Figure 13.2 The growing complexity of fulfilling e-commerce customer orders
With the consumer in control, the variations of the traditional supply chain are multiplying rapidly. These variations are driving heightened complexity in retail and manufacturing supply chains. But historically the supply chain has been considered a cost centre for many organizations. When considering the ‘Amazon Effect’, now more than ever, supply chain models – which dictate where an order will be picked, packed and fulfilled over the last mile, in support of new paths to purchase – will be one of the most critical growth enablers for both retailer and manufacturer organizations. This is because Amazon has already been winning over the last mile for some time now.
Developing the last mile
Winning the last mile increasingly dictates who wins the overall race to reach the consumer – success means also beating the competition on frequency, as well as relevancy, and, ultimately, loyalty. Amazon’s fulfilment infrastructure is its competitive engine, in service of the speed and convenience that powers its flywheel. Without it, its two biggest supply chain-based growth generators – Prime and Fulfilment by Amazon (FBA) – could not be successful. In winning the last mile, Amazon is well known for wanting same-day and, in some areas, one-hour delivery to be the norm, where its customer proposition also makes it just as easy to order whatever you want. In that, it is a genuine disruptor.
Take, for example, YouTuber Rob Bliss, who decided to use Amazon’s Prime Now to deliver goods to the homeless community around New York City. He asked each person what they needed and ordered them. Donations included socks, shoes, sleeping bags, long johns, and other hygienic items. Within hours, the items were delivered, while his videos and idea went viral.8
In Chapter 6 we saw how much of its last-mile strategy has also been built on the foundations it is using to gain ground in the grocery market. But it’s worth restating how its massive AWS computing capability powers the complex algorithms that orchestrate its massive logistics capability and manage the complexity of getting an order processed, picked, shipped and packed to a street corner in downtown Manhattan within a matter of minutes. The AWS pillar underpins Amazon’s delivery mechanisms in the most literal sense.
If you look at the final part of the shopping process in isolation, it starts from the time that the customer decides to buy an item and place an order online. This is whether they are using their own device to place the order and complete the purchase or one belonging to the retailer instore, including checkouts with e-commerce integration, kiosks, or other ‘endless aisle’ applications. Here, we’ve already seen how Amazon has enticed Prime members into its book stores with preferential pricing. It also highlights the ease of using their existing online accounts to speed payment, just as it set the standard for 1-click purchasing, which simplifies the most laborious parts of the online checkout process – filling in delivery and payment information. As we acknowledged earlier in the book, Amazon directly influenced the widespread adoption of this feature with its 1-click patent; while its Dash Buttons and Wand simple auto-replenishment, as well as its Alexa voice assistant embedded in its technology hardware range, can all perform the search, browse and discovery stages of the online shopping process hands free, right through to the order and putting items in the customer’s basket for checkout.
When it comes to checkout, Amazon has also built a major play. Amazon Payments, the online payments gateway gives Amazon.com customers the option to pay with their Amazon accounts on external merchant websites. Just like its rivals Google Checkout and PayPal, Amazon Payments effectively enables customers to use one account from a trusted provider for all their online payments, while merchants are charged a percentage of the transaction and a transaction fee. One of the reasons third-party merchants like Amazon Pay is that its customers never leave the merchant’s website during the checkout process and can pay using any method supported by Amazon. It is also device agnostic and merchants receive a customer’s name and verified e-mail at check-in. It has also built API integrations to some of the e-commerce platforms that are popular with mid-sized merchants, such as BigCommerce, Magento and Shopify, so their users can activate a free plug-in to add the Amazon Payment option to their checkouts.
In the race for the online payments space, however, Amazon Payments cannot claim market dominance, although its client base makes it a major player. It can access 300 million-plus active customer accounts, while payments gateway rival PayPal has some 200 million. But Apple last publicly stated in 2014 that it had 800 million iTunes accounts, which require payment information, while industry estimates put Google Play accounts at around the same number. Meanwhile, the competition from social media is mounting. Facebook said at the beginning of 2018 that it had over 1.45 billion daily active users and, although its payments processing revenue is a tiny proportion of its earnings in comparison to its advertising revenues, it declared $711 million in payments and other fees in 2017 from sources including in Facebook Payments and Marketplace.9 But you need not necessarily register payment details in order to use the social network, unlike some of the others. Despite this, while most of the others – with the exception of PayPal – have larger user bases, Amazon is the only retailer with this extended capability (though Apple has retail stores to sell its own consumer electronics products and services, and also offers Apple Pay). The only real online rival in both size, scale and sector in this regard is Alibaba subsidiary AliPay, which had 520 million registered users as of 2018.
