McNellis on Amazon’s Global Designs

amazon-warehouse

By John McNellis

John Goodman pitched his new series, Alpha House, on The Daily Show last week. Ordinarily, a talk show guest selling his wares is about as newsworthy as government incompetence. But this had a twist. Alpha House is Amazon’s latest venture—original content for the Web. In the actor’s words, the show is part of the company’s far-reaching plans for “world domination”. Goodman modestly called himself just a “cog” in Amazon’s war machine.

The first three episodes will be free to Amazon customers; thereafter, they will only be available initially to subscribers of Amazon Prime, the company’s “free” two-day delivery service that costs $79 a year.

Alpha House is just Seattle’s latest pounding of war drums. Competing with cover stories deifying Jeff Bezos are Amazon’s almost daily announcements: it is testing the grocery home delivery business in Seattle and Los Angeles; it is adding 5 more “fulfillment centers” (you and I call them warehouses) to the 89 it had in 2012; it will build a massive warehouse on the outskirts of each of the top 20 U.S. metropolitan centers (thereby extending its same-day delivery reach to half of America); it bought a robotics company, Kiva Systems, to make these warehouses deadly efficient; it’s competing with PayPal with its new on-line payment system; and, in a bold bid to replace the word chutzpah with bezos, Amazon has just asked its first road kill—independent book sellers—to carry its Kindle e-readers in their stores.

Goodman wasn’t kidding—Amazon is out to conquer the world. And its war machine is same-day delivery. If it succeeds, retail will never be the same; Wal-Mart will become soda shop quaint and consumers will wax nostalgic over the free ravioli samples they once enjoyed at Costco.

After World War II, national supermarket and drug store chains sprang forth like dragons’ teeth to eviscerate the small independents that lined Main Street, winning this brief struggle by superior pricing. The chains had greater buying power, advanced distribution systems, lower payrolls and, because they built on the edge of town, lower rents; the chains thus profited wildly while selling at prices the independents couldn’t touch. Fast forward a generation or two and Wal-Mart and Target began winning the same war with the same tactics—brilliant efficiency and lower costs—but this time the victims were those once invincible, suddenly old-school chains. The super-discounters built even farther out of town. Following closely on their heels was Costco with even better prices, more distant real estate and greater efficiency. (Costco’s prices are so cheap that its net profit of $1.7 billion in 2012 was less than what it charged its 68 million members in annual dues—meaning it made nothing on the merchandise it sold.)

Thus, over the past couple generations, bargain retailers have become increasingly efficient—and profitable—by putting consumers to work, by making them drive ever greater distances to their stores, by offering them less and less in-store assistance, by almost requiring they fight for a parking spot in front of their cavernous warehouses. In short, bargain retailers succeeded by eliminating the retail from retail, by forcing the consumer to become part of the delivery cycle through driving its most expensive leg—the last two miles.

Now Amazon is proposing to turn that business model on its head.

Ratcheting up these very tactics exponentially, the company will be more ruthlessly efficient than its older competitors ever imagined. Instead of an oversized warehouse store you drive to fifteen minutes away, Amazon will have a million square foot warehouse an hour from your house that you will never see. If Amazon’s strategy succeeds, you will no longer fight traffic or swear over non-existent customer service or grow old in a check-out line; instead, you will click your order and Amazon will deliver it to you in a couple hours.

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