‘Amazon makes money differently from a conventional publisher. It is an infrastructure player.’
Nick Harkaway, novelist1
Having seen how Prime and Prime Now expand Amazon’s reach across categories and act as a conduit for the introduction of new services to strengthen its flywheel effect and fuel its rapid growth, it is important to think about how the cost of satisfying such impatient and varied demand impacts Amazon’s broader fulfilment logistics strategy. Consider for instance that Amazon’s first Prime Now fulfilment centre (FC) was in midtown Manhattan, opposite the Empire State building, and dedicated Prime Now teams work to fulfil orders via a variety of methods. ‘We are taking our operational expertise that we’ve developed at our more than 100 fulfilment centres around the globe and bringing it to New York to fuel this service’, declared Kelly Cheeseman, Amazon communications spokesperson, at its launch. ‘Delivery associates will walk, take public transportation, bike or drive to deliver to customers.’
The Prime Now FC locations are miniature ‘Hubs’, rather than full-blown Amazon FCs. They are smaller: for example, the Prime Now Kenosha, Milwaukee hub covers 25,000 square feet, which is equivalent to around twice the size of an average urban grocery store. Compare this in size to its mega 1 million-square-foot FC in Dunfermline, Scotland or the 1.27 million-square-foot FC in Phoenix, Arizona, which is large enough to fit 28 football pitches. In the absence of a substantial physical store network in a given location, these FC hubs shorten the last-mile fulfilment costs in densely populated urban areas, where transit times can be severely impacted by traffic. More importantly, they also serve as Amazon’s next-best means of competing with the instant gratification of a local retail store visit, with the advantage of your purchases being brought to you. According to Cooper Smith, an analyst at research firm Gartner L2, Amazon ‘now has warehouses within 20 miles of half the US population’.2 This closes the last-mile gap to the densest urban populations but is still comparatively further than the average distance of a US consumer to a Walmart, which is 6.7 miles.3
The Prime Now ‘pickers’, so-called in the logistics industry because they pick and pack orders in FCs, use mobile handheld barcode-reading devices to locate items. Space is saved by using a ‘random stow’ system, instead of designated stock areas that more automated warehouse management systems require. While this can lead to some incongruous items being stored alongside each other, where items are put on the aisles of shelving is left down to the pickers to maximize use of space. An Amazon spokesperson reported that random stow enhances picking accuracy; it might be easier to make a mistake if many different versions of the same item were stored in the same location.
The Prime Now FCs also feature easily accessible ‘high-velocity pallets’ for frequently ordered items, such as toilet paper and bananas, and walk-in refrigerator and freezer units for chilled and frozen goods that might also be ordered through via AmazonFresh and Pantry household and grocery services. After picking, orders are prepared for dispatch via what Amazon calls its ‘SLAM’ line, which is an acronym for ‘scan, label, apply, manifest’. Orders are then fulfilled using a number of delivery methods; the company’s bike courier experiments in Manhattan received a lot of publicity and fuelled rumours of a move into express delivery in the weeks before Prime Now’s launch.
From the perspective of last-mile labour costs, Prime Now differs to the rest of Amazon’s fulfilment infrastructure in its intensive use of pickers, as well as its random stow system. This makes it more reliant on more human labour than in its larger FCs, where its Kiva warehouse robotic sortation systems take on more of the traditional picking and packing tasks. Its use of express courier services to deliver Prime Now orders is also another extra labour-intensive expense Amazon must absorb for the price of having the fastest and most extensive last mile. This is why it also quickly followed up on its initial launch of Prime Now with the introduction of Amazon Flex, a platform for independent contractors to provide delivery services, towards the end of 2015. The platform capitalizes on the expanding gig economy popularized by Uber and other express delivery rivals to first meet the demand for Prime Now, but it now manages regular Amazon deliveries too.4 In the same way as Uber matches drivers with what it calls ‘riders’ and Instacart matches customers with ‘shoppers’, the Amazon Flex Android-based app directs ‘Flexers’ to delivery locations within a radius local to them.
