Amazon Widens Its Moat

2014-02-September-Forbidden-City.jpgLast Christmas Eve, Amazon received an early gift in the shape of a patent for "anticipatory package shipping." The patent describes a method for shipping a package of one or more items to an end destination’s geographical area without specifying the delivery address at time of shipment -- the final destination is defined en route. While last Christmas may have been good to Amazon on several fronts, this patent and some other actions it's pursuing indicate how determined Amazon is to expand the already sizable moat between it and other retailers.

Getting Rid of the Middle Man

One of those other activities involves opening 15 sortation facilities across the US this year. Each of these new facilities enable Amazon to exert more influence over the final mile of the delivery process including making Sunday deliveries possible, which no other retailer or e-tailer can currently offer. Whereas before packages would be picked up by either UPS or FedEx at one of their fulfillment centers, many of these will now be delivered by Amazon to the relevant sortation center where they are organized by zip codes and then delivered to the respective post office by no later than 8 am to be delivered the same day.

Beyond facilitating Sunday deliveries through the US Postal Service (USPS) -- currently the only destination for sortation center packages but one would suspect won’t always be the case -- these facilities allow later ordering times for two day delivery, up to nine hours for both Prime and regular customers who pay extra for the privilege, as well as the ability to hedge their exposure to both UPS and FedEx where they experienced several challenges last holiday season in getting packages to customers on time. Finally, this helps lower shipping costs which is key for Amazon. And the possibility exists it could start delivering directly from the sortation centers, bypassing third party shippers.

Wait a minute -- Amazon could start making its own deliveries and bypass UPS, USPS, FedEx, etc.? While this has been a hypothetical topic of conversation for quite some time, it appears to be emerging as reality. Besides the delivery issues last holiday season, this could in part be driven by UPS’s and FedEx’s move to dimensional pricing after the 2014 holiday season. The net effect of this should be increased shipping costs for most retailers, which means either limits on or the elimination of free shipping and/or higher prices, whereas Amazon has been pursuing ways to lower its expenses over the long haul for the better part of at least a year.

Say what you want about its ongoing infrastructure investment strategy, Amazon is clearly focused on a different end game than any other retailer or e-tailer. As Jay Greene of the Seattle Times noted, “It’s unlikely any other (online) retailer has enough volume to even try its own sortation center.” If Amazon can lower its costs by taking on more of its own logistics, it will have addressed several of the issues above as well as extended its moat in such a way that it would be hard to imagine another retailer/e-tailer attempting to cross it, let along succeeding.

Maneuvering Into Brick and Mortar

In what could be the coup de grace, Amazon recently announced a mobile point of sale (PoS) solution for brick and mortar retailers where the initial carrot is lower costs than other vendors. While it may seem unrelated to the logistics challenges addressed above, look again. The PoS system, besides trying to drive more business to Amazon as well as gain better visibility into merchants’ transactions, is also an attempt to co-opt the omnichannel efforts of brick and mortar retailers.

While helping Amazon increase its sales volume through Marketplace, this could eventually enable them to offer buy online and pickup in store (BOPiS) without having to own the physical store. Think of the one thing Amazon lacks today -- a physical presence for picking up orders -- and then envision them having access to hundreds if not thousands of locations courtesy of the Marketplace merchants. While this may be a stretch, if Amazon can make it worthwhile for the merchants it could create a distribution network of locations throughout the country without having to invest in building them. Add in its efforts to control more of its logistics and the bigger picture starts to emerge.

A Crack in the Infrastructure

Amazon is playing to a different end game than anyone else. Its goal is to dominate retail like no other company and right now it's hard to see anyone getting in their way. Brick and mortar retailers and e-tailers should be highly concerned about these developments and be taking steps to mitigate them. The one thing outside retailers’ control that can possibly help them is Amazon’s recent challenges in the cloud. As one of Amazon’s key profit drivers, this helps sustain the infrastructure investment, but with pressure from Google and Microsoft, Amazon has to respond by lowering costs.

What do $8 billion, $58 billion and $85 billion represent? Amazon’s, Google’s and Microsoft’s respective cash positions. While $8 billion is nothing to sneeze at, it pales next to its competitors. As a retailer, one way I can help myself is by supporting Google’s and Microsoft’s cloud efforts because the more of that $8 billion Amazon has to spend defending its Web Services turf, the less it has to spend on that unrelenting infrastructure that serves to widen its moat.

Title image by Yuangeng Zhang /