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How Amazon's Prime Day Creates New Challenges for Traditional Retailers

First there was Black Friday. Then Cyber Monday. And now, Amazon.com's Prime Day. Why do retailers invite peak-demand headaches?

How Amazon's Prime Day Creates New Challenges for Traditional Retailers

The upside is obvious: increased sales. The Christmas shopping season accounts for more than 19 percent of total U.S. retail sales, and many retailers rely on those few weeks for a much larger share of their annual revenues. So it behooves them to set off a shopper stampede whenever possible.

On the other hand, the accompanying logistical challenges are immense. Just getting enough bodies in place to handle the flow of merchandise is hard enough. The National Retail Federation predicts that retailers will fill between 700,000 and 750,000 temporary positions this holiday season. That doesn’t include the additional jobs that will be triggered in manufacturing, fulfillment and transportation. Now add in the extra capacity required in ships, trucks, trains, planes and warehouses – some of which must be carried throughout the year. With consumer demand notoriously unpredictable, retailers can only hope that they get the numbers right.

And so Amazon, fearless as ever, steps into the fray with a stroke of promotional genius: Prime Day. July 12, 2016 marked the e-commerce giant’s second annual promotion, and it triggered massive sales approaching $600m. Discounts were popping up on Amazon’s site as frequently as every five minutes, and consumers with Amazon Prime subscriptions took advantage in droves. (Amazon’s first Prime Day, in 2015, reportedly topped its sales on the previous Black Friday.)

Other retailers, especially Amazon’s brick-and-mortar rivals, were quick to respond. Wal-Mart, Best Buy, Sears and Target were among the big merchandisers to offer deals during the entire week in which Prime Day fell, in an attempt to whet consumers’ thirst for discounts.

One might assume, therefore, that the Prime Day mania has created yet another period of sharp and short-lived demand with which merchandisers must cope. But that’s not necessarily the case. Hari Pillai, chief executive officer of Speed Commerce, says Prime Day is actually causing a leveling out of demand over the year, taking some pressure off fourth-quarter sales. “Everybody understands that at the end of the day, capacity is finite or comes at a cost,” he said. “To the extent you can balance and level-load your business throughout the year, it helps.”

Of course, Amazon would prefer that Prime Day sales were in addition to regular consumer activity in the busy period between Halloween and New Year’s Day. But that’s only true to an extent. What Prime Day really achieves, in addition to the obvious bump in sales during a relatively quiet period in the middle of summer, is better utilization of capacity and inventory.

There’s still a need to ramp up staffing at the traditional seasonal peak approaches. But some of Speed Commerce’s customers have already launched promotional programs by as early as the 4th of July, Pillai says. They’re targeting buyers of gardening and home-care products. Then comes Halloween, which in recent years has evolved into a much greater source of sales, and which serves to ease retailers into the Thanksgiving and Christmas seasons.

One problem with a Prime Day-type promotion is that Amazon and others can’t engage in a hiring frenzy to support a one-day or one-week spike in sales. The cost would be far too high. Instead, says Pillai, they must become smarter and more efficient in their inventory and ordering strategies.

“It’s really [a matter of] blocking and tackling,” he says. “Are you sure about the product that you’re going to push? You don’t want an out-of-stock situation, so it’s important to get synchronized and be able to turn on a dime.”

Existing staff can be moved around, with heavier reliance on overtime, during short-term promotions. But merchandisers have to be thinking about more than the bodies in their warehouses. Contact centers must ramp up staffing as well, to handle the inevitable surge in customer calls.

On a tactical level, merchandisers need to identify promotional products and move then into high-velocity packing zones within the warehouse. Even a few minutes’ savings of fulfillment time can be crucial when deals are being squeezed into short periods of time, and customer expectations of fast service are even higher than usual.

Retailers must also sync up tightly with carriers, says Pillai, ensuring that the right capacity is available at the right time. Again, there’s precious little margin for error when deals are appearing every few minutes.

Don’t forget about the reverse-logistics component, Pillai stresses. “A record shipment day is also a record returns-generation day,” he says, “and it starts almost the next day. All the goodwill that you created as a retailer can be easily damaged if returns aren’t processed in a timely manner.”

Amazon is able to support Prime Day activity with its expertise in fast and efficient shipping. (Prime members get free two-day shipping on most orders.) To match that capability, other retailers need to identify their most time-sensitive products, and position them as close as possible to the prospective customer. They might not have the benefit of a nationwide network of huge fulfillment centers, but they can still pursue creative strategies that satisfy customer expectations of rapid fulfillment.

None of this will be easy for traditional retailers to achieve, especially for small to mid-sized players. And seasonal peaks will always be a part of omnichannel retailing. The survival of today’s brick-and-mortar merchandiser depends on its ability to match the agility, creativity and deep resources of Amazon, no matter how bumpy demand might be.