Checkout to go
The main reason for considering purchase as part of the fulfilment process and its influence over the last mile is to put the Amazon Go store concept into its proper context here. Completely eliminating the need for checkout and payment points the way towards store of the future concepts that are more focused on fulfilment. The previous two chapters focused on how retailers can look to reduce friction at every stage of the shopping journey – from search and browsing to discovery. But, in terms of those processes that may discourage conversion instore, checkout and payment loom front and centre; retailers should take a tip from Amazon and see stores as a way of letting customers get hold of the products they want with as little effort and inconvenience as possible.
UK grocer Waitrose has trialled a cashless store in its ‘little Waitrose’ format, while Walmart and Kroger certainly heeded the Amazon Go threat in the US, with both developing checkout-less shopping services but with differing fortunes. In 2014, Walmart initially tested its ‘Scan & Go’ mobile app that allowed customers to scan the barcodes of selected products and then check them out without having to complete an additional stop at a checkout – although those customers did have a dedicated Express lane to exit the store with their purchases, for security purposes. Then, just before the Amazon Go store opened to the public in Seattle at the beginning of 2018, Walmart announced that it was expanding its 25-store trial to 100 stores across the US after successfully implementing a similar service at its wholesale chain, Sam’s Club. But, just as suddenly as it made its announcement, six months later it said it was abandoning the trials at Walmart stores due to low uptake. Some in the industry said customers found it difficult to manage their device, the product they were scanning, and their basket, trolley or shopping bag; that theft was also an issue. Walmart said it will continue to offer its Scan & Go service using proprietary handheld scanning guns, with no risk of them running out of battery life, and dedicated trolley holders. Kroger has fared slightly better, rolling out a similar mobile app and handheld scanner-based service it calls ‘Scan, Bag, Go’, to 400 stores in 2018, having first trialled the concept a year before. One last point of note here is that Waitrose was first to roll out proprietary handheld scanning guns… in 2002!
So, Amazon’s checkout and payment strategy certainly ensures it has a role to play in the ordering and payment processes of other retailers as it continues to revolutionize this part of the shopping journey from a physical perspective too. Although it does not include these services in its third-party Marketplace financials, let’s not forget this part of the flywheel in our consideration of Amazon’s role in the order, pay and fulfilment process, where Amazon provides the entire e-commerce front-end, online shopping service for third-party merchants.
Where every part of the Amazon infrastructure, offering and ecosystem reinforces its core aim, to sell ‘more stuff’, its last-mile proposition very much reinforces the core values of its offer: choice, convenience and speed. The multi-track Amazon last mile extends from auto-replenishment to Prime and its free, unlimited two-day delivery offer, or same day depending on the delivery location.
It’s worth considering how well Amazon fares in using the mechanics of subscription to drive increased sales among members. Certainly, led by Amazon’s example with Prime, subscription services have been growing in popularity for a while. For example, a recent survey found British consumers were spending on average over £2 billion ($2.6 billion) annually on delivery subscriptions.10 Of course, the most popular subscription service was Amazon Prime, with 61.4 per cent of those who took part in the survey signed up to benefit from the service. Other popular subscriptions revealed by the poll were: healthy snacks company Graze (12.3 per cent), fashion and homewares retailer nextunlimited (9.7 per cent), fast fashion pureplay ASOS Premier (8.8 per cent), Pact Coffee (8.5 per cent) and beauty provider Glossybox (7.8 per cent). Respondents also said both convenience (45 per cent) and value for money (60 per cent) were the key drivers behind them signing up, while almost half (48.9 per cent) admitted to buying items they wouldn’t have otherwise bought if they hadn’t had the subscription service. It’s easy to see why Unilever was willing to pay $1 billion for Dollar Shave Club in 2017.11 The direct-to-consumer (D2C) acquisition gave the brand giant a recurring revenue source and predictable demand from a loyal customer base.