Flex is interesting for two main reasons: the first is that its entry into the ‘gig economy’ by employing independent contractors over its last mile hasn’t exactly proved the most customer-centric solution to last-mile express delivery Amazon might have hoped for. True, it gives Amazon end-to-end control, where it can share its last-mile visibility with customers through its delivery tracking app feature. But the fact that Flexers use their own vehicles and initially wore nothing that identified them as working for Amazon, led to an initial backlash by worried neighbourhood watch activists, who were ‘creeped out’ by these strangers coming to their door.5 Like Uber, Amazon has also had to defend contractor lawsuits brought by ex-Flexers, who argued that they took home less than minimum wage after costs associated with running their own vehicles. Some plaintiffs who were sub-contracted by Amazon.com via Amazon Logistics and local courier firms, claimed Amazon should pay them as full-time employees because they worked out of its warehouses and were highly supervised by Amazon, who also provided their customer service training.6
Perhaps staff working for its Whole Foods acquisition could carry out deliveries after work to lessen the litigious risk from gig economy-based models, just like Walmart said it was testing in 2017. In yet another attempt to cut e-commerce fulfilment costs, Walmart can exploit not only its extensive store estate to promote click & collect, but also began looking to its large store staff base to carry out home deliveries. The retailer was offering to pay staff extra to use an app that could direct them to deliver up to 10 customer orders per commute. ‘It just makes sense’, said Marc Lore, Walmart US e-commerce president and CEO, in a blog post. ‘We already have trucks moving orders from fulfilment centres to stores for pickup. Those same trucks could be used to bring ship-to-home orders to a store close to their final destination, where a participating employee can sign up to deliver them to the customer’s house.’7
The second reason for singling out Flex is that Amazon’s gig-based initiative reveals a fulfilment logistics strategy that seeks to lessen its reliance on the US Postal Service, FedEx and UPS’s third-party parcel delivery services. Bear in mind that 20 different partners currently ship some 600 million Amazon parcels a year, with the US Postal Service, FedEx and UPS moving the most. Cost management is an obvious priority, where Amazon can realize efficiencies by gaining end-to-end visibility over its entire supply chain. Entrusting the last mile to third parties cedes control over the most visible customer-facing part of that chain and is at odds with its customer-driven ethos. Its US Postal Service custom has also recently been in the firing line of Donald Trump’s peripatetic Twitter rants in what some have seen as thinly veiled attacks on Jeff Bezos and his ownership of the Washington Post newspaper, which has been critical of the US President’s threats against journalists who provide coverage he deems unfavourable. In what Trump has termed Amazon’s ‘Post Office scam’, he tweeted, ‘It is reported that the US Post Office will lose $1.50 on average for each package it delivers for Amazon.’8 While this and the taxes Amazon pays have been criticized by Trump and may end up becoming part of a wider antitrust move by the Republican president, industry consensus puts the US Postal Service’s woes down to reasons that have little to do with Amazon. Some estimates show that the US Postal Service is charging below market rate for package delivery, where Amazon undoubtedly has the scale to negotiate the best possible price; but its falling revenues are actually attributable to the slowdown in direct mail demand rather than package deliveries.9 Amazon has also had spats with FedEx and UPS over how much business it puts through their US Postal Service rival. But they have, in turn, also been critical of the amount of fixed costs they are required by law10 to cover with revenue from their competitive parcel business – FedEx and UPS argue that at least 5.5 per cent is not enough, when its competitive business now accounts for 30 per cent of its total revenue, up from 11 per cent a decade ago.
Other competitive challenges of note have come from direct retail rivals, Walmart and Target. Reports surfaced at the end of 2017 that Walmart had told a number of its contracted carriers that it may choose not to do business with them if they were also doing business with Amazon,11 such is the demand for third-party fulfilment capacity driven by US e-commerce sales growth. Walmart took a similar stance with those suppliers using AWS. Target’s acquisition of grocery marketplace and same-day delivery platform Shipt for $550 million at the end of 2017 was seen as a direct challenge to Amazon’s ability to fulfil same-day deliveries, while also giving the retail chain a greater capability to overcome inventory challenges associated with click & collect. In a company blog about its purchase, John Mulligan, Target’s chief operating officer, cited the acquisition as part of a series of measures aimed at ‘making shopping at Target easier, more reliable and more convenient’ for its customers, which included expanding ship-from-store capabilities to more than 1,400 stores nationwide, launching its next-day essentials delivery service Target Restock and Drive Up in-car fulfilment service, and acquiring last-mile transportation technology company Grand Junction.12 Target’s declared aim was to bring same-day delivery to about half of Target stores in early 2018.