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The upside is obvious: increased sales. The Christmas shopping season accounts for more than 19 percent of total U.S. retail sales, and many retailers rely on those few weeks for a much larger share of their annual revenues. So it behooves them to set off a shopper stampede whenever possible.

On the other hand, the accompanying logistical challenges are immense. Just getting enough bodies in place to handle the flow of merchandise is hard enough. The National Retail Federation predicts that retailers will fill between 700,000 and 750,000 temporary positions this holiday season. That doesn’t include the additional jobs that will be triggered in manufacturing, fulfillment and transportation. Now add in the extra capacity required in ships, trucks, trains, planes and warehouses – some of which must be carried throughout the year. With consumer demand notoriously unpredictable, retailers can only hope that they get the numbers right.

And so Amazon, fearless as ever, steps into the fray with a stroke of promotional genius: Prime Day. July 12, 2016 marked the e-commerce giant’s second annual promotion, and it triggered massive sales approaching $600m. Discounts were popping up on Amazon’s site as frequently as every five minutes, and consumers with Amazon Prime subscriptions took advantage in droves. (Amazon’s first Prime Day, in 2015, reportedly topped its sales on the previous Black Friday.)

Other retailers, especially Amazon’s brick-and-mortar rivals, were quick to respond. Wal-Mart, Best Buy, Sears and Target were among the big merchandisers to offer deals during the entire week in which Prime Day fell, in an attempt to whet consumers’ thirst for discounts.

One might assume, therefore, that the Prime Day mania has created yet another period of sharp and short-lived demand with which merchandisers must cope. But that’s not necessarily the case. Hari Pillai, chief executive officer of Speed Commerce, says Prime Day is actually causing a leveling out of demand over the year, taking some pressure off fourth-quarter sales. “Everybody understands that at the end of the day, capacity is finite or comes at a cost,” he said. “To the extent you can balance and level-load your business throughout the year, it helps.”

Of course, Amazon would prefer that Prime Day sales were in addition to regular consumer activity in the busy period between Halloween and New Year’s Day. But that’s only true to an extent. What Prime Day really achieves, in addition to the obvious bump in sales during a relatively quiet period in the middle of summer, is better utilization of capacity and inventory.

There’s still a need to ramp up staffing at the traditional seasonal peak approaches. But some of Speed Commerce’s customers have already launched promotional programs by as early as the 4th of July, Pillai says. They’re targeting buyers of gardening and home-care products. Then comes Halloween, which in recent years has evolved into a much greater source of sales, and which serves to ease retailers into the Thanksgiving and Christmas seasons.

One problem with a Prime Day-type promotion is that Amazon and others can’t engage in a hiring frenzy to support a one-day or one-week spike in sales. The cost would be far too high. Instead, says Pillai, they must become smarter and more efficient in their inventory and ordering strategies.

“It’s really [a matter of] blocking and tackling,” he says. “Are you sure about the product that you’re going to push? You don’t want an out-of-stock situation, so it’s important to get synchronized and be able to turn on a dime.”

Existing staff can be moved around, with heavier reliance on overtime, during short-term promotions. But merchandisers have to be thinking about more than the bodies in their warehouses. Contact centers must ramp up staffing as well, to handle the inevitable surge in customer calls.

On a tactical level, merchandisers need to identify promotional products and move then into high-velocity packing zones within the warehouse. Even a few minutes’ savings of fulfillment time can be crucial when deals are being squeezed into short periods of time, and customer expectations of fast service are even higher than usual.

Retailers must also sync up tightly with carriers, says Pillai, ensuring that the right capacity is available at the right time. Again, there’s precious little margin for error when deals are appearing every few minutes.

Don’t forget about the reverse-logistics component, Pillai stresses. “A record shipment day is also a record returns-generation day,” he says, “and it starts almost the next day. All the goodwill that you created as a retailer can be easily damaged if returns aren’t processed in a timely manner.”

Amazon is able to support Prime Day activity with its expertise in fast and efficient shipping. (Prime members get free two-day shipping on most orders.) To match that capability, other retailers need to identify their most time-sensitive products, and position them as close as possible to the prospective customer. They might not have the benefit of a nationwide network of huge fulfillment centers, but they can still pursue creative strategies that satisfy customer expectations of rapid fulfillment.

None of this will be easy for traditional retailers to achieve, especially for small to mid-sized players. And seasonal peaks will always be a part of omnichannel retailing. The survival of today’s brick-and-mortar merchandiser depends on its ability to match the agility, creativity and deep resources of Amazon, no matter how bumpy demand might be.

Comment on This Article

How Amazon's Prime Day Creates New Challenges for Traditional Retailers