Recurring revenues
Melanie Darvall, director of marketing and communications at Whistl, the UK postal delivery company that sponsored the subscription survey, commented that the key to launching a successful subscription service is finding the right balance to make the offering beneficial for both parties – the retailer and consumer. ‘Ensuring the quality of product or value of discount is high enough to make your customer base loyal and consider spending money outside of what is essentially a monthly “taster” service can certainly be a challenge, but once you’ve cracked that side of things, you’ll reap the rewards and hopefully retain a happy customer base’, she commented.12 To Darvall’s point, a recent Amazon advertising campaign used the slogan ‘Amazon Prime Delivers More’, in reference to the free video and music streaming Prime members have access to, alongside free delivery, among its many other benefits.
Amazon also raised the order fulfilment stakes with the introduction of Prime Now, which, as previously discussed, introduced one-hour delivery for subscribers in eligible urban shipping areas. Prime Now serves as a potent example of the behemoth’s ability to build on its innovations, but also of how potent a force its speed to market can be. Now Amazon’s growing Prime subscriber base is driving its fulfilment capacity demands.
So, in the rest of this and the next chapter, we’ll look at how it is building out its last-mile fulfilment logistics proposition, including current and future innovation through Prime Now, lockers and ultra-rapid delivery by drone, as well as FBA, but also how its supply chain strategy is evolving to encompass added online-to-offline (O2O) capabilities in a growing array of other sectors, including fashion and, of course, grocery too.
Building out the last mile
Amazon was actually a relative latecomer to the instant delivery space. At launch, industry watchers questioned whether Amazon could afford to dump money into a war with the rash of on-demand start-ups springing up to challenge traditional retail fulfilment models in response to consumers’ insatiable appetite for instant gratification. Others suggested it had no choice but to go head-to-head with the Postmates, Shipts, Instacarts and Delivs of this world, where these competitors own no products and fulfil customer orders on behalf of their retailer clients who are also playing catch-up to Amazon on same-day delivery, including the Walmart-to-Go initiative and Tesco’s one-hour delivery tie-up with Quiqup in London.
Direct competitors also responded quickly: eBay, for example, differentiated its same-day delivery service by adding 80 small businesses in Brooklyn to the eBay Local programme. This was seen as an acknowledgment of the fact Amazon was potentially cutting its Marketplace merchants out of its new last-mile development by using Prime and Prime Now selections to favour its nascent private label ranges, which include nappies and other everyday essentials. But it does highlight some local retailer partnerships, such as with Spirited Wines, Morrisons and Booths in the UK and regional US grocer New Seasons Market, for example.
eBay had, in fact, bought the start-up responsible for the world’s fastest e-commerce delivery – Shutl – for an undisclosed sum in 2013, a year before Prime Now launched. Shutl expanded its deliveries for purchases made via the e-commerce sites of major retailers’, including Argos and B&Q Tradepoint, as well as fashion brands like Karen Millen, Oasis, Coast and Warehouse, in as little as 90 minutes across 11 cities way back in 2011. Making its first delivery in 2010, Shutl claims its fastest was completed in 15 minutes, making it an early developer of the algorithms required to match local independent, third-party couriers with orders and pickup points based on cost, location and capacity. Yet eBay took three years to fully incorporate the start-up into its operations, launching a new delivery service for its UK sellers in 2017 based on a platform built from scratch by Shutl. Merchants weren’t happy that there was no option to opt out of using its express delivery services. One posted on a merchant noticeboard: ‘Shutl could be an asset if they redesign it and make it work efficiently, it’s another example of eBay launching a service before it is fully ready. It is of course just a booking agent like P2Go, basically a middle man between seller and postal carrier. One label per sheet of paper, lack of choice, compensation limited, all are problems at the moment.’
Competitive context
Google, in comparison to eBay, was quicker to launch a same-day and overnight delivery service from local and national US retailers in 2013 with Google Shopping Express, which was later shortened to Google Express. Delivery is carried out via branded vehicles and third-party courier firms and customers must have a Google Play account. Although the retailers can add delivery surcharges, deliveries are charged at $5 per stop, and delivery windows come nowhere near those of Prime Now, with a three- to five-hour window. But it has seen gradual expansion, in part because its voice assistant integration offers retailers a capable alternative to Amazon’s Alexa, signing deals with Walmart, Costco, Target and Carrefour.
