Walmart vs. Amazon: Who Wins the Retail Future?

The following graphic from Minyanville illustrates how the shift in retail to online sales affects employment and commercial construction.   Amazon generates 1/12 the sales of Walmart and has 1/60 the number of employees.  Even if one assumes that subcontractors and delivery firms employ one person for every person employed by Amazon, the Amazon retail model requires fewer employees than Walmarts.

As far as real estate, the difference is obvious.   Amazon needs only its distribution centers.   Walmart needs both distribution centers and retail stores.   Amazon's model requires lower capital requirements to build selling space than Walmart, reducing construction spending as compared with the traditional retail model.  Amazon's model also moves jobs away from communities that are close to the ultimate consumers to the distribution locations that are further away. 

Walmart is trying to replicate Amazon's model and grow its on-line sales as brick and mortar sales stagnate.  Still as the chart at the bottom of the graphic shows, Amazon may eclipse Walmart's sales by the middle of the next decade.
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Via: Online MBA

Why Mail Matters: Newegg

Newegg, one of the largest sellers of computer and electronic parts and products is a Postal Service customer.  How do I know?  I just purchased some memory for my laptop and just got the notice that the shipment is on its way.    Here is the e-mail message, minus information describing the purchase.


Dear Alan M Robinson,


Thank you for shopping at Newegg.com. We're glad we had what you're looking for!

Your tracking number has been generated via Egg Saver. Please see below for your order information and tracking number. It may take up to 1 business day for your tracking information to become available.

Egg Saver shipments are picked up from our warehouse at the close of each business day by DHL Global Mail, who handles shipping from Newegg to your nearest USPS facility. USPS then delivers the package to your ship-to address with your regular mail delivery within 4-7 business days. [Words are bold in the original email.]

Now, the graphic is nice but isn't it a bit too complicated for Newegg customers who don't know what a DDU, SCF, BMC, or an AMF are?   But it does make it clear that the shipment will arrive in the mail after being transported much of the way by DHL. (DHL should develop a new graphic for inclusion in e-mails like this designed for non-mailing industry customers of Newegg.)
 
The description of the service clearly illustrates a marketing and operations problem that the Postal Service has to fix if it wants to take a larger share of the Newegg's delivery business.   Doesn't the sentence, "USPS then delivers the package to your ship-to address with your regular mail delivery within 4-7 business days," encourage customers to pay to upgrade to faster service the next time they make an order?  Doesn't this sentence make signing up for either Amazon Prime or Shoprunner to get 2-day service at no charge if one shops online frequently?
 
Even with much slower service commitments, the Postal Service has been able to grow its last mile delivery business. In the First quarter of FY 2011 parcel select volume was up 26%, allowing its first-mile partners to cost-effectively drop shipments nearer to the delivery point. 
 
The Postal Service's last mile, parcel delivery service could grow faster if it had tighter delivery standards so DHL would no longer say the "USPS then delivers the package to your ship-to address with your regular mail delivery within 4-7 business days."  For example, the USPS needs to find a way to deliver shipments dropped at a DDU or SCF the next delivery day, and shipments dropped at a National Distribution Center (NDC) in two or three days.   Then its service would nearly service competitive with ground delivery offerings of FedEx and UPS to merchants trying to satisfy demanding customers, while still offering the low-cost delivery option that makes on-line purchases attractive.
 
 

Sales Taxes and the Mailing Industry

The Wall Street Journal reported today that some of the nation's largest retailers are backing a coalition called the Alliance for Main Street Fairness to force e-commerce only retailers to collect sales taxes on their web-based sales just like they do on their sales at both brick-and-mortar outlets and over the Internet.  Companies that are part of the coalition include Wal-Mart, Target, Best Buy Co., Home Depot Inc. and Sears Holdings Corp.   These large retailers have expanded their web presence and are among the top twenty web-based retailers in the United States.  On the other side of this issue are on-line only companies like Amazon. com, NewEgg, and regional merchants that sell nationwide over the web.


The issue is being raised in states including California, Texas, and Illinois which all have significant challenges in trying to balance their budgets.  Illinois recently passed legislation expanding the criteria for requiring companies that sell products in the state to collect sales tax on web based sales and similar legislation is being considered in the other states. 

