Monday, February 25, 2013

Amazon: The Faux Retailer

Amazon’s corporate mission says it for the most part: “We seek to be Earth’s most customer-centric company for four primary customer sets: consumers, sellers, enterprises, and content creators.” Three out of their four constituencies are non-consumer. Unlike other retailers, Amazon has been investing very heavily in the back-end logistics and fulfillment technology (Kiva Systems, warehouses totaling almost 50 million sqft) in addition to their intense focus on enterprise technologies (AWS, Amazon Web Services now hosting SAP) and consumer devices (Kindle) and technology (IVONA). But almost everybody thinks of Amazon as a retailer and keeps comparing them to other retailers. Is that fair?

There is no doubt that Amazon started as a retailer sans the stores in the then new and emerging world of online retail. There is also no doubt that retailers are their most obvious competition and they do have a lot of common business objectives. Amazon single handedly has hastened the speed and extent of change that we now take for granted in retailing. They pioneered the concepts of customer reviews, you-might-also-like, people-who-bought-this-also-bought, low prices, fast fulfillment and delivery including their newest “same-day delivery” efforts, delivery boxes to avoid missed carrier appointments, subscribe-and-save, hassle-free returns, Amazon prime bundling 2-day shipping with host of other services like media streaming and book-lending, and digital books and devices like Kindle. The list goes on and these are only some of their consumer-facing innovations.

But Amazon has also been big on innovations on the back-end which in turn enable these consumer-facing innovations like investing in warehousing facilities closest to their biggest customer hubs, technology platforms built for e-commerce including hardware systems like Kiva, hosting thousands of store-fronts that collectively provide millions of products: Amazon Marketplace – definitely the largest under a single brand-umbrella, “fulfillment by Amazon”, “checkout by Amazon”, Kindle Publishing, and programs like Amazon Affiliates.

The fact is that Amazon today is first and foremost the largest retailing platform hosting thousands of stores enabled through Amazon services than simply an online retailer. But how does that make Amazon a faux retailer?

Retail has three core pillars: Merchandising, Stores, and Logistics. One of the biggest focus and risk areas for a retailer is merchandising: Deciding what to sell. By enabling thousands of small merchants (who are not Amazon employees) Amazon has practically sub-contracted the biggest retail function and with it a large part of the risk associated with unwanted merchandise!

Stores and logistics are the other two retailing pillars. Being an online retailer, Amazon obviously does not have to worry about the stores. That leaves Logistics: Once again, rather than limiting to create conventional logistics infrastructure of a typical retailer, Amazon developed a logistics services platform complete with technology, hardware, and operations management that gives them the advantage of scale as they manage receiving and fulfillment services for thousands of merchants, as well as enables them to create a large warehouse-network to enable most optimal shipping for their own merchandise.

Then comes their AWS (Amazon Web Services) or their cloud as it is better known. Once again, Amazon was among the pioneers to develop the cloud services for enterprises and quietly announced hosting SAP in their 4th quarter press release, “AWS announced that SAP Business Suite is now certified to run on the AWS cloud platform. Enterprises running SAP Business Suite can now leverage the on-demand, pay as you go AWS platform to support thousands of concurrent users in production without making costly capital expenditures for their underlying infrastructure. AWS also announced that SAP HANA, SAP’s in-memory database and platform, is certified to run on AWS and is available for purchase via AWS Marketplace.” GIGAOM estimates that AWS is now over 1.5 billion dollars business for Amazon. Granted they may not be making money on it yet (not big money, anyway), but the potential upside of having the world’s best-known ERP available on AWS is huge.

Finally, there is Kindle: Now evolved into a tablet and competing with other tablets more often than the e-readers. Amazon recently bought IVONA that powers “the “Text-to-Speech,” “Voice Guide” and “Explore by Touch” features on Kindle Fire tablets”. What might that indicate? That Amazon will likely continue to enhance their foray into tablets (or consumer devices) at least in the short-term!

With such a un-conventional portfolio, what type of company does Amazon make? Definitely no conventional label works. However, there are two broad themes that emerge:

  1. Technology: This has always been their strong point and Amazon has never been shy about putting it to use. Their seller-platform, logistics services, AWS, and tablets all point to their single strength: Ability to understand, create/develop, and exploit technology unlike any other company we have seen so far.
  2. Logistics: This has emerged as an Amazon strength for the last few years, but their unique way of developing it into a commercial platform is amazing. Suddenly, all the mom-and-pop shops out there can provide you with world-class ordering experience including shipping and tracking and they only have to worry about what to sell. What a way to unleash commerce and entrepreneurship!

Retailer? Technology? 3PL? Consumer Electronics? Enterprise Technology? You decide, but whatever they may be, they are investing in the infrastructure of tomorrow and laser-sharp focus on making their customers happy - without worrying about appeasing Wall Street’s myopic bosses. And, that is more than you can about any other public company of comparable size and visibility!

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Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

© Vivek Sehgal, 2013, All Rights Reserved.

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