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You can’t beat Amazon for assortment and selection. The world’s largest online retailer, it has come a long way from its origins as an internet bookseller. Today there’s scarcely a consumer product on the market that can’t be had either directly through Amazon, or from one of its merchant partners.
The company’s network of warehouses is correspondingly huge. At last count, it was operating 107 fulfillment centers, totaling nearly 75 million square feet, with plans for 14 new sites in North America and five more outside the region over the next year. To get orders to buyers, it has launched Amazon Prime, offering two-day shipping for a flat annual fee, and Amazon Fresh, with same-day delivery in key markets. In addition, it’s said to be readying a fleet of its own trucks and drivers to provide even broader service within certain urban areas. Then there’s Amazon Prime Air, which plans to use drones to deliver items within 30 minutes or less, once the company gets authorization from the Federal Aviation Administration.
All of this adds up to a huge pool of virtual inventory, supported by an unmatched system of fulfillment. But brick-and-mortar retailers aren’t waving the white flag. They have certain advantages that could allow them to compete with the Amazon behemoth.
Big as they might be, individual stores can’t hope to offer the same assortment of product as a retailer like Amazon. But they can work with third-party fulfillment providers, in addition to drawing on their own warehouses, to ship any number of items directly to online customers. They can also provide a convenient location for same-day pickup of goods ordered over the internet.
CommerceHub, which links retailers with thousands of fulfillment sources, did $7bn in online business last year, according to founder and chief executive officer Frank Poore. He says the growth of virtual inventory in cyberspace has “definitely accelerated.”
The challenge is to have enough infrastructure on hand to meet the periods of highest demand, especially the Christmas shopping season, without over-investing in standing warehouses. But even the most expansive networks can’t always handle peak flows. Last Christmas, UPS and FedEx struggled to get packages to impatient consumers on a timely basis. It didn’t help that retailers were promising delivery within increasingly tight windows.
The inevitable result was late deliveries and frustrated buyers. “You try to build the church for Easter Sunday,” says Poore, “but sometimes it overflows.”
Deals with outsiders carry both big benefits and big risks. The failure of a third-party distributor to deliver on time can have a devastating effect on a major retailer’s brand reputation. It’s one thing for the retailer to draw from its own warehouses. But product being shipped on its behalf by an independent entity “is a whole different ballgame,” says Poore. If retailers and manufacturers are to compete with such a network, they need to tightly integrate their order-processing systems with fulfillment partners, and achieve visibility over all inventories that are available to them.
Amazon, of course, faces the same challenge with its many merchant partners. But the latter are subject to buyer evaluations, which determine their ongoing status with Amazon – who, after all, calls the shots.
Expect to see continued growth in the shipment of product directly from manufacturer to customer, Poore says. The traditional retailer often has no control over that relationship, even though its own reputation rests on the transaction going smoothly.
In just 20 years, Amazon has managed to surpass the biggest old-line retailers through huge investments and an intense focus on customer service. In response, they have come to rely increasingly on third parties, with access to tens of thousands of additional SKUs. Still, says Poore, many retailers today are “treading water,” even as they see their market share eroding.
The next big battle will occur in the last mile of a delivery. Amazon’s major investment in trucks and drivers should pay off handsomely, because it reduces the company’s dependence on the big parcel carriers. It also allows Amazon to ramp up its expedited and same-day offerings, even to the point of fulfilling orders within an hour or less. The company, says Poore, “is working to out-drone every other retailer.”
Amazon might have the capital to carry out its plans – founder and CEO Jeff Bezos has become legendary for his willingness to forgo short-term profits – but other players are rising up to challenge the monster in their own way. Both Google and eBay have private fleets of vehicles that offer same-day delivery of products ordered through their sites in a limited number of markets. Another recent entry, Deliv, teams up with shopping malls to provide same-day delivery on behalf of their retailing tenants. And passenger ride-sharing services such as Uber and Lyft are devising commercial equivalents that will offer transportation on demand for small packages.
All of which suggests that Amazon won’t be the only player left standing when the competitive dust settles, provided that traditional retailers can move beyond their limited resources to embrace an extended family of fulfillment and distribution partners, and make the concept of “virtual” inventory real.