For decades the mailing industry through catalog merchants and more recently e-commerce retailers have thrived from business generated from the printing of catalogs and the delivery of parcels.   Customers were driven to catalog and e-commerce sales channels due to better selection, prices, and yes even the lure of not paying sales taxes.  Today, however, the mailing industry relies on the business of printing catalogs and delivering parcels from companies that both collect and do not collect sales taxes in all fifty states.   The mailing industry has seen growth in demand for its services from both firms that collect and do not collect sales tax.   Regardless as to how this political fight ends, this growth will continue as customers take advantage of the convenience, selection and prices that the on-line retail channel offers.

Amazon: Avoiding the Post Office

In Rethinking the Parcel Market, I noted Amazon's effort to offer same day delivery and what that means for UPS, FedEx and the Postal Service in the United States. Today's Times Online reports that Amazon has launched "a secret search for bricks-and-mortar stores to support its rapidly growing website. It is understood to be scouring the country for high-profile sites."

According to the article, Amazon is not looking to open retail outlets where customers can buy goods that the store has in inventory. Instead, the stores will provide a delivery point for customers that order larger items that mail or truck delivery is inconvenient.

[Monday 12/7/2009 Amazon has subsequently denied the story. Given the success of Apple stores and Amazon's success in revolutionizing the retail supply chain, the idea that Amazon would add a brick and mortar option seems logical. The brick and mortar option clearly fits with Amazon's clear interest in reducing the time from order to delivery. The post was edited following its original posting to reflect why Amazon may have explored the possibility of retail even if it has for now rejected the available brick and mortar options.]

Amazon's move if completed would put it in direct competition with Argos, Tesco and John Lewis which all offer similar services. The Times reports that Argos' customers pick-up 18% of their Internet purchases in brick and mortar outlets rather than have the items delivered by parcel carrier or road transport. Argos will generate half of their television sales this Christmas via the combination of a purchase on the Internet and delivery to a brick and mortar outlet.

If Amazon goes ahead with a retail strategy, it should be able to haul items for pick-up to its "stores" using contract carriers dedicated to their retail network. Amazon's business case would most likely show that both customers prefer to pick-up their larger items at a retail outlet and the overall delivery costs, including the cost of operating retail outlets, is less than the cost of home delivery. Amazon could then decide to hold some inventory of fast moving items at retail outlets to further reduce costs and allow for same day pick-up of these items. For this strategy to be successful, the customer's experience in retail outlets has to be just as good as the experience on the website.

A retail initiative by Amazon's would be a direct assault on Royal Mail, DHL, UPS, TNT, FedEx and road transport companies that handle items that weigh over 75 pounds (34 kilo). The reported new initiative would also be a direct assault on retail outlets of Royal Mail and its competitors that could provide a similar service to replace the loss of sales as single-piece letter mail volume decline.

Amazon is unlikely to pursue a similar strategy in the United States. Pursuing this strategy in the United States could require Amazon to collect sales taxes on sales in those states where it opened retail outlets. Losing the sales tax advantage would eliminate a price advantage that Amazon has over Best Buy, Sears and other s that offer store pick-up of Internet sales. Given the peculiarity of U.S. tax law there is an opportunity for FedEx, UPS, and the Postal Service to work with Amazon to expand the hours of a limited set of their retail outlets to make them pick-up points for Amazon and other Internet retailers. Alternatives any of these competitors could follow the lead of the German and Danish Post Offices and open self-service lock-boxes for after hours parcel delivery.

Rethinking the Parcel Market

The parcel market is at the cusp of change. Long established distribution patterns are changing as e-comerce competes more aggressively against brick-and-mortar retailers. The latest example is provided by Amazon which just introduced same-day delivery in in seven cities - New York, Philadelphia, Boston, Washington, Baltimore, Las Vegas and Seattle. This will soon expand to Chicago, Indianapolis and Phoenix.

Amazon's new "Local Express Delivery Option" allows order placed in the morning to be delivered that afternoon. In Seattle, orders as late as 1 pm can be delivered same day. The service is not cheap costing Amazon Prime members $3.99 for delivery and $6.99 for everyone else. As the service grows, stock analysts expect that Amazon's same-day delivery charges to drop as the delivery service gains density.

