Executive Briefings

How Retailers Can Meet the Challenge of Amazon

The outsourcing of logistics is supposed to save businesses big money. They pay only for the services they need; they turn over complex operations to a pro, and they get expensive assets off their books. It all makes eminent sense - unless your name is Amazon.com Inc.

How Retailers Can Meet the Challenge of Amazon

In fact, Amazon founder and chief executive officer Jeff Bezos has made a career out of upending traditional financial expectations. For years, he's been willing to trade profitability for market share and breadth of products and services. Just when he's on the verge of showing a consistent profit, he plunges the company back into red ink.

Amazon’s latest gambit in its march toward world domination targets the acquisition of logistics assets. That’s hardly a departure from prior strategy; the company’s success to date stems largely from its ability to move product to the customer in as fast and efficient a manner as possible. But Amazon built that capability on the backs of established powerhouses such as FedEx and UPS, along with a handful of third-party logistics providers. For the most part, it’s been willing to move packages on the trucks and planes of existing operators.

That dependency might now be on the verge of eroding, if recent rumors are true. Amazon is reported to be rolling out a fleet of tractor-trailers and chartering its own aircraft under the name Project Aerosmith. (In the case of the latter, the underlying service provider is said to Air Transport Services Group.) In fact, Amazon undertook multiple flights in Europe during the 2015 Christmas shopping season.

There’s plenty of precedent for the moves. Amazon already has in place a fleet of delivery trucks to support its Amazon Fresh service, in addition to an Uber-like operation for home package deliveries under the name Amazon Flex. And, of course, there’s the company’s sprawling network of self-operated fulfillment centers, not to mention the delivery drones that it’s readying for action the moment it receives the regulatory green light from the Federal Aviation Administration. So it’s no surprise that Bezos should act to assert additional control over his e-commerce empire.

Still, you have to wonder about the wisdom of taking on so many capital-intensive assets in a business that operates on perilously thin margins (assuming it even makes a profit). Amazon appears to have been motivated by the service failures experienced by UPS and FedEx during past holiday seasons – failures for which Amazon got blamed by the customer. Given Bezos’s obsession with reliable delivery, that outcome is unacceptable.

Amazon is also determined to overwhelm traditional retailers such as Wal-Mart Stores, Inc., which are struggling to match its prowess with their own e-tailing setups. And the company is well on the way to achieving that goal. It controlled 36 percent of all e-commerce transactions during the most recent Black Friday, according to Jeremy Bodenhamer, chief executive officer of e-commerce platform provider ShipHawk.

“What Amazon wants,” says Bodenhamer, “is every retailer to wave the white flag and resign to selling on Amazon Fulfillment.”

Walmart, which itself seemed invincible for years, is finding it tough to respond. Recently the retailer announced that it would close 269 stores globally, including 154 in the U.S., saying the action was driven by the need “to ensure assets were aligned with strategy.” Translation: Profits are slipping. And the challenge from Amazon is a major reason.

So what can Walmart and other old-line retailers do in order to stay relevant? They can start, says Bodenhamer, by not trying to be like Amazon. Walmart has something that Amazon doesn’t: an extensive network of retail outlets, which constitute “its biggest asset.” According to a study by University of Kentucky geographers Matthew Zook and Mark Graham, 96 percent of the U.S. population lives within 20 miles of a Walmart store. Those locations could serve as efficient fulfillment points for online orders.

It wouldn’t take that much, Bodenhamer argues, for Walmart to create its own delivery service, and use the stores as a means for getting product to e-tail customers faster and more cheaply than Amazon ever could.

“It’s not a massive investment,” he says, “just a different usage of assets. They created real-time inventory management. If anybody can make it available in an e-commerce setting, it’s Walmart.” Instead, the retailer appears to be investing in a separate e-commerce channel, building new warehouses in regions where stores already exist.

Fulfilling internet orders out of brick-and-mortar stores is no easy task. But a number of retailers are beginning to do just that, in order to make the most of their limited pools of inventory. In the process, they avoid the need to maintain redundant supply networks. Notes Bodenhamer: “What the consumer wants is right there already.”

For a traditional retailer like Walmart, thriving in the age of the omnichannel requires systems that can manage and track inventory regardless of how it’s flowing to the buyer. “Theoretically,” Bodenhamer says, “Walmart is on the cutting edge of knowing exactly where everything is in real time.”

On the transportation side, Walmart could tap into a local delivery network much like those being crafted by independent upstarts like Deliv, Postmates and TaskRabbit – or, for that matter, Amazon Flex. Bodenhamer finds it hard to believe that Walmart couldn’t match those services with relative ease.

Other big retailers should be taking similar steps to draw on the resources of their physical locations, Bodenhamer says. Nordstrom is among those to allow online purchases to be returned to stores. The policy frequently results in the customer purchasing additional items on impulse. Meanwhile, he says, FedEx and UPS should be adjusting their services to better align with the e-commerce needs of the retailer.

Whether retailers can or should follow Amazon in its bid to insource logistics is another matter entirely. Ralph Lauren recently announced that it would take over direct management of a North Carolina distribution facility, while continuing to employ outside logistics providers in selected markets. But retailers needn’t take that drastic a step to keep pace with Amazon. Instead, they should be drawing on their natural strengths to fend off the e-tailer’s challenge – and Bezos’s seemingly bottomless pockets.

