-do-50-million-amazon-prime-members-mean-for-t.aspx
Great article, Ahn. One interesting thing to note is that are now robots with cool end effectors that can put disparate objects into a box. I think Amazon itself is also working on that.
The other interesting thing is how Amazon is forcing (maybe that’s too strong a word, but anyway) to change their operating models. For example, most people buy one unit of quanity at a time e.g. one bottle of tide. However P&G does not ship one bottle of tide in one brown box (which is what Amazon wants). They ship 6-8 bottles in a box and many boxes on a pallet. As Amazon becomes more important, companies like P&G are retooling their operations to be able to supply smaller case counts. So there is this interesting reverbation effect across multiple industries
Great read. What do you think is Amazon’s core competency which has kept giants such as Walmart in the online space. Do you think it will be easy for competitors to replicate this competency? Lastly what do you think is the biggest threat to Amazon continued success?
Hi Tariro, thank you for your thought provoking question! you obviously put a lot of thoughts in my post!
There’s more and more competition as eCommerce gain market share from brick-and-mortar retailers. We should never expect Amazon to have a monopoly on the business. There will be niche players. Amazon’s strength is selection, convenience, and price. Amazon will compete with other niche eCommerce site. The brick-and-mortar analogy is Wal-Mart vs specialty retailers, or department stores vs boutique stores in a shopping mall.
So, it’s important for Amazon to focus on its core strength. It’s hard to be everything to everyone. But I see Amazon invests in specialized store fronts such as grocery or industrial supplies:
Amazon fresh: https://fresh.amazon.com/welcome;jsessionid=E14AC286BA70254EB522B6938F566ECC
Industrial supplies: http://www.amazon.com/industrial-scientific-supplies/b/ref=nav_shopall_ind_sup?ie=UTF8&node=16310091
But I don’t know if Amazon will do better than niche players who are more focused and who have everything to lose in this eCommerce battle. These players have specialized web interface, specialized services, and specialized supply chain. Amazon’s general competitive advantages might not be as significant in these areas. But I don’t see it as a problem for Amazon. It doesn’t hurt Wal-Mart that it can’t compete with Home Depot in home improvement products. I see Amazon as the Wal-Mart of ecommerce.
Anh, this is a good review, specially for someone who has not worked at Amazon. You have noted a couple of nuances that have not widely been reported, like amazon developing their own truck fleet. Having worked there, I believe the below two points are mostly incorrect (or maybe you can point me to your sources)
1) The number of warehouses (or Fulfillment centers) that Amazon operated in the US should be closer to 60. They had 56 while I was working there and they normally expand by 3-4 a year.
2) They don’t really use grouping while putting away items. Amazon actually use random stow and a propriety pick algorithm that optimizes on multiple criteria many times each day. The only stow criteria that they actually use is based on bin size, value of item (high value items are put in secure locations) and frequency of ordering.
I got the 90 warehouse number from a bloomberg article
Amazon Ramps Up $13.9 Billion Warehouse Building Spree: http://www.bloomberg.com/news/articles/2013-08-20/amazon-ramps-up-13-9-billion-warehouse-building-spree
Nice piece of work Anh. Thanks! From the videos it seems that the various warehouses differ a lot in terms of automation and technology. So besides delivery, Amazon still has big room for improvement and optimization in its warehouses and internal operations.