Given rivals Google and eBay’s apparent lack of speed to market or ability to rapidly scale their rapid fulfilment efforts, it’s easier to understand Amazon’s relatively measured entry into express delivery with Prime Now in 2014. At its launch, CNET senior editor, Dan Ackerman, pointed to the huge expense of servicing and expanding Prime Now. He pointed to ‘the manpower, the infrastructure to not just put something in a box and mail it but to actually put it on the back of a bike messenger in a city and send it out.’13 In that same year the free shipping (and rapid Prime delivery) that Amazon uses to delight its customers and best the competition cost more than $4.2 billion or nearly 5 per cent of net sales. Stephenie Landry, Amazon Prime Now vice president, addressed questions about the cost of Prime Now at an industry event in 2017.14 ‘Ultra-fast shopping is an expensive proposition’, she admitted. ‘It isn’t easy to do but the only way to learn about it is to be in the game.’ But, in the true spirit of living the Amazon Leadership Principles, Landry added, ‘As leader of this business, I don’t spend much of my time thinking about delivery costs; I really think about customer love – how do I make a customer love this product? I would take a cost problem over a customer love problem any day.’ 15
Food takeaway expansion
In addition to consolidating the wider benefits of Prime within Amazon’s ecosystem – feeding the flywheel – Amazon also added restaurant delivery to the services available with Prime Now. Launched in the summer of 2015, offering free two-hour delivery and one-hour delivery for $7.99, Amazon Restaurants is an online food ordering service available in 20 urban areas throughout the US and London, England. As of 2018, the service had over 7,600 restaurants offering delivery through the Prime Now service. As well as independent restaurants, the service includes chains such as Red Robin, Applebee’s, Olive Garden and P.F. Chang’s. Amazon Restaurants is available on the Prime Now mobile app and on Amazon’s website. One-hour delivery is free once users meet a certain spending amount, determined by the restaurant using a comparable business model to those of Just Eat, Delivery Hero, foodpanda, foodora and a whole host of other restaurant food delivery intermediaries. Interestingly, arguably the king of fast food giants, McDonalds, has been operating its McDelivery service in 25 countries; it first launched in the US in 1993, predating the rapid food delivery gold rush. The latest McDelivery development, however, shows just how disruptive third-party delivery intermediaries have become, rolling out in the UK via Uber Eats in 2018.
Deliveroo is worth a mention here, not only for the fact it shares similarities in its rapid restaurant food delivery model with the Just Eats of this world, but that it has also taken on some of the food production as well. Founded in London in 2013, its fleet of independent but branded couriers deliver both sole trading and chain restaurant fare in 200 cities across 12 countries. But Deliveroo has gone on to launch its pop-up Editions ‘dark’ kitchens in its home market in 2017. The so-called ‘RooBox’ takeaway-only kitchens prepare branded food from the likes of Thai chain Busaba Eathai, US-style MeatLiquor diners and Franco Manca pizza parlours, from locations like industrial estates and disused car parks, to reduce the set-up costs in comparison to a full-service restaurant.
Also, like Deliveroo, Instacart has been learning from the clients it serves. Brittain Ladd, industry consultant and former Amazon executive, wrote:
Instacart is given complete and unfettered access to every detail and costs of the retailers who signed them. Instacart has been actively increasing the amount of capital they raise so that they can become a grocery retailer, wholesaler, and manufacturer of private label products. The grocery retailers who viewed Instacart as being their saviour taught Instacart their business, including their strengths and weaknesses. As Instacart expands their business model, they’ll be able to use their knowledge of their grocery customers to their advantage.16
Driving last-mile demand
So, we can see how expansion of services, including Amazon Restaurants, AmazonFresh and Pantry, respond to growing sector opportunities through the mechanisms of Prime Now. They may have Amazon’s scale behind them to add significant momentum to its flywheel, but they must compete against increasingly diverse rivals.
One area where Amazon has sought to stay ahead of the competition when it comes to the differentiation of Prime Now is, of course, the actual online shopping experience. A good example of this is the tracking capability first introduced in the US with a soft launch in 2017, and which Amazon began quietly ramping up the following year. It gives customers a real-time map of their delivery’s journey, as well as how many other stops or deliveries your courier will make before yours. But early reports suggest that the system is only compatible with parcels fulfilled by its own logistics network and not those handled by the US Postal Service, UPS or FedEx. However, the fact that the tracking capability also eliminates missed deliveries and fraud, means it is a system Amazon is likely going to want to roll out to more Prime users in future.
