Beware! Amazon Warehouse Coming Soon to Your Neighborhood

by Lee Schwartz

Is it déjà vu all over again?

In my inaugural Keys to Profitability newsletter in July, the Nugget of the Month shared a report describing Amazon’s intent to take over the world. Well, not literally, but if their plans are realized they will dramatically reshape today’s landscape for retailing and distribution. Amazon cut their teeth on books and music. Today, they’ve expanded prodigiously, even offering automotive supplies and food. Imagine an Amazon distribution center located within five (5) miles of most major U.S. cities, with same day delivery service. Wonderful for the consumer. Not so for those competing with any of Amazon’s categories.

Let’s take a trip down memory lane. Early-1970s. Big Box retailers? Only a concept in some visionary’s mind. Back then the supply chain was much simpler.

More linear and defined.
Manufacturers manufactured. Distributors distributed. Retailers, hardware and department stores, supply houses ordered their product from distributors.
Cost of goods was a function of position in the supply chain.
Competition typically came from those of similar orientation – department store vs. department stores, lumber yard vs. lumber yard, home center vs. home center.

Then the world of distribution and retailing began to spin off its axis. Big Boxes began to pop up. These mammoth discount stores consumed opposing street corners, like two bulls ready to charge from opposing ends of the bullring. They anchored shopping malls and became the prime strip center tenants. I cut my teeth in distribution when the names Price Club, Home Depot, Costco and the like were just beginning to reset the topography of the supply chain.

Price Club opened in San Diego in 1975. Costco appeared in 1976. Home Depot launched in ’79, opening their first L.A. store in 1985. In short order, the marketplace was in the midst of a sea change. Big Boxes represented enormous buying potential to those selling to them. Bigger orders reduced handling and transportation costs for sellers. Big Box executives weren’t stupid. They knew the costs of servicing their companies would be lower and the volume greater so they extracted . . . one might say “blackmailed” . . . prices for goods far below what traditional resellers could secure.

And so what happened? Traditional business panicked. Prices were discounted even though profit margins couldn’t support the discounting. Many focused on the same high velocity items that the Big Boxes featured, but couldn’t compete with the pricing. The Boxes could throw huge dollars after marketing. Most others didn’t have such deep pockets, although some tried, further eroding their bottom line.

The country is littered with companies that thought they could compete against the onslaught of the new breed of discount warehouses. For those like me from Southern California, these familiar names are gone – Builders’ Emporium, Computer City, Gemco, National Lumber and All American Home Center. They didn’t fail overnight but ultimately succumbed to panic, poor planning and questionable leadership in the face of fierce competition.

Let’s fast forward to the present. The world has changed . . . rather dramatically. Who thought that My Space would be supplanted by the omnipresent Facebook . . . and now Twitter? Netflix now has original programming and will continue to challenge cable. And more and more business is being done online . . . and that trend will continue as the Millennial generation, today’s teenagers to early 30-somethings, replaces the Baby Boomers and Gen Xers as the primary consumers of products and services.

Amazon has radically advanced the original Big Box concept. They offer a larger assortment of goods, (most of which carry discounts of 15-22% when compared to other retailers) that can be ordered from the comfort of your home or office, to be delivered no later than the next day and possibly within the same calendar day. Remember the Pac-Man arcade game of the ‘80s with those adorable creatures scurrying around the screen gobbling up those little dots? Is Amazon about to do the same with their competitors?

It doesn’t need to be. When TV took hold it was thought radio would disappear. Didn’t happen. Typewriters manually allowed us to share information. Today we type onto a laptop but the concept hasn’t disappeared. Amazon will be an ongoing threat as they grow (sales in 2012 exceeded $61B (1) . . . yes ‘B’ as in billion) and continue to make buying easier. Traditional retail and distribution will definitely be challenged . . . but they can survive. How?

Don’t panic. Be strategic.
Cut out the fat. Implement continuous process improvement practices.
Train your staff to be the best. Customer service must reign supreme.
Provide personal attention. People still like to touch, feel, smell before making their purchases.
Become truly customer-centric. Support your customers not only with CRM technology, but also with appropriate social media outreach and interaction.
Create loyalty programs supported by your best customer service and personal attention to keep the purchases coming to you from your customers.
Differentiate your positioning and your value offerings into specialty niches and target markets, and focus your brand and customer service on these specialties. Competing directly is a losing proposition.
Maintain your margins while supporting your new positioning and value-added services. Become known for your excellence to those who still prefer the personal touch.

Your thoughts? Please share at moc.orpztrawhcsnull@eel.

“Amazon.com, Form 10-K, Annual Report, Filing Date Jan 30, 2013”. SEC database. Retrieved Feb 26, 2013