“People love Amazon,” Bodenhamer says, “but I’m not sure that extends past a friction-free, low-cost transaction. If you can offer better service – anything that customers really value – I think those customers are available for the taking.”

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In fact, Amazon founder and chief executive officer Jeff Bezos has made a career out of upending traditional financial expectations. For years, he's been willing to trade profitability for market share and breadth of products and services. Just when he's on the verge of showing a consistent profit, he plunges the company back into red ink.

Amazon’s latest gambit in its march toward world domination targets the acquisition of logistics assets. That’s hardly a departure from prior strategy; the company’s success to date stems largely from its ability to move product to the customer in as fast and efficient a manner as possible. But Amazon built that capability on the backs of established powerhouses such as FedEx and UPS, along with a handful of third-party logistics providers. For the most part, it’s been willing to move packages on the trucks and planes of existing operators.

That dependency might now be on the verge of eroding, if recent rumors are true. Amazon is reported to be rolling out a fleet of tractor-trailers and chartering its own aircraft under the name Project Aerosmith. (In the case of the latter, the underlying service provider is said to Air Transport Services Group.) In fact, Amazon undertook multiple flights in Europe during the 2015 Christmas shopping season.

There’s plenty of precedent for the moves. Amazon already has in place a fleet of delivery trucks to support its Amazon Fresh service, in addition to an Uber-like operation for home package deliveries under the name Amazon Flex. And, of course, there’s the company’s sprawling network of self-operated fulfillment centers, not to mention the delivery drones that it’s readying for action the moment it receives the regulatory green light from the Federal Aviation Administration. So it’s no surprise that Bezos should act to assert additional control over his e-commerce empire.

Still, you have to wonder about the wisdom of taking on so many capital-intensive assets in a business that operates on perilously thin margins (assuming it even makes a profit). Amazon appears to have been motivated by the service failures experienced by UPS and FedEx during past holiday seasons – failures for which Amazon got blamed by the customer. Given Bezos’s obsession with reliable delivery, that outcome is unacceptable.

Amazon is also determined to overwhelm traditional retailers such as Wal-Mart Stores, Inc., which are struggling to match its prowess with their own e-tailing setups. And the company is well on the way to achieving that goal. It controlled 36 percent of all e-commerce transactions during the most recent Black Friday, according to Jeremy Bodenhamer, chief executive officer of e-commerce platform provider ShipHawk.

“What Amazon wants,” says Bodenhamer, “is every retailer to wave the white flag and resign to selling on Amazon Fulfillment.”

Walmart, which itself seemed invincible for years, is finding it tough to respond. Recently the retailer announced that it would close 269 stores globally, including 154 in the U.S., saying the action was driven by the need “to ensure assets were aligned with strategy.” Translation: Profits are slipping. And the challenge from Amazon is a major reason.

So what can Walmart and other old-line retailers do in order to stay relevant? They can start, says Bodenhamer, by not trying to be like Amazon. Walmart has something that Amazon doesn’t: an extensive network of retail outlets, which constitute “its biggest asset.” According to a study by University of Kentucky geographers Matthew Zook and Mark Graham, 96 percent of the U.S. population lives within 20 miles of a Walmart store. Those locations could serve as efficient fulfillment points for online orders.

It wouldn’t take that much, Bodenhamer argues, for Walmart to create its own delivery service, and use the stores as a means for getting product to e-tail customers faster and more cheaply than Amazon ever could.

“It’s not a massive investment,” he says, “just a different usage of assets. They created real-time inventory management. If anybody can make it available in an e-commerce setting, it’s Walmart.” Instead, the retailer appears to be investing in a separate e-commerce channel, building new warehouses in regions where stores already exist.

Fulfilling internet orders out of brick-and-mortar stores is no easy task. But a number of retailers are beginning to do just that, in order to make the most of their limited pools of inventory. In the process, they avoid the need to maintain redundant supply networks. Notes Bodenhamer: “What the consumer wants is right there already.”

For a traditional retailer like Walmart, thriving in the age of the omnichannel requires systems that can manage and track inventory regardless of how it’s flowing to the buyer. “Theoretically,” Bodenhamer says, “Walmart is on the cutting edge of knowing exactly where everything is in real time.”

On the transportation side, Walmart could tap into a local delivery network much like those being crafted by independent upstarts like Deliv, Postmates and TaskRabbit – or, for that matter, Amazon Flex. Bodenhamer finds it hard to believe that Walmart couldn’t match those services with relative ease.

Other big retailers should be taking similar steps to draw on the resources of their physical locations, Bodenhamer says. Nordstrom is among those to allow online purchases to be returned to stores. The policy frequently results in the customer purchasing additional items on impulse. Meanwhile, he says, FedEx and UPS should be adjusting their services to better align with the e-commerce needs of the retailer.

Whether retailers can or should follow Amazon in its bid to insource logistics is another matter entirely. Ralph Lauren recently announced that it would take over direct management of a North Carolina distribution facility, while continuing to employ outside logistics providers in selected markets. But retailers needn’t take that drastic a step to keep pace with Amazon. Instead, they should be drawing on their natural strengths to fend off the e-tailer’s challenge – and Bezos’s seemingly bottomless pockets.

“People love Amazon,” Bodenhamer says, “but I’m not sure that extends past a friction-free, low-cost transaction. If you can offer better service – anything that customers really value – I think those customers are available for the taking.”

Comment on This Article

How Retailers Can Meet the Challenge of Amazon