Notes
1 Video (2017) ‘You do not want to give Jeff Bezos a seven-year head start,’ CNBC, 8 May. Available from: https://www.cnbc.com/video/2017/05/08/buffett-you-do-not-want-to-give-jeff-bezos-a-seven-year-head-start.html [Last accessed 5/11/2018].
2 Lexis Nexis (2014) Annual Report: True cost of fraud study: post-recession revenue growth hampered by fraud as all merchants face higher costs, LexisNexis, August. Available from: https://www.lexisnexis.com/risk/downloads/assets/true-cost-fraud-2014.pdf [Last accessed 7/6/2018].
3 Wells, Jeff (2017) Report: France’s drive is a growth model for U.S. grocery e-commerce, RetailDive, 20 July. Available from: https://www.fooddive.com/news/grocery–report-frances-drive-is-a-growth-model-for-us-grocery-e-commerce/447522/ [Last accessed 6/6/2018].
4 Global Data (2017) Click & Collect in the UK, 2017–2022, GlobalData, December. Available from: https://www.globaldata.com/store/report/vr0104ch–click-collect-in-the-uk-2017-2022/ [Last accessed 6/6/2018].
5 IMRG (2016) IMRG Collect+ UK Click & Collect Review, IMRG, 14 June. Available from: https://www.imrg.org/data-and-reports/imrg-reports/imrg-collect-plus-uk-click-and-connect-review-2016/ [Last accessed 6/6/2018].
6 Gov.uk (2016) Case study: Amazon lockers in libraries, Gov.uk, 5 January. Available from: https://www.gov.uk/government/case-studies/amazon-lockers-in-libraries [Last accessed 7/6/2018].
7 Schlosser, Kurt (2017) Amazon’s new ‘Hub’ delivery locker system is already a hit in San Francisco apartment building, GeekWire, 25 August. Available from: https://www.geekwire.com/2017/amazons-new-hub-delivery-locker-system-already-hit-san-francisco-apartment-building/ [Last accessed 7/6/2018].
8 Lang, Cady (2017) How you can use Amazon Prime to help people in need this holiday season, Time, 12 December. Available from: http://time.com/5061792/amazon-prime-charity/ [Last accessed 2/6/2018].
9 Facebook (2018) Facebook Quarterly Earnings Slides Q1 2018, page 4, Facebook Investor Relations, 25 April. Available from: https://investor.fb.com/investor-events/event-details/2018/Facebook-Q1-2018-Earnings/default.aspx [Last accessed 6/6/2018].
10 Whistl (2018) Press release: Brits spending over £2bn on average a year on delivery subscriptions, Whistl, 25 May. Available from: http://www.whistl.co.uk/news/subscription-services-a-whistl-survey/ [Last accessed 6/6/2018].
11 Primack, Dan (2017) Unilever buys Dollar Shave Club for $1 Billion, Fortune, 20 July. Available from: http://fortune.com/2016/07/19/unilever-buys-dollar-shave-club-for-1-billion/ [Last accessed 24/4/2018].
12 Morrell, Liz (2018) British consumers spending more than £2 billion a year on delivery subscriptions, edelivery, 14 May. Available from: https://edelivery.net/2018/05/british-consumers-spending-2-billion-year-delivery-subscriptions/ [Last accessed 13/9/2018].
13 Staff writer (2014) Instant gratification: Amazon launches 1-hour shipping in Manhattan, CNBC, 18 December. Available from: https://www.cbsnews.com/news/amazon-launches-1-hour-shipping-in-manhattan/ [Last accessed 6/6/2018].
14 Wienbren, Emma (2017) Two-hour deliveries will be normal, says Amazon Prime Now VP, The Grocer, 20 March. Available from: https://www.thegrocer.co.uk/channels/online/two-hour-deliveries-will-be-normal-says-amazon-prime-now-vp/550248.article?rtnurl=/# [Last accessed 6/6/2018].
15 Galloway, Scott (2015) The future of retail looks Like Macy’s, not Amazon, Gartner L2, 1 May. Available from: https://www.l2inc.com/daily-insights/the-future-of-retail-looks-like-macys-not-amazon [Last accessed 7/6/2018].
16 Ladd, Brittain (2018) The Trojan Horse: Instacart’s covert operation against grocery retailers, LinkedIn, 18 March. Available from: https://www.linkedin.com/pulse/trojan-horse-instacarts-covert-operation-grocery-retailing-ladd/ [Last accessed 4/9/2018].