This same day delivery follows Amazon's entry into local delivery with its "Amazon Fresh" service in Seattle that offers delivery of everything from ice cream to digital cameras with same-day or next day delivery. This service is delivered in trucks painted with an Amazon logo. The late delivery offered in Seattle for Amazon's local express delivery option most likely reflects the capability of the already established delivery operation for Amazon Fresh.

Amazon is not alone in offering same day delivery. Barnes and Noble has offered same day in Manhattan for a number of years. That service is free for orders over $25.

The same-day service that Amazon and Barnes and Noble offer does not use the usual parcel delivery suspects, FedEx, UPS, and the Postal Service. Instead, They use national companies that offer local delivery and dedicated fleet services in numerous cities. For the launch of the Local Express Delivery Option, Amazon is using Dynamex and A-1 Express Delivery Service.

These two local delivery carriers are just two of the largest of set of local and regional parcel carriers that are shrinking the time between when an on-line order is made and the parcel is delivered. Amazon's service succeeds only because Amazon can cut the time from order to placement on a delivery truck to less than 4 hours and it has multiple warehouses close to major population centers.

Other on-line retailers offer service that is nearly as speedy. Staples offers next day delivery on most on-line orders and it recently purchased an office supply firm that specialized in next-day delivery to offices using a private fleet of delivery trucks. (In fact the firm that Staples bought had a private delivery fleet because it bought its primary supplier of delivery services.)

On-line retailers are looking for ways to cut the time from order to delivery and find that the FedEx, UPS, and the Postal Service all are too inflexible to allow for later pick-ups and early-morning deliveries that on-line customers want. They are turning to not only same day couriers but to regional parcel carriers that operate out of one or more distribution hubs to cover most of the United States. The rise of these regional carriers was note at the recent Document Forum, where their presence as exhibitors was given a special place in the exhibit hall. The largest of the regional carriers are:

• Capital Express - covers the Midwest with a focus on delivery of medical and other time sensitive and high-security delivery customers
  
• Dunham Express - covers all of Wisconsin and parts of surrounding states
  
• Eastern Connection - covers Maine to Virginia with next day service
• Edge Logistics - provides regional parcel delivery with nationwide coverage
  
• Lone Star Overnight - covering Texas, Oklahoma and Louisiana
• OnTrac - covers the West Coast plus Nevada and Arizona with next day and 2- day service and same day service throughout the plains and mountain west
• Skyline Messenger Service - covers Georgia and the Carolinas
  
• Spee-Dee Delivery Service - covers 7 states in the Midwest from Illinois through the Dakotas
• Transtek - covers Colorado, western Nebraska and parts of Wyoming
  
• US Cargo - covers 11 states from terminals in Ohio and Pennsylvania

Combined the regional and local delivery carriers are still small. At best their total revenue does not exceed $2 billion. However they are growing faster than any of the three largest carriers and their lower costs, focus on specific markets and willingness to accommodate special needs of specific customers, allow them to accommodate the new faster delivery services that Amazon and other shippers now demand.

Can the big three compete? Probably, but they have to add new services and become more flexible in how they operate. For example, the Postal Service could offer a new competitive next-day service if they offered a combined pick-up to delivery service under the "Postal Service brand" with the pick-up operations operated by contractors. The key is focusing on local delivery and a well run pick-up operation could handle a late pick-up with a-drop-off to a delivery office in the early morning of the day of delivery. Worksharing does not allow for as seamless a process as one provided under a single corporate identity.

Will they compete? Making the changes necessary to handle the new distribution needs requires flexibility from both management and labor at the three largest carriers. Standard operating procedures, sometimes contained in operating manuals, and sometimes in union agreements reflect the old paradigms of parcel distribution. Top management learned the delivery business in a world with different distribution patterns than what Amazon is now looking for. Justifying changes in what appears to have worked for many years is not easy. All three have shown that they will make the effort and the delivery products available today are far superior to what was available two-decades ago.

How soon will they compete? This is the great unanswered question. My hunch is that the regional and local carriers will grow their business and nibble away market share for many years before a serious move is made in this market by FedEx, the Postal Service or UPS. What may force the pace of entry into the quick-delivery market is the challenge of the recession that has made selling delivery services more difficult and finding volumes to fill existing distribution networks more challenging. Maybe by next year's parcel forum we will see what the big three plan to do pick-up the business that they have lost to carriers that can offer the quick-delivery services